An Appraisal Of The Mortgage Foreclosure Right And Its Limitations In Nigeria
The purport of this article is best introduced with a practical analogy.Let us imagine a country where 80% of Debtors (Mortgagors) do not repay money loaned to them by financial institutions (Mortgagees) and where the civil court’s proceedings are largely cumbersome and time-consuming which invariably favour the Debtor (Mortgagor). Will that kind of system not cripple the sector and by extension the country’s economy? Will this not impact negatively on entrepreneurs and start-ups who have profitable projects? Will these entrepreneurs and start-ups ultimately not have limited access to the loans when needed? In essence, will it not limit the provision and access of funding and capital from a prospective Mortgagee? The major objective of a Mortgagee in a mortgage transaction is to fully recover the principal and interest on the date agreed by both parties for the repayment of the debt/loan, while releasing the collateral back to the Mortgagor. Indeed, a collateral usually landed properties, is taken to secure the Mortgagee in instance s where the Mortgagor defaults in the repayment of the loan advanced to him. To fully exploit the security taken with a view to recovering the mortgage sum, there are certain legal or equitable remedies available to the Mortgagee. Foreclosure is one of the ready to use remedies available to a Mortgagee to recover the mortgagesum.We will in this piece appraise the right of foreclosure open to the Mortgagee and itslimitations under the Nigeria’s law.
What is an action of Foreclosure?
A simplified meaning of foreclosure is defined as a judicial procedure by which the Mortgagee acquires the mortgaged property for himself free from the Mortgagor’s equity of redemption in order to recover the mortgage loan in a mortgage transaction. Foreclosure is a result of failure of the Mortgagor to pay off a mortgage loan after the expiration of the legal due date. Upon a careful study of the judicial process and procedures in Nigeria on recovery of debt in mortgage transactions, certainly most Mortgagees have seen foreclosure as an effective remedy available to recover its debts because it immediately empowers him to sell the collateral, which ideally should be sufficient to cover the facility. 1 In Afribank v. Alade 2 the Court on foreclosure posited that:
“The word foreclosure is a term of art used in conveyance practices, particularly in a legal mortgage which means that the estate mortgaged or secured in, as the mortgaged property has become the property of the mortgagee by the order made in a foreclosure suit. Sometimes, the agreement of foreclosure is contained in the deed. The order of foreclosure is usually made upon the proved default of the mortgagor to observe the mortgage terms. Failing the institution of a suit, the terms of the mortgage may provide conditions upon which the mortgaged property may be sold if the mortgagor defaults in payment of the mortgage debt. See Stroud’ ;s Judicial Dictionary volume 4 at page 1075.”
It is not in dispute in law that the remedy of Foreclosure is available to both legal and equitable mortgage. The overall effect of an order of foreclosure is that it endows the totality of the interest in the property in the Mortgagee. Foreclosure cannot be done by self-help but by the order of the Court.
1. Why is foreclosure order needed
The need for a foreclosure order can arise when a Mortgagor fails to liquidate the loan advanced to purchase a property or when a reasonable time has passed and the Mortgagor fails to repay the mortgage sum. For this right to become actionable, some essential elements must however be present; the Mortgagor must be shown to have defaulted in the payment of any instalment of interest in the mortgage loan when due; or where no date is fixed for payment, after a demand or notice has been made by the Mortgagee. A Foreclosure order is even more imperative in cases where an equitable mortgage exists since a Legal Mortgagee has the option to exercise the power to sell the property in the event of a default by the mortgagor.
2. Is foreclosure order readily available to all class of persons in a loan transaction?
From a very practical perspective, indeed the right to foreclosure is restricted. It is not all class of persons that this remedy is available to in the event that the Debtor/Mortgagor defaults in repaying the loan sum. However, the following are the class of persons who may institute an action of foreclosure: · The Mortgagee (legal or equitable)
Legal Mortgagee: In a legal mortgage once the day fixed for redemption is passed, the Mortgagee becomes the absolute owner of the mortgagedproperty.
Equitable Mortgagee: In the case of equitable mortgage, the equitable Mortgagee may exercise the right of foreclosure. This is however predicated on the creation of the equitable mortgage by an agreement (whether express or implied), or by such deposit of title deeds accompanied by an agreement by the Mortgagor to give a legal mortgage if the debt is due or the Mortgagorfails in repayment of the loan.
- Assignee: An assignee has the right to institute an action where a Mortgagee assigns the mortgage’s security. However, it is subject to the state of the accounts between the Mortgagor and Mortgagee at the date of the transfer.
- Others that may institute an action for foreclosure are: Co-mortgagee, Personal representatives, Trustees of the mortgagee as the case may be.
