SECURITY DOCUMENTATION AND PERFECTION OF LEGAL MORTGAGE - CHALLENGES OF A LEGAL OFFICER



BANK FACILITY   & SECURITY DOCUMENTATION – PERFECTION OF LEGAL MORTGAGE – CHALLENGES

Commerce and investments are the key drivers of any economy. The place of finance cannot be over-emphasised here. Banks play key role in the provision of fiancé in form of credit facilities to individual investors, corporate entities, multinationals etc. Banks in the provision of these credit lines to entrprenuers are faced with risks of non- compliance of the creditors to the repayment plan and accepted lending terms.

In most occasions, credit facilities are not repaid leaving the bank at the long battle of litigation with the debtors. Even when judgment is awarded to them and goes ahead to levy execution, they may still not have any security interest in the property.

 In the face of the uncertainties surrounding the repayment of the credit line given the creditors, the banks in many instances take proactive steps to secure their exposures. Some of the securities often taken by the banks include: Legal mortgage, Debenture, Lien and charge etc.

The Banks and Other Financial Institutions Decree No. 25., 1991 ;sections 20(1) (b) and section 20 (2) (a) and (b) provides credit limit beyond which banks cannot go without security. The Failed Banks (Recovery of Debts) and Financial Malpractices in Banks Decree No. 18 1994, section 19 (1) (a) (as amended) makes it mandatory for banks and other financial institutions to obtain security when giving out credits. It provides: “ …any director, manager, officer or employee of a bank who knowingly, recklessly, negligently or willfully or otherwise grants, approves or otherwise connected with the grant or approval of any credit facility without adequate security or with no security as normally required, or with a defective security, or without perfecting a security is guilty of an offence punishable with 5 years imprisonment without an option of fine pursuant to section.20(1) (a) of the Law”.

This shows that it is imperative on Banks and indeed all the employees and Management to do all it takes to secure their credit exposures.

 MORTGAGE:

Lord Lindley in the celebrated case of Santley v Wilde (1899) Ch.p.474 defines a mortgage as “a legal or equitable conveyance of title as a security for the payment of debt or the discharge of some obligations for which it is given, subject to a condition that the title shall be reconveyed if the mortgage debt is liquidated” the crux of mortgage as a security  is a right of property vested in the creditor (mortgagee) to have rents and profits applied to satisfy the debts and upon default by the debtor (mortgagor) to liquidate the loan, to enforce the security by sale or foreclosure.

The borrower, debtor who conveys the property is called the Mortgagor, the lender who obtains interest in the property is called the Mortgagee and the debt, money for which the security is created is called the Mortgage debt.

TYPES OF MORTGAGE:

Mortgages can either be between two parties or three parties. It is two parties when the mortgagor is both owner of the property pledged and the borrower of the loan. The mortgage therefore is between the mortgagor and the mortgagee.

It is third party (tripartite) where the mortgagor is different from the owner of the property. The property is owned by a third party called surety mortgagor. The parties here are the mortgagor customer, the surety mortgagor and the mortgagee.

We have two types of mortgage; the equitable mortgage and the Legal mortgage.

EQUITABLE MORTGAGE:

It is created in three different ways:

a.            where the interest of the mortgagor is itself equitable, therefore whatever mortgage he creates thereon to another party must be equitable – nemo dat quod non habet.

b.            where the owner of the property had agreed to create a legal mortgage in favour of the creditor, issued drafts for the perfection and along the line something stops the perfection.

c.             the actual deposit of title document with written evidence to show that the mortgagor intended to mortgage the property to the creditor. See African Continental Bank Ltd v. Yesufu (1977) NCLR p.212.

LEGAL MORTGAGE:

This takes effect when the legal charge has been placed on the mortgagor’s property after the mortgagor has submitted the original title documents to the mortgagee and executed all the forms and issued the required statutory drafts for the perfection.

DOCUMENTATION NEEDED FOR LEGAL MORTGAGE:

1.            Title document:  This must be the original not photocopy

2.         The legal mortgage forms: This must be well executed by the mortgagor and surety mortgagor where applicable. If the mortgagor is a corporate body, then the mortgagor must be executed by the two directors of the company or the Director and the Company Secretary, and it must be under the company’s seal.

