Creation of Mortgages Common Law

By creation of mortgages at common law, we mean the creation of legal mortgages at common law. At common law, a legal mortgage is created in one of the following ways, depending on whether it is a leasehold or freehold estate.

a)        Freehold Estate

Here, the legal mortgage of freehold land was created by a conveyance of the fee simple estate (that is to say the whole of the mortgagor's interest in the land) to the mortgagee, with a proviso for a recovery to the mortgagor on redemption. The mortgage was fee simple in the sense that there was no term of years as in the case of a mortgage of leasehold. The fact that by the conveyance the legal mortgagee had the whole fee meant that at law the mortgagor had no estate or interest with which he could afterwards deal.

Again, in its earliest form, a mortgage was created by the mortgagor by putting the mortgagee into possession of the mortgage property in return for the loan and permitting him to take the rent and profits in discharge of both principal and interest of the loan. This was called a 'living pledge’. But where the profits from the mortgage property were used to discharge the interest only, the transaction was called a “death pledge”.

However, by the 15^th century, a mortgage transaction took a different shape. The land was conveyed in fee simple to the mortgagee on the condition that if the loan was repaid upon the day fixed by the agreement; the conveyance was defeated and the mortgagor was freed to re-enter.

On the other hand, if payment was not made on that fixed date, the interest of the mortgagee became absolute. In other words, the mortgagee becomes the owner of the property because the mortgagor failed to pay at the agreed date. A mortgage therefore looked more like an absolute conveyance than a security, for apart from the creditor taking actual and immediate possession, the chance of the debtor/mortgagor not being able to get back or redeem the land (Mortgage property) was very high and while the mortgage lasted, the mortgagor had no proprietary right to the land, but merely a personal right to have the property returned on repayment on the due date. And even the personal right was extinguished for ever if he defaulted in timely payment.

However, equity intervened to transform the law of mortgage, both with regard to the mortgagor's right to redeem the property and the mortgagee's right to take possession and both steps led to the recognition of the mortgagor as having an equitable proprietary interest (rather than a personal right to have the property returned), the existence of which restricted the exercise of ownership-type rights by the mortgagee.

No longer was redemption dependent upon strict compliance with the contract. Equity looked at mortgage as a purely security transaction and therefore, the institution provided no justification for the expropriation or exploitation of the mortgagor's property. Thus, even after the lapse of the date fixed for redemption or repayment of the loan, a court of equity will permit the mortgagor to redeem the property. It is usual for equity to concede to the mortgagor a period of six months after the appointed day for repayment during which he may redeem. (Equity looks at the intent rather than the form).

The attitude of equity is explained by the fact that the mortgagor retains an interest in a mortgage property expressed by his equity of redemption, which of course, arises after the expiration of the fixed period agreed, for redemption. Hence, equity of redemption encompassed the mortgagor's equitable right to redeem after the contractual redemption date.

The mortgagor's equity of redemption must not be clogged in any way. There must be no collateral advantage reserved in the mortgage deed which could make it impossible for the mortgagor to redeem his land on payment of loan, interest and costs. The court of equity regarded the right to redeem as a special term in the security contract which could not be altered or contracted out of. Equity thus made the right to redeem a larger one than was usually given to the mortgagor by contract.

However, the equity of redemption is distinguishable from the right of redemption which is the right of a mortgagor to redeem a mortgage property upon the discharge of the mortgage liabilities. The former constitutes the reversionary estate of the mortgagor attached to the property upon a mortgage and this reversionary estate is devisable and disposable.

In fact, it is a mortgageable and transferable interest in land: Kreglinger v. New Patagonia Meat and Gold Storage Ltd. (1914) AC 25. Again, in Western Region Traders Syndicate v. Fashugbe (1960) WNLR 51, the court held that the first mortgage vested the legal estate (interest) in the syndicate and the second mortgage by the mortgagor was of the equity of redemption.

In similar vein, in Alli v. Allen (1966) NCLR 14; (1966) All NLR 98, „A‟ borrowed money from „B‟ and the loan was unsecured. He later borrowed a further sum of money from „C‟, from which he gave his land as security. „A‟ defaulted in repaying 'B', whereupon 'B' sued and obtained judgment for the debt. 'A' was unable to satisfy 'B's judgment debt in full and so 'B' attached and sold the land which 'A' had given to 'C' as security. The court per BRETT JSC, held that the purchaser of the land from 'B' purchased only the equity of redemption- which was the only right left in 'A' after the security – as the legal title to the property is still vested in C.

Lastly, in equity, a mortgagee who took possession was required to derive no personal profit therefrom because the mortgagor, while still retaining the right to redeem, was recognized as the real owner of the property so that all the profits must be credited to his account: Heath v. Pugh (1881) 6 QBD 345; (1882) 7 AC 235.

b)        Leasehold Estate or Term of Years

A legal mortgage of a leasehold interest is usually by “term of years”. Two methods are involved at common law for the mortgage of a leasehold interest. A legal mortgage of a leasehold was either by sub-demise or sublease for a period slightly lesser or shorter than the residue of the mortgagor‟s term or by assignment of the residue of the term of the lease, with a proviso for a re-assignment of the residue to the mortgagor on redemption. The two methods will now be briefly examined.

i)          By Sublease or Sub-demise

Here the  mortgagor conveys a sub-lease or sub-demise of his  interest to the  mortgagee for a period slightly less than his own term. In other words, the mortgagor may grant a sublease of his term for a period shorter than the term he holds with a provision for redemption upon the repayment of the loan.

The advantage of this method is that it does not subject the mortgagee to the burden of any onerous covenant that may be contained in the head lease or original lease; since there is no privity of estate between the mortgagee or sub-leasee and the head-lessor. However, the disadvantage is that the mortgagee cannot sell the reversionary interest of the mortgagor upon default except this defect is cured by the two remedial devices of a Power of Attorney or a Declaration of Trust.

ii)         By Assignment:

    

     Alternatively, the lessor may assign the remainder of his term to the mortgage with a provision for cesser upon the discharge of the mortgage debt. In other words, the whole term of the mortgagor is transferred to the mortgagee; leaving the mortgagor with only the legal right to redeem the property.

     This method is not attractive because it renders the mortgagee liable for onerous covenants that are contained in the original lease because of the existence of the privity of estate. However, its advantages are that the title deeds are retained by the mortgagee and also that the mortgagee has a right to transfer the interest assigned to him to a subsequent purchaser.

     Please take notice that both the assignment and sub-demise also had to be by deed. An assignment was similar in form to a conveyance of freehold land, subject to such alterations as were dictated by the difference in the tenure of the land transferred. The method of mortgage by sub-demise necessarily required a certainty of term for it was a sublease.

     States of the former Southern and Northern Nigeria still apply the Conveyancing Act of 1881, thus assignment and sub-demise are used. States of the former Western Nigeria (and mid-west) adopt the charge by way of legal mortgage under the Property and Conveyancing Law, 1959.

     Lastly a common feature and a significant change in the method of creation of mortgages in all parts of Nigeria is that since the inception of the Land Use Act, a mortgage must obtain the written consent of the state Governor in the case of land situated in the urban area, or the approval of the local government in the case of land situated in a non-urban areas.