Mortgage is a contract. It
is arises ex-contractu, therefore, the parties to a mortgage must provide for
the terms that will bind them. A prudent mortgagee must clearly specify the
terms of the mortgage. These terms or covenants are sourced from the common law
and statute. The terms of a mortgage are in the form of covenants.
Covenants in mortgages are
specific agreements (terms) between the parties reached to regulate the
relationship between the mortgagor and mortgagee in a particular mortgage
transaction. They form part of the particulars of information required to draft
a Mortgage Deed. Mortgage covenants are contractual agreements between the
mortgagor and mortgagee. It is important to note the meaning, rationale, extent
and consequences of the breach or absence of these covenants.
There about eight covenants to be
studied. These include: covenant to pay the mortgage sum and interest at a
fixed date, covenant to insure against risk, covenant to consolidate,
observance and performance of covenants in the head lease, covenant to repair,
covenant to create lease and sublease, restriction of redemption for a term
certain, and covenant to create a power of attorney or declaration of trust. We
shall briefly consider each of these covenants.
(1)
Covenant to Repay the Principal and Interest at a
Fixed Date
The mortgage sum is the principal
amount advanced to the mortgagor by the mortgagee while the interest is the sum
accruing on the principal over a period of time. This covenant must be included
in a deed of mortgage. It presupposes an agreement as to the rate of interest.
In respect of this covenant, the parties may make reference to the prevailing
customs and usage in the banking industry as well as the Central Bank of Nigeria
lending rate and interest rate policy.
Again, there must be express agreement
on the mortgage sum and interest thereof. Where the latter is not expressly
agreed upon, the court of equity will presume a reasonable interest. Where the
mortgagee is a bank, the rule is that parties are bound by the rate of interest
they have agreed; but where there is no express agreement, the bank is entitled
to charge interest:
a) on the basis of customs and usages, or
b) on the ground that the customers has impliedly
consented where he allowed his account to be debited and he did not protest.
A bank will not be able to
unilaterally charge compound interest or vary the interest rate upwards: Owoniboys Tech Services v. UBN. Nevertheless,
compound interest is chargeable when agreed upon: Union Bank of Nigeria v. Ozigi. Besides, a bank can unilaterally reduce the interest rate. Again, please
note that if there is reference to CBN rate and the CBN rate increases, then
the interest rate in the mortgage can increase without any further agreement between
the parties.
The rationale or essence
of this covenant are enumerated as follows:
1.
To aid the Mortgagee to
know when his power of sale may arise, that is to say, the legal due date: Twentieth Century Banking Corporation Ltd
v. Wilkinson & Anor.
2.
To enable the
mortgagee to know when the cause of action will arise, since any action
commenced when the legal due date has not passed, will be held to be pre-mature.
3.
To show what the
mortgagee’s cause of action will be upon either failure to pay the principal
sum or interest.
4.
To prevent statute of
limitation and exercise of immediate right of redemption, since the mortgagee
is interested in the interest that will accrue from the mortgage sum.
Furthermore, the covenant
to repay principal & interest must be drafted as a positive inducement and
not a negative inducement, the latter being construed as punitive and a penalty
by the court of equity. For example, the courts will frown at a covenant
drafted thus: “The interest payable is 15% but where mortgagor fails to pay on
time, the interest shall be 20%." The court of equity will interpret this
clause as a penalty, thus it would not be upheld. Therefore, the better approach
is to draft the clause: "the interest payable is 20%; but where the
mortgagor pays promptly, it will be reduced to 15%".
Please note that the legal
due date is not the same as the duration of the mortgage. The legal due date is
the date when the mortgagor covenants to repay the principal sum and interest.
It determines when the power of sale by the mortgagee will arise.
(2)
Covenant to Insure the Property
This covenant is to
provide for what would happen in the event of any damages or destruction to the
property. This is very important as the transaction is dependent on the
mortgage property. Any damage or destruction to the property would adversely
affect the rights of the parties. The mortgagee must ensure that the property
is insured. The insurance covenant should contain the following things:
a.
The insurance company (must
be a reputable and viable insurance company)
b. Date of commencement of the insurance policy.
c.
The risk to be insured
against determined by:
(i) the use to which the property is put;
(ii) the location of the property (example whether the area
is prone to flood or erosion);
(iii) the nature of the property itself; and
(iv) the applicable government policy.
d. The premium and who is to pay for the premium. The
premium payable must not be outrageous: section
130 of the Property and Conveyancing Law 1959 and section 23 of the Conveyancing Act.
e. The person to insure the property and whether such a
person is to insure in his name or the name of the other party. In legal a mortgage,
the mortgagee has the power to get insurance for the mortgage property; but it
is usually in the name of the mortgagor. In such situations, it is important to
execute a power of Attorney so as to protect the mortgagee and enable him be
entitled to the indemnity when paid.
f.