3.            Land form 1c: This applies to lands in some towns in Lagos. The owner of the property must sign as the grantor while the lender executes as the grantee.

4.            Tax clearance certificates: The current tax clearance certificate of the mortgagor is needed.  where the property belongs to the company, the tax certificates of the company and two of its directors must be submitted. If it belongs to a third party, then the tax certificate of the third party and the company must be submitted.

5.            Development Levy: The current receipt evidencing payment of the special development levy must be submitted.

6.            Ground Rent Receipt: the current receipt evidencing payment of ground rent must be submitted.

DRAFTS & PAYMENTS:

The mortgagor is expected to make drafts available for the perfection exercise. The statutory fees

payable differ from state to state. In Lagos state for instance, the mortgagor is expected to issue the

following drafts: consent fee, Registration fee, Stamp duty fee, Charting, endorsement & form1c fee,

Administration fee, CTC of title document fee.

PERFECTION OF LEGAL MORTGAGE:

Perfection of a mortgage involves three key stages:

i. stamping

ii. Governor’s consent

 iii. Registration.

STAMPING: A mortgage security must be stamped to be admissible as evidence of a loan agreement of asecurity transaction in a court of Law see Section 22 Stamp Duties Act. Cap 411 LFN 1990; Cap 411 LFN 1990. However, a penalty or fine  is payable for late stamping  section 80 CAP411 LFN 1990.  Drafts for payment of stamp duties are made in favour of FGN, Federal Inland Revenue Services, Stamp Duties Account. This is paid at the Federal Inland Revenue Services (FIRS) Office. Stamp duties for Legal mortgage is calculated at N15,000.00 per million.

GOVERNOR’S CONSENT: Governor’s consent is one of the condition precedents of a valid mortgage

transaction. It is the next stage after the stamping of the mortgage. Perfection is not complete until the Governor’s consent is obtained see Awojugbagbe Light Industries Ltd V Chinukwe (1993) 1 NWLR (PT. 270) P.485. It is not automatic, it is granted after certain conditions are met which include, payment of ground rent, self-assessment tax, consent fee, which is one percent of consideration in Lagos State.

REGISTRATION: A mortgage agreement is a registerable instrument and must be registered, failure to do so makes it inadmissible in evidence to prove the existence of the security see section 2 Lands Registration Act 1924. A registered instrument has priority over other competing instrument and priority is ranked from the date of the registration itself.

CHALLENGES:

1.         POOR DOCUMENTATIONS: Most often than not, the credit officers lack knowledge on the proper documents needed and also how the mortgage forms are to be filled and executed.

2.         LACK OF CO-OPERATION: Most customers at the inputation of credit facilities take all steps to frustrate the perfection of the mortgage. They refuse to show co-operation with the Branch in provision of any documents outstanding and necessary for the perfection including issuance of their drafts or cheques.

3.        COMPROMISE: many atimes credit officers and indeed Branch managers collude with the customers to stall the perfection of the mortgage. At times  due to pressure to keep the customer and in some instances out of selfish purposes.

4.        UNNECESSARY BUREAUCRACY: many atimes efforts at swift perfection of mortgages are stalled and frustrated at the different Government agencies involved in the assessment and perfection exercise, like the Lands Registry, Federal InLand Revenue Services (FIRS), Corporate Affairs Commission (CAC) etc.

RECOMMENDATIONS:

1.            Legal officers should engage the credit officers in frequent education and trainings on the documentations required and how the documents are to executed to ensure smooth perfection exercise

2.            Legal officers to inform the credit officers and customers early enough before the acceptance of the Offer letter the cost of the perfection to enable them take a decision.

3.            Receipt of all documents required for a smooth perfection including all the drafts for statutory fees and professional fees before facility inputation.

4.            More trainings, seminars and exposure for Legal officers on the secured credit.

5.            Disciplinary actions to be put in place for Branches, Managers and indeed all officers found to be actively or passively frustrating the perfection exercise as this is sabotage.