Secured Credit Transactions



UNIVERSITY OF LAGOS SCHOOL OF POSTGRADUATE STUDIES FACULTY OF LAW LL.M (2010/2011)COURSE TITLE:PPL 813: SECURED CREDIT 1 1ST SEMESTER 2010/2011SEMINAR TOPIC:THE DISTINCTION BETWEEN A MORTGAGE AND A CHARGE.IS IT MERELY IN NOMENCLATURE?PRESENTED BY:1) IDOWU KOFOWOROLA, MAT. No. 1090610362) SPENCER OHWOFA, MAT. No. 0990611443) OGUNDELE ADEDAYO O., MAT. No. 0206011444) IHUA ARMSTRONGMAT. No. 1090611495) NWABUEZE NGOZI6) EWEDEMI ADEDOYINLECTURER:DR. OLUDAYO AMOKAYEJANUARY, 2011TABLE OF CONTENT.INTRODUCTIONDEFINITION OF MORTGAGE AND CHARGEMORTGAGECHARGEHISTORICAL DEVELOPMENT OF MORTGAGE AND CHARGECHARGEDISTINCTION BETWEEN MORTGAGE AND CHARGEAPPLICABLE LAWS OF MORTAGE IN NIGERIA4.0MORTGAGECHARGEPLEDGELIENFACTORS AFFECTING MORTGAGE TRANSACTIONCAPACITY OF THE PARTIES MORTGAGE TITLEACQUISITION AND COMPENSATIONCONSENT OF GOVERNOR UNDER LAND USE ACT.TOWN PLANNING LAWEVELUATION OF THE PROPERTYSTAGES OF MORTGAGE TRANSACTIONNEGOTIATION INVESTIGATION OF TITLESEARCH FOR TITLEMODES OF CREATING MORTGAGES IN NIGERIALEGAL MORTGAGECOMMON LAW STATESPCL STATESRTL AREAADVANTAGES AND DISADVANTAGES OF VERIOUS FORMS OF MORTGAGE CREATIONMORTGAGE BY CONVEYANCEMORTGAGE BY DEMISEMORTGAGE BY SUB-DEMISEMORTGAGE BY ASSIGNMENTSTATUTORY CHARGELEGAL MORTGAGEEQUITABLE MORTGAGEDEPOSIT OF TITLE AGREEMENT TO CREATE LEGAL MORTGAGEEQUITABLE CHARGE OF MORTGOR’S PROPERTYEQUITABLE MORTAGE BY OPERATION OF LAWMORTGAGE CREATION UNDER LAND USE ACT.CHARGEEQUITABLE CHARGE AND EQUITABLE MORTGAGEFIXED CHARGEFLOATING CHARGESTATUTORY CHARGEDISTINTION BETWEENCHARGE AND MORTGAGEWHETHER OR NOT A CHARGE MAY CREATE PROPRIETARY RIGHTDOES AN EQUITABLE CHARGE OVER A RIGHT OF OCCUPANCY REQUIRE CONSENT?8.0CONCLUSION. INTRODUCTIONThis paper is divided into three (3) sections, in the first section of this work, we would attempt to define the concept of mortgage and charge, we shall also give a brief history of the development of mortgage and charge, we shall also briefly ex-ray the distinction between a mortgage and a charge, the second section of this work would be centered on the question whether the distinction between a mortgage and a charge; it is mere nomenclature? while the last section would contain the conclusion and suggestions. DEFINITION OF A MORTGAGE AND A CHARGE MORTGAGEIt is apparently, easier to describe a mortgage as a concept rather than defining it. However, in attempting to describe the concept of Mortgage in a satisfactory manner both the judiciary and academic have been facing a difficult task. In the case of Samuel V. Jarrah Timber and Wood Paving Corporation. Lord Macnaghten stated thus “that no one, by the light of nature, ever understood an English mortgage of real estate”Maitland in his book “Equity” ( 2nd ed. 1969) p. 182 described this problem as “one long suppressio veri and suggestion falsi”.However, Lindley M.R has described a mortgage transaction in Santley v. Wilde as a charge of property to serve as security for performance of an obligation. The facts of this case was that a mortgage was taken not merely as security for the loan but, additionally, as security for a one-third share of future profits. The transaction in this case was that an estate in land was conveyed to the lender. Different writers have described Mortgage as a conveyance of land or an assignment of chattels as a security for the payment of a debt or the discharge of some other obligations for which it is given.A mortgage has also been described as a legal or equitable conveyance of title as a security for the payment of debt or the discharge of some other obligations for which it is given, subject to a condition that the title shall be re-conveyed if the mortgage debt is liquidated.CHARGE Per Millett, In Re Cosslett (contractors) limited. “as the appropriation of real or personal property for the discharge of a debt or other obligation, without giving the creditor either a general or special property in, or possession of, the subject of the security”.A charge has been explained as an order upon a third party to apply money in his hands to the discharge of a debt or a charge on realty for the payment of a specified amount. The creditor has a right of realization by judicial process in case of non-payment of the debt. Where goods are so appropriated the transaction is sometimes called hypothecation”.Denman J. explanation of legal charge in Tancred v. Delagoa bay as follows:“A document given “by way of a charge” is not one which absolutely transfers the property with a condition for re-conveyance, but is a document which only gives a right to payment out of a particular fund or particular property, without transferring that fund or property”Again, Section 197 (10) of the Company and Allied Matters Act. defines “charge” to include mortgage. 