The application of the
insurance money in the event of damage, that is to say, whether or not there
will be reinstatement or liquidation of the debt. In the case of the latter,
the is need to negate section 67 of the Insurance
Act which states that there must be reinstatement in the case of every
property that is destroyed by fire
Please note that in
a legal mortgage, the mortgagee usually insures the property against damage by
fire or any effects of an insurable nature and the premiums paid for such
insurance shall be a charged on the mortgaged property in addition to the
mortgage money: section 123(1)(a) of the
Property and Conveyancing Law 1959, and section 19(1)(ii) of the Conveyancing Act. However, where the
mortgagor insures in his name, the mortgagee should be granted a Power of Attorney
by the mortgagor as his lawful attorney in order to be able to collect the
insurance money upon damage of the property.
The mortgagee upon receipt
of the insurance money would disburse the funds, first to pay off the principal
sum and interest owed him by the mortgagor and then render the remaining amount
to the mortgagor. As such, the mortgagee would not have to wait for
reinstatement of the damaged property. The effect of failure to insert an
insurance covenant in a mortgage instrument is that the mortgagee cannot compel
the mortgagor to surrender the insurance money to him: Halifax Society v. Keighly.
(3)
Covenant to Consolidate Different Mortgages
Consolidation of mortgages
occur where a mortgagor uses different properties to secure a loan of money
from the same mortgagee. For example, where there is: mortgage on property A
for a sum of money from Zenith Bank; mortgage on property B for a sum of money
from Zenith Bank and mortgage on property C for a sum of money from Zenith
Bank, Zenith Bank can consolidate the mortgages into ono, the implication of
which is that the mortgagor must redeem all three properties at the same time
and not separately). By consolidation, the mortgagee tries to prevent a
mortgagor from redeeming the properties in his preferred order or separately.
Again, these mortgages as
described above are consolidated in the sense that the mortgagor will not be
allowed to redeem any of the properties without also redeeming the other
securities. This is a fetter on the mortgagor's equity of redemption and it is
as a result of this state of affairs that generally, the law (sections 17 of the Conveyancing Act and section 115 of the Property and
Conveyancing Law) leans against consolidation of mortgages (because it is
oppressive to the mortgagor); except where the parties expressly agreed to it
in their deed of mortgage. Indeed, sections
17 of the Conveyancing Act and
section 115 of the Property and Conveyancing Law, all prohibit
consolidation of mortgage.
However, where parties
expressly agree to allow for consolidation, four things must exist:
a.
It must be the same
mortgagor
b. It must be the same mortgagee
c.
The legal due date must
have passed
d. It must have been expressly agreed by the parties and
stated in the Deed of Mortgage.
There is need to separate
"Consolidation of Mortgages" from "creation of Successive
Mortgages over a piece of property by the same party". Consolidation of
Mortgages is statutorily prohibited subject to the above conditions; while
creation of successive mortgages over a piece of property by the same party,
which is based on the common law doctrine of interesi termini is prohibited only in the states where the
Conveyancing Act is operative, but allowed in the states where the Property and
Conveyancing Law is applicable subject to section
109 of the Property and Conveyancing Law.
The rationale for the
prohibition of creation of Successive Mortgages over a piece of property by the
same party in the Conveyancing Act states is that where a mortgagor creates a
legal mortgage by assignment, he transfers his title in the property to the
mortgagee and what he has left is a mere equity of redemption, which can at
best only be used to create an equitable (not a legal) mortgage. Nevertheless,
the challenge relating to the creation of Successive Mortgages over a piece of
property by the same party in the Conveyancing Act states can be remedied by
creation of the legal mortgage by sub-demise.
(4)
Observance and Performance of Covenants in the
Headlease.
A lease or a sub-lease,
such as one created by a Right of Occupancy, usually has attendant covenants,
such as to pay rates, ground rents, to use for agreed purpose, not to sublet, and
so on. The mortgagor is under an
obligation to observe these covenants since he is usually the one in possession.
Where the mortgagor mortgages the property, he should agree with the mortgagee
to ensure that the mortgagee observes the covenants in the head-lease. This is
important especially in a legal mortgage by assignment.
However, note that where
the mortgagee does not wish to be liable for observing the covenants and
conditions in the head-lease, the parties may covenant that the mortgagor
continues to be liable to perform the covenants in the head-lease (example,
liability to the Governor to pay ground rent).
(5)
Covenant to Repair
The essence of repairs is
to maintain the value of the property so as to protect the mortgagee and to
avoid depreciation of the property. Covenant to repair deals with the
reinstatement of parts that have fallen into disrepairs, so as to positively affect
the value of the property where the mortgagee is to exercise his power of sale.
Thus, this covenant should be of primary concern to the mortgagee. The parties
should agree on who is to repair, and list out the places to be repaired. All
these are to be included in a Schedule to the Mortgage Deed. Please note that it
is advisable that the mortgagee should be the one to carry out the repairs and
subsequently charge the cost of the repairs on the mortgage property.
Repair, however, does not
include rebuilding the property: Nigerian
Loan & Mortgage Co v. Ajetunmobi. Repair does not mean improvements
(like adding a swimming pool and air conditioners that did not exist before).
If the mortgagee does this, he cannot charge the money to the mortgagor. Repair
is just routine maintenance of the existing structure of the property. The cost
of repairs must not be outrageous or it will be disallowed by the Court of
equity.
(6)
Covenant to Create Lease and Sub-Lease on the Property
This largely depends on
whether the lease was created before or after the mortgage. If there was a
lease on the property before the
mortgage, the lease will be binding on the mortgagee and even on a subsequent
purchaser and the mortgagee will not be entitled to rent. On the other hand, where
the lease is created after the
mortgage, then the determining factor is whether either party is in possession
in which case that party in possession of the mortgaged property can create a
lease binding on the other.
In this regard, section 18(1) of the Conveyancing Act and section 121(1) of the Property and Conveyancing
Law provides that a mortgagor of land while in possession shall, as against
every incumbrancer, have power to make from time to time any such lease of the
mortgage land or any part thereof.
Accordingly, it should be
noted that where the mortgagor is in possession, the mortgagee’s solicitor
should ensure that the covenant is couched in such a way as to provide that
mortgagee’s consent in writing should be first had and obtained before the
mortgagor can lease or sub-lease the property (however, such consent is not to
be unreasonably withheld in case of a responsible and respectable person).
(7)
Restriction of Redemption for a Fixed Term Certain
What this means is that
the mortgagor’s right of redemption may be expressed to be inoperative for a
certain period and only to become operative from a certain time after the
creation of the mortgage. This also allows the mortgagor to redeem before the
legal due date, since a mortgage does not enure in perpetuity.
Please note that where
parties express a mortgage to be irredeemable until the due date, same will be
construed by the court as a negation of the mortgagor's right to redeem. Equity
hates a clog on equity of redemption.
Accordingly and for
instance, the right of redemption may not be operative during the first two
years after the creation of the mortgage; but as from the third year, the
mortgagor can redeem his property.
Nevertheless, the
mortgagee may push for the insertion of a clause in the agreement restricting
redemption for a fixed term certain, in order to enjoy the interest, which will
accrue on the principal sum where the mortgagor does not redeem soon after the
creation of the mortgage.
Again, there is need to
note the attitude of the courts to an agreement where the mortgage is expressed
to be irredeemable for a term certain. We have already stated that the court in
exercise of its equitable jurisdiction regard this as a negation of the right
of the mortgagor to redeem his property at any time he is ready with the
principal sum and interest already accrued. Thus, the courts frown at this
restriction and therefore adopt a restrictive approach in interpretation and
enforcement of this covenant.
However, a clause in the
agreement restricting redemption for a fixed term certain may be allowed after
the following has been considered.
a.
what is the length of time? Where the length of time is short, the court may allow
it; but where it is fairly and reasonably long the court may not allow it.
b. who are the parties? If the mortgagor is a corporate body, not in liquidation, or those who are elites and
knowledgeable, the court will allow the restriction on the ground that the
members ought to know the implications of such restriction. Where however, it
is an individual (especially an elderly and illiterate person), the court of
equity may be sympathetic towards him.
c.
What type of mortgage is created? If it is a legal mortgage with all the covenants
expressly agreed upon that is created, the court of equity will be slow to go
against the agreement. Conversely, if it is an equitable mortgage that is
created, the court of equity will be more willing to be sympathetic.
d. What are the
circumstances surrounding the creation of the mortgage? In the case of Multi
Service Banking v. Merden, a restriction of redemption for a period of 10
years was held not to be too long.
(8)
Covenant as to a Declaration of Trust and Power of
Attorney
This is a remedial device usually
included in certain circumstances to protect the mortgagee. It is ideal for
mortgages created by way of sub-demise pursuant to the Conveyancing Act. The
attorney clause makes the mortgagee to become the mortgagor's attorney in all
cases, throughout the period of the mortgage, especially if the mortgage is
created by sub-demise.
This empowers the mortgagee to
exercise his power of sale in case of default, as an appointed agent of the
mortgagor without reference to the mortgagor. This covenant is not necessary in
the case of a legal mortgage created by sub-demise pursuant to the Property and
Conveyancing Law, since section 112(1)
of the Property and Conveyancing Law provides that the mortgage term shall
merge in the leasehold reversion and the mortgagee can validly sell the entire
interest of the mortgagor including his reversionary interest.
©Onyekachi Duru Esq and www.legalemperors.com,
2016. (All Rights Reserved) Unauthorized use and/or duplication of this
material without express and written permission from this site’s author and/or
owner is strictly prohibited. Excerpts and links may be used, provided that
full and clear credit is given to Onyekachi Duru Esq and www.legalemperors.com with
appropriate and specific direction to the original content.