3. Mode of Commencement of foreclosure action in Nigeria
An action for foreclosure is commenced either by a writ of summons or by originating summons in the appropriate High Court. However, most lawyers prefer to use an originating summons because its proceedings are faster than those commenced by a writ of summons. Where the same Mortgagor takes out different mortgages, the different parties (Mortgagees) may bring foreclosure actions together in a consolidated action against the Debtor/Mortgagor.
3 Where the action is instituted solely to enforce the remedy of foreclosure, one of the reliefs sought by the Mortgagee will include an order that an account be taken of what is due to the Mortgagee under the mortgage. This must be specially described,whether principal, or i nterest and /or cost. An order that the mortgage may be enforced by foreclosure is usually sought. The Mortgagee may ask for sale in the alternative to foreclosure but the court may suo moto direct this even where it is not sought.One established principle of law is that where the mortgage is an equitable mortgage by deposit of title deeds, whether accompanied by a memorandum or not, the Mortgagee may claim a declaration that he is entitled to be considered as a Legal Mortgagee before claiming on account and enforcement of a security. 3 The legal maxim translated thus, “equity regards as done that which ought to be done,”applies in this instance to enlarge the title of an equitable Mortgagee to that of a Legal Mortgagee upon an order of foreclosure by the court. It is instructive to note that a foreclosure order/action can be cancelled, delayed, or avoided at any time prior to the sale at the courthouse. 4
4. Is there a limitation of time in instituting an action of foreclosure?
Limitation of time is an important factor to be considered when instituting an action of foreclosure because the Mortgagee (either equitable or legal Mortgagee) can become statute-barred and prevented from recovering the mortgage sum and interest. Where this right to recover the mortgage sum is extinguished, the Mortgagee cannot exercise any other remedy ordinarily available to him. 5 It should be noted that the Mortgagee has a long twelve years within which to recover the mortgage sum and from experience the court follow this limitation period strictly. Typically, this period usually begins to run from when the right to recover the loan accrued.
5. When is the order of foreclosure issued by the court?
An order of foreclosure is not a one-off process because it is usually granted in stages. At the first stage, an Order Nisi is granted while at the second stage an Order Absolute is effectively granted.At the Order Nisi stage, the Mortgagor still has the right of redemption for a period of 6(six) months. This period begins on the day specified in the order of the court. At the order nisi stage, the unpaid amount of the loan is determined and the owner is given one more opportunity to redeem the property by paying all the unpaid loan. Where he fails to do this, the Mortgagee has the right to sell the property to the public upon the authority of the court. The proceeds of the sale are applied to pay or reduce the unpaid balance on the mortgage loan.
However, in a situation where the Mortgagor still fails to redeem by paying up all the unpaid sum in the loan, upon another application by the Mortgagee an Order Absolute will be granted by the court. In essence, where the Mortgagor defaults in paying the certified sum, the order for foreclosure nisi will be made absolute. A diligent legal practitioner is mindful of the fact that where the proper formalities are not complied with by the Mortgagee, the court may refuse to grant the order of foreclosure. Indeed, An Order Absolute eliminates the Mortgagor’s right to redeem the property. It gives the absolute ownership to the Mortgagee.
6. Can there be an order for sale in lieu of foreclosure by the court?
Where a Mortgagee has commenced an action for an order of foreclosure, such Mortgagee is not automatically entitled to an order for sale by the court, except in special circumstances. The court, may however, in its discretion, grant an order for judicial sale as an alternative to foreclosure. Upon the request of the Mortgagor or any person interested in the equity of redemption, the order may be made as the court thinks fit in the exercise of its absolute discretion. In this instance, the court would issue a certificate of purchase which is a certificate usually issued to purchasers in case of a judicial sale. Where such an order for sale is made, it is similar in form to a foreclosure order as it provides an opportunity to the Mortgagor to redeem the security. However, the sale may be directed without allowing the Mortgagor any time to redeem the property; this is done in cases where the property is small and the security deficient. 6 An order by the court for sale is most times granted where the value of the property exceeds the amount claimed, as the court is unwilling to allow the Mortgagee make an unearned profit through foreclosure. Furthermore, it is to the general benefit that the Mortgagor or subsequent Mortgagees should have an opportunity of obtaining the surplus which may be realized upon a sale. Moreover, the purpose of foreclosure is to satisfy an outstanding loan However, in a situation where it is impossible to affect a sale, then the court may grant an order for foreclosure.Most times the court exercises its discre-tion in granting an order for foreclosure with regard to the general benefit of all persons interested in the equity of redemption. An immediate sale is usually not directed by the court, as the mortgagor will most times be given a reasonable time