2.0THE HISTORICAL DEVELOPMENT OF MORTGAGE AND CHARGE.The mode of creating mortgages varies according to the applicable law and the nature of interest which forms the subject of the mortgage. The mode of creating mortgages in the earlier days of common law was through pledge.The pledges of land are found in Anglo-Saxon times and the Domesday Book during this time; the rules relating to pledge are dealt with as for movables and then applied by reference to immovable. Possession would usually be given to the mortgagee but he had only a special sort of “vivum vadium or living pledge” Since it would automatically discharge the entire debt, because he is entitled to take rents and profits either in the discharge of both the principal and interest, but when the rent or profit is agreed to discharge only the interest of the debt it is called “Mortun Vadium or dead pledge” since it would effect gradual liquidation of the debt.By sixteenth century the form of the mortgage by pledge had changed. The form mentioned above were replaced by the more convenient covenant where the mortgagor would convey title in fee simple to the mortgagee on the condition that same would be re-conveyed to him by the mortgagee on repayment of the loan at the appointed date and the conveyance to the mortgagee became annulled at the mortgagor free to re-enter. But upon failure to repay the loan on the agreed date, the mortgagor’s interest in the land would extinguish and the title hitherto conveyed to the mortgagee would become absolutely vested in him.This form of mortgage by conveyance became the usual form of legal mortgage of freeholds until the provisions of the Law of Property Act 1925 became operative on 1 January 1926 and it still remains the usual form of legal mortgage in other cases.The alternative form of mortgage by lease continued to be generally used until the early nineteenth century. This form had advantages in that it could be used for a mortgage of both freehold and leasehold land and, since it created only a chattel interest, on the mortgagee’s death this passed to his executors and not to his heir. It had the disadvantage, however that a reversion was left in the mortgagor, even if he defaulted. Moreover, there was doubt as to whether the mortgagee could call for the title deeds. As a result, the mortgage by lease fell into disuse, save for those circumstances where it was particularly useful, for example, for raising portions in family settlements.Whatever form the mortgage took, at common law, upon non-payment by the appointed time the estate of the mortgagee became absolute and irredeemable unless the mortgage provided otherwise. However, with intervention of the courts of equity, , the law of mortgages has been transformed to effect that, the mortgagee’s estate was subject to a right called the equity of redemption, which arose from the courts consideration that the real object of the transaction was the creation of a security for the debt. This entitled the mortgagor to redeem or recover the property even though he had failed to repay by the appointed time. If the mortgagee retained possession, equity held him liable to account for the full rent to the mortgagor.At first, the court would only intervene in cases of special hardship, but by the seventeenth century relief was given as a matter of course. At the same time the mortgagee was in possession became accountable to the mortgagor for rent. The mortgagee was compensated for the special favour shown to the mortgagor by the right of foreclosure. And order of the court, made on the mortgagee’s application, declared that the equitable right to redeem was at an end, leaving the mortgagee with an unencumbered fee simple. If, however, the property was much more valuable than the debt, the court would order a sale of the property with the balance of the debt to be discharged from the proceeds, in order to prevent the remedy being used oppressively. Equitable rights became recognized in common law courts by the Judicature Act 1873. In Nigeria, prior to the intervention of the principles of the English common law and Equity the indigenous form of secured credit transactions were regulated by the customary law, whereby the institution of customary pledge or pawn played a dominant role in the area of protecting the transaction, the security and the interests of parties in relation thereto.However, with the intervention of the principles of the English common law and equity, the provisions of statutes of general application, local statutes, judicial precedents, codes of commercial practice, and international law and conventions, the influence of customary law with regards to secured credit transactions has been restricted and frustrated in the age of complex business relationships and high rate of investment. As rightly stated the frustration of customary law has been further compounded by the provision of the land use Act 1978.2.1CHARGEAlthough the original conception of a charge as a security at common law was that of a mere appropriation of property to the contract existing only in the imagination of equity and transferring neither proprietary nor possessory security, As stated above, a legal mortgage of land may be made, not only by the creation in the mortgagee of a legal estate, but by a charge expressed to be by way of legal mortgage. Under such a mortgage the mortgagee has the same protection, powers and remedies (including the power of sale), as if it had been created by demise and, save that an actual legal estate is not created, a legal charge does not differ from any ordinary legal mortgage.The charge becomes effective at law only when the chargee is entered as proprietor of the charge in the Charges Register of the chargor’s title and, until registration, the chargee holds only an equitable charge.2.2THE DISTINCTION BETWEEN MORTGAGE AND CHARGEA legal charge may be created today in Nigeria with all the paraphernalia of a mortgage. While the Property and Conveyancing Law of the old Western Nigeria has recognized a charge by deed expressed to be by way of legal mortgage as a proper form of legal mortgage, the Companies and Allied Matters Act, has defined a charge to include a mortgage.It has been said that as a result of the development of the equity of redemption, the real effect of a mortgage is much the same as that of a charge and the difference between them is mainly formal. In both types of security, the mortgagor, like the chargor, is still the real owner of the property until enforcement of the security and pending such enforcement, both the mortgagor and the chargor may reap all the profits accruing from the encumbered property and may deal with the property in any way. That the mortgagee may exercise his legal right by entering into possession and exercising possessory rights is a mere declaration of the law with little practical advantage to the mortgagee. While the significant difference between a charge and a mortgage lie in the remedies available to the creditor, Conveyancers in recent times have provided special powers and conditions in charge instruments which make available to the chargee the powers of a mortgagee. Thus, it may be of no moment in modern times whether a transaction is a mortgage or a charge after all.3.0APPLICABLE LAWS TO MORTGAGES IN NIGERIALand Use Act Cap L 5. Laws of Federation of Nigeria 2004Conveyancing and Law of Property Act 1881,1882Property and Conveyancing Law Cap 100 Law of Western Nigeria 1959Registered Tittles Law Cap L 4 Laws of Lagos State 2003Land Instrument Registration Law Stamp Duties Act Cap S 8 Laws of Federation of NigeriaLand Registration ActIlliterate Protection Act Statute of Fraud 1677 Statute of General ApplicationInfant Relief Act.Law Reform (contract) Act.Law Reform (Contract) Law. Cap 114 Laws of Lagos mon Law and Doctrine of panies and Allied Matters Act.4.0MORTGAGEMortgage is the transfer of interest in land as a security for the payment of a debt or the performance of an obligation, after which the interest in the property is transferred back to the debtor.The interest in land could be legal or equitable which will determine quantum of estate to be transferred and re - conveyed back to the debtor once the debt is settledThe debtor or the transferor is referred to as the mortgagor and the creditor or the transferee is known as the mortgagee.Mortgage is therefore the transfer of legal or equitable interest as security for the discharge of a debt or performance of some obligation which is subject to cesser on redemption.Mortgage as contractual transaction is usually between two persons i.e. mortgagor who is using his title to secure loan (mortgage sum) and the mortgagee (the creditor who advances the loan).It should however be mentioned that a third party could be involved as guarantor or head lessor giving or confirming is consent to the assignment or sublease as the case may be in the interest used as security for the loan. Therefore the mortgage transaction will be tripartite.Other forms of security transaction include Pledge, Lien, Conditional sale or Charge.4.1.CHARGE.A charge unlike mortgage is mere appropriation of a specific property set aside for the discharge of a debt, or some other obligation.This form of transaction does not involve transfer of interest or possession of the property to the charge by the debtor. The charge does not have power of sale as a mortgagee does, because he has not acquired any interest in the appropriated property.However, under certain law i.e. PCL a statutory charge acquires all rights and remedies obtainable by a mortgagee despite the fact that no interest is transferred.This class of charge is referred to as charge by deed by way of legal mortgage However, where the chargor or the borrower’s interest in the property is equitable and cannot thus transfer legal interest to the lender, an equitable charge is created.4.2PLEDGEPledge is the delivery of possession of that property as security for a debt subject to redemption.Distinguishing feature in this transaction is that it is not interest that is transferred as in mortgage but the physical possession of the property. Such transfer excludes others from possession including the pledgor. The pledgee cannot foreclose since he has no interest in the property.To realize his security he has to obtain court’s order to sell the property. A pledge is not subject to limitation laws and thus it is perpetually redeemable.4.3LIENUnlike mortgage that is essentially contractual lien arises by operation of law*(Gladstone v Birley ER Vol.35).Lien is the right in a person to retain property belonging to another person, which is in his possession. This detention continues until the debt or certain obligation is discharged.Lien could also be maritime or equitable;Maritime lien is the power to have a ship or cargo and certain interest therein realized, and the proceed used to discharge debt due to the party having lien.Equitable lien is right to hold certain property applied in specific manner e.g. vendor’s lien on property conveyed until the balance of the purchase price is paid.5.0FACTORS AFFECTING MORTGAGE TRANSACTION.As a contractual transaction, the parties must ensure that conditions that will make it enforceable are well looked into and those that can vitiate the transaction must be avoided.Before we venture into the stages of the contract, we must first look into the Capacity, Title, Acquisition and Compensation, Consent, Evaluation, Planning.Capacity of the parties involved:-In the conveyancing Act states i.e. Eastern, Northern and Lagos state(excluding the RTL zone), an infant cannot enter into a mortgage transaction. Such transaction will be void under infant Relief Act 1874 and the money in not recoverable.In the Property and Conveyancing Law States i.e. Oyo, Ondo, Osun, Ekiti, Edo and Delta States transaction of land involving an infant is voidable only at the instance of the infant; but not void. Until the infant attains majority he is said to hold the beneficial interest in the land in trust for the mortgagee.Statutory Corporation: Capacity to enter into contractual transaction like mortgage has been ameliorated by CAMA Sect 39(3) by wittling down the harsh effect of common law principle which limit them with the object clause. Persons of unsound mind not under general law into mortgage transaction during his lucid interval provided a receiver has not been appointed for him.If the mortgage is aware of the insanity, the transaction is voidable and maybe avoided.Trustee has no right to borrow money using the trust property as security in a mortgage transaction unless such power is reserved for the trustee in the trust instrument or by statute. Mortgages Title: If the mortgagor cannot provide a good title then the security of the mortgagee will be in jeopardy. In case the property belongs to a 3rd party, the consent of the owner must be sought and hard.Where the title of the mortgagor is found to be defective the security of the mortgagee becomes unsecured debt and can only be recovered by action for recovery of debt like any other debt.In Erikitola V Alli: Mortgage was set aside where a domestic servant used family land given to him without the consent of family head or principal members as security for personal loan.Acquisition and Compensation:- for the preservation of the property to secure this interest, mortgagee must look into this so that the res is preserved in case of default by mortgagee.Consent of Governor under Land Use Act:- Under the Act where the consent is not obtained before the transaction and consent not obtained subsequently or transaction completed without the consent, such transaction is rendered void by the pliance with the town planning law:- so that the property is preserved.Proper evaluation:- of the property is essential, so that various economic factors which may negate the interest of the mortgagee should be adequately considered by the valuer.5.1STAGES OF MORTGAGE TRANSACTION; Negotiation:- This involves discussion on loan to be advanced and the borrower gives detail of the property to be used for the security.Investigation of Title and Evaluation of the property:- Mortgagee must investigate the title to ensure its infallibility before advancing loan. This to the fact that a defective title from mortgagor renders the loan unsecured and can only be recovered by action on loan recovery.The Search for Title: This is given to a solicitor who conducts a comprehensive search and files his report on the state and situation of the title of the property. If the report is favorable, the parties will now proceed to contract stage of loan agreement. The contract is now put into writing.The next stage is the drafting of the mortgage deed by the solicitor. The terms of the contract will depend on the interest of the mortgagor to be transferred to mortgagee as security for the loan.The completion of the deed to the satisfaction of both parties will necessitate the execution of the document .If any of the parties involved is either blind or illiterate then the execution must be done in presence of judge, magistrate or justice of peace.The deed which is the instrument of the transaction stamped at stamp duty office, obtain the consent of the Governor and the instrument is registered at the land registry.5.2MODES OF CREATING MORTGAGES IN NIGERIAIn Nigeria mortgages are basically created according to laws applicable in the jurisdiction of the mortgage transaction, and the nature of interest in the property involved in the transaction.Without going to the history of creation of mortgage in the harsh days of common law before the advent of equity which saved defaulters through introduction of right of equity and equitable right of redemption .Mortgages in Nigeria are basically created based on jurisdiction (i.e. state and applicable law) and the interest or the estate in the property for the transaction (i.e. legal or equitable).Legal Mortgage In common law states i.e. Northern and the Eastern states (where Conveyancing and Law of Property Act is applicable) also referred to as CA states. Mortgage of freehold is created by the transfer/conveyance of whole interest in the land to the mortgagee. A mortgage of leasehold is created by the assignment of the whole lease to the mortgagee.In the Property and Conveyancing law (PCL) states i.e. Oyo, Ondo, Ogun, Osun, Ekiti, Edo and Delta; the grant of the whole interest in land is prohibited. In PCL states mortgage of freehold land can be created by granting a lease or demise to the mortgagee since he is prohibited to grant the whole interest. He can only create a mortgage by demise for a term certain even where he intends to transfer the whole interest to the mortgagee as security for the loan granted .In which case where there is intent to transfer the whole estate, this is converted into lease of three thousand yearsWhere the mortgagor has leasehold interest, he can only create a sub-demise. This is due prohibition PCL to assign his whole interest by way of assignment.He may also create a legal mortgage through Statutory charge by deed expressed by way of legal mortgage In RTL (Registered Title Law),Legal Mortgage can be created by charge using form 5 in the first schedule pursuant to section 18.The form can be adapted by draftsman to suit then circumstances of the transaction.5.3Advantages and Disadvantages of various forms of Mortgage Creation.Mortgage by Conveyance: Advantages; 1. Mortgagee can transfer the whole interest of the mortgagor to a purchaser in exercising his power of sale.2. Mortgagee has the whole interest of the mortgagor vested in him, therefore has right to retain the title.Disadvantages;1. Mortgagor cannot create subsequent mortgages, since all his interest has been transferred.2. Limited to states under Conveyance and Law of Property Act.Mortgage by Demise: Advantages;Successive mortgages can be created since he has reversionary interest in the property. The mortgagor can therefore use the same mortgaged property to secure further loan. Disadvantages;The mortgagee cannot transfer the whole interest of the mortgagor to a purchaser including his reversionary interest since he does not have the entire interest. Where the mortgagor intend to transfer all the in interest; though not possible in CA states, the PCL provide for this through the use of Declaration of Trust or Power of Attorney in respect of the reversionary interest.The Mortgagee may not have custody as the mortgagor has reversionary interest to be protected by keeping the title. In PCL mortgagee has the right to keep the title. Mortgage by Sub-Demise: Advantages;The mortgagee is not bound by covenants in the head lease as there is no privity of estateMortgagor can create successive mortgage on the same mortgage property on his reversionary interest.It underscores the essence of uniformity as it applies in both CA and PCL StatesDisadvantages;Mortgagee cannot transfer the whole interest (Under CA) of the mortgagor since the mortgagor has reversionary interest. This is same as in Demise in PCL state, but in PCL states S.112 (1) of PCL provides for merging of the interest and the reversionary with Declaration of trust or Power of Attorney. So that mortgagee can pass title to purchaser.The mortgagee cannot enforce beneficial covenants in the head lease since there is neither privity of estate nor contract between him and head lessor.The mortgagee cannot be in possession of title deeds, (except in PCL) because the mortgagor will protect his reversionary by holding on to the title deeds.Mortgage by Assignment: Advantages;Mortgagee can transfer the whole interest of mortgagor to a purchaser.Mortgagee can transfer the whole interest since there is privity of estate between the mortgagee and head lessor.Mortgagee has right to custody as the mortgagor no interest left to protect.Disadvantages; Mortgagee is bound by all the covenants in the head lease that touch and concern the land.Mortgagor cannot create successive mortgages having transferred the whole of interest to the mortgagee.Mortgage by assignment is possible only in CA states, it is not in line with the principle of uniformity of mortgage creation in Nigeria.Statutory Charge: Advantages;Prescribed forms are used instead of deed and are adaptable to circumstance of each transaction. Form 5 in Lagos and Form 1-3 in PCL.Mortgagee has all rights in legal mortgage despite mortgagor’s interest not transferred.Mortgagor can transfer interest in properties despite variation in their interest (freehold or leasehold).mortgagor only need to describe them in the form.Charge can be discharged by statutory receipt and not by Deed of reconveyance or Deed of Release. Statutory charge is used to circumvent the restrictions in assignment and sub-letting.Advantages of Legal Mortgage;Mortgagee has power to sell the property.Mortgagee can appoint a receiver once his right of sale has become exercisable without recourse to courtHas priority over equitable mortgage where equities are equal.Has right to possession even before default.5.4Equitable MortgageAgreement transferring the equitable interest in land as a form of security is essentially equitable mortgage. The mortgagee acquires equitable interest which is not as secure as legal mortgage.The mortgagee in practice protect themselves by requesting the mortgagor at the time of creating the equitable mortgage sign a legal mortgage and consent form, which is kept aside until the mortgagor is in default of repayment and the mortgagee will perfect the legal mortgage to enable him exercise the statutory power of sale. They are preferred method of creating security for short term loan. This form of mortgage creation cuts across various jurisdiction across Nigeria. Therefore there is no variation in the creation of equitable mortgage in Nigeria.This form of mortgage can be created in various ways;Deposit/delivery of title Deed: Deposit of title with intent to use same as form of security will create an equitable mortgage, whereas ordinary deposit without more in itself is not sufficient to create equitable mortgage. In practice, if the title deed is accompanied by memorandum of deposit under seal the equitable mortgagee is conferred with power of sale. However, since the mortgagee does not have legal interest to pass to a purchaser, a power of sale or declaration of trust, or both, are embedded in memorandum to enable the mortgagee pass good title.Agreement to create legal mortgage: During the course of transaction, a mortgagee may agree and even advance loan to mortgagor, based on the agreement that on future date the mortgagor will execute a deed of mortgage in favour of the mortgagee who has given out the loan, which has created equitable mortgage. If the mortgagor tries to renege on the agreement i.e.to execute the mortgage deed, the mortgagee can secure an order of specific performance compelling the mortgagor to execute the deed and if he defies the order, the court may direct any of the officer of the court to execute the deed for and on behalf of the mortgagor and such execution will be held to be valid in passing a good title to the third party purchaser.In Ogundaini v Araba, Ashiru deposited his title deed with the bank in respect of one property at Ijebu ode and another at Lagos accompanied with memorandum in which Ashiru covenanted to covey to the bank a legal mortgage of both properties in the event of his failure to discharge the overdraft. On default he refused to create the deed as promised .The Bank then commenced an action for declaration. The trial court gave judgment to the bank but refused specific performance. On appeal the Supreme Court ordered specific performance. Ashiru failed to comply and the court caused a legal mortgage to be executed by the registrar of the high court on behalf of Ashiru in respect of the properties and the bank sold the properties by public auction. Ashiru again went to court to contest the sale, while the action was still pending and to the notice of the buyer Ashiru went on and purportedly sold the properties, the buyer then commenced action against who bought from the bank seeking declaration that the auction was illegal, void and of no effect. The court of appeal held that the order of specific performance was in order and that the equitable mortgagee can pursue all statutory remedies open to legal mortgagee.Equitable charge of the mortgagor’s properties: In this case the property is mere appropriated as security for the loan. There is no transfer of interest to the chargee. Here, there is no intention to create a legal mortgage therefore the chargee has no interest to enlarge to the status of legal mortgagee; he can only realize his security by way of repayment out of the property. Unlike equitable mortgagee this charge does not vest any estate in the chargee, he cannot order for specific performance, cannot foreclose the equity of redemption .His remedy lies only in proceeds from the sale of the property through the appointment of receiver by an order of the court. Equitable mortgage by operation of law: equitable mortgage may occur by operation of law where the purported legal mortgage is defective. Where a mortgage was annulled for non-compliance with section 22 of the land use act 1978.Failure to create an effective mortgage in law does not preclude the existence of a valid mortgage.5.5MORTGAGE CREATION UNDER THE LAND USE ACT It is important to discuss mortgages and charges under Land use act, since the act swept away all indeterminable interest in land. This is replaced with limited estate in land which is right of occupancy.The land use act does not affect the existing laws of mortgage but rather modifies as to ensure conformity with the act or its intendment.The right of occupancy in land use act extinguishes the unlimited interest in land ownership which connotes inability of land owner to convey freehold interest, except assignment of right occupancy in creation of mortgage in common law states .i.e. CA states.In PCL states, where the interest is freehold, mortgage can be created by demise for a term of years certain. Where he intends to transfer the entire interest, it is restricted to three thousand years – a subgrant is substituted in Land use act. In case of leasehold in PCL states where mortgage is created by sub demise – a subundergrant is substituted. Under the land use act statutory right of occupancy granted by the governor may be mortgaged subject to Governor’s consent first had and obtained. Failure to comply with this provision renders the mortgage transaction void.Under RTL, mortgage can be created by charge using form 5 in the first schedule pursuant to section 18. The statute place a total bar on alienation to create mortgage in non-urban land with right of occupancy whether statutory or customary.Inconsistency in right of occupancy grant by governor jeopardizes mortgage transaction, where the title is found to defective the mortgagee may lose his security at the instance of a party with superior title. The statute reduces the security of a mortgagee of deemed grant of statutory right of occupancy on undeveloped land in urban area covering an area more than half hectare, since the mortgagor is not entitled to more than half hectare of land. Any security in excess of half hectare is forfeited to the stateThe statute provided that before consent sought is given, the governor may require the production of the mortgage instrument transferring the interest to the mortgagee. In effect the forms of mortgage remain intact whether legal or equitable.6.0CHARGE A charge is a security whereby real property is appropriated for the discharge of debt or other obligation but does not pass either an absolute or a special property in the subject of the security to the creditor, nor any right to possession.In the event of non-payment of the debt, the creditor’s right of realization is by judicial processCharge does not grant the chargee immediate right in the mortgage property as it does in mortgage but the result of his judicial right – order of sale by the court. The proceed of sale is held in trust for the charge.Charges are created by agreement between parties, contract, settlement, will or by appropriation of realty or personalty for the discharge of chargor’s obligation to the charge.Charge by way of contract over land must be contained in a single document signed by the parties containing all terms of that contract.A charge over after-acquired property will not be effective. The Doctrine of distinction between charges and mortgages is the right of ownership granted to a mortgagee by a mortgage which does not apply in an ordinary charge.Debate in older cases inadvertently or advertently merged the two.However, recent cases have asserted the importance of the difference between the two. It is suggested that the distinction between the two is principally the grant of ownership right in mortgage which the ordinary charge does not.6.1Equitable Charge and Equitable Mortgage.In contrasting equitable charge and equitable mortgage; the following dicta of Buckley L.J illustrate the great similarity between the concepts which have appeared in a number of decided cases but also illustrate the need to maintain a distinction between the two concepts. “An equitable charge may take the form of an equitable mortgage of an equitable charge not by way of mortgage. An equitable is created when legal owner of the property constituting the security enters into some instrument or does some act which though insufficient to confer a legal estate or title in the subject matter upon mortgage, nevertheless demonstrate a binding intention to create a security in favour of the mortgagee, or in other words evidences a contract to do so…………An equitable charge which is not an equitable mortgage is said to be created when property is expressly or constructively made liable, or specially appropriated, to the discharge of a debt or some other obligation ,and confers on the charge a right realization by judicial process, that is to say, by the appointment of a receiver or an order for sale.A charge does not create a proprietary right but rather it create a right in judicial process which empower the charge right to the proceed made from the sale of the property to satisfy the chargor’s security.The right so created on the event default in payment obligation under the charge. Unlike in mortgage, mortgagee has a right of possession at common law “even before the ink dry on the contract ’’.The right so created after default is only in relation to fixed charge.6.2 Fixed Charge: A fixed charge grants contingent proprietary rights to the charge, which entitles the charge to take full proprietary rights over the charged property, the contingency being that the chargor’s must have defaulted in some defined obligation. 6.3 Floating Charge: Unlike fixed charge where the right is attached specified and identified property, a floating charge has a value which takes effect over a range of property but not any specific property until the point in time which it crystallizes.The floating charge affords the chargor to deal with property without reference to the charge, unlike fixed where the charger could be restrained from dealing with the property without recourse to the charge. Floating charge relates to company assets present and future; it is that class of assets which in ordinary course of business changes from time to time, and remains unencumbered from use until crystallization.6.4 Statutory Charge: Statutory charge has all the features of ordinary charge i.e.no transfer of interest or proprietary right, appropriation of property as subject matter of security. It is statutory because it is created by law.Statutory charge acquires all the rights and remedies of a legal mortgage.7.0DISTINCTION BETWEEN A CHARGE AND A MORTGAGEAlthough the terms are used interchangeably by many practitioners, a charge and mortgage are not the same thing. The strength of Article 9 of the uniform commercial code is that it provides a unified concept of security, so that we need no longer distinguish for security purposes between a mortgage, a charge and a reservation of title under a hire-purchase or conditional sale agreement. But the distinction may still be relevant for other purposes, e.g. in resolving a priority dispute between the holder of an Article 9 security interest and a party claiming an equitable tracing right as bailor of goods wrongfully disposed of by his bailee. Moreover, even Article 9 finds it necessary to maintain a distinction between possessory and non-possessory security. A mere charge (that is, one that does not include an agreement for a mortgage) gives the creditor no interest in the goods which it refers to but merely gives them a right in preference to other creditors, to look to the goods to satisfy the debt due to him, and for this purpose to follow the goods into the hands of any third party other than a purchaser for value of the legal title without notice of the charge or a person having a charge or other claim over the goods ranking in priority to that of the charge.The main distinction between a charge and a mortgage is that in case of a charge there is no transfer of interest in the property but only the creation of a right of payment out of the property while a mortgage amounts to a transfer of interest in the property. A charge cannot also be enforced against the property in the possession of a person to whom it has been transferred for consideration and without notice of the charge while a mortgage can be enforced even against a transferee for consideration without notice of the mortgage.Some other distinctions are as follows:A charge is by way of security for the payment of money which may or may not be a debt. Mortgage is by way of security for the payment of a debt.A charge is the result of act of parties or by operation of law while a mortgage is generally by act of parties.In a charge, a purchase of property for value without notice can be raised as a defence. But such defence is not available in the case of a mortgage.Charges, as opposed to mortgages, take effect only in equity.There is a doctrinal distinction between mortgages and charges due to the immediate right of ownership granted to a mortgagee which is not granted by an ordinary charge. In contrasting an equitable charge with an equitable mortgage, the following dicta of BUCKLEY LJ in the case of SWISS BANK CORP. vs. LLOYDS BANK [1982] AC 584@594 illustrates the great similarity between the concepts which have appeared in a number of the decided cases but also illustrates the need to maintain a distinction between those two concepts;“An equitable charge may, it is said, take the form either of an equitable mortgage or an equitable charge not by way of mortgage. An equitable mortgage is created when the legal owner of the property constituting the security enters into some instrument or does some act which, though insufficient to confer a legal estate or title in the subject matter upon the mortgage, nevertheless demonstrates a binding intention to create a security in favour of the mortgagee, or in other words evidences a contract to do so… An equitable charge which is not an equitable mortgage is said to be created when property is expressly or constructively made liable, or specially appropriated, to the discharge of a debt or some other obligations, and confers on the chargee a right of realization by judicial process, that is to say, by the appointment of a receiver or an order of sale.” 7.1 WHETHER OR NOT A CHARGE MAY CREATE A PROPRIETARY RIGHTOrdinarily, as considered above, a charge doesn’t technically create a proprietary right for the chargee but rather creates a right to judicial process which will then empower the chargee to seize the charged property if an underlying debt or other obligation has not been satisfied in good time or in accordance with the terms of the appropriate contract. Nevertheless, there are two recent decisions of the House of Lords in which it has been suggested that charges create proprietary rights, in spite of the strict position under the case law which has distinguished between charges which ordinarily do not create proprietary interests and other structures which do create proprietary rights such as trust and mortgages.In Nigeria, although an equitable charge does not involve a transfer of an interest of a right of occupancy, it undoubtedly involves a transfer of a right over it. This is what makes an equitable charge a real security and gives it its proprietary character. Nevertheless it suggested that it is only in relation to a fixed charge that there could be such a proprietary right.7.2 DOES AN EQUITABLE CHARGE OVER A RIGHT OF OCCUPANCY REQUIRE CONSENT?On the face of it this question ought to be answered affirmatively since an equitable charge especially if properly drafted, so resembles an equitable mortgage that one ought to construe the equitable mortgage referred to in the definition of a mortgage in section 50(1) of the Land Use Act 1978 as encompassing an equitable charge. In law, however, the distinction between an equitable mortgage and an equitable charge is well established.The question, then, is why should an equitable mortgage require consent but not an equitable charge? Let us take section 22 of the Land Use Act as representative of the consent provision. It provides that:“It shall not be lawful for the holder of a statutory right of occupancy granted by the military Governor to alienate his right of occupancy or any part thereof by assignment, mortgage, transfer of possession, sublease or otherwise whatsoever without the consent of the military governor first had and obtained.”Section 50(1) of the Land Use Act defines a mortgage as including an equitable mortgage but as we have seen, in legal theory, though not in practice, an equitable charge is altogether a different animal from an equitable mortgage. Since the draftsman is presumed to know the distinction between an equitable charge and an equitable mortgage and also because an equitable mortgage will not ordinarily include an equitable charge, the absence of any reference to a charge in both section 22 and 50(1) the Land Use Act impliedly excludes it from the definition of a mortgage. It follows, therefore, that unless an equitable charge be brought within the phrase “or otherwise however” in section 22 it doesn’t require consent. 8.0 CONCLUSIONAlthough the terms are used interchangeably by many practitioners, charge and mortgage are not the same thing. The chargee gets no right of possession and, apart from contract, he has no right of foreclosure, for he has no estate capable of being made absolute, the remedy of an equitable chargee, in the absence of any contrary provision in the charge document, is to have it enforced by proceedings against the chargee for an order of judicial sale or the appointment of a receiver. In practice, however, as a matter of contract the chargee is usually given a power of sale, a power to execute a legal mortgage as an attorney of the chargor and a power to appoint a receiver who is made the agent of the chargor. This contractual amplification of the powers and remedies of the equitable chargee, first shows the artificiality inherent in distinguishing an equitable charge from a mortgage, second, makes it difficult to locate precisely where the distinction lies, and, third, diminishes almost to vanishing point such distinction as may be thought to exist. ................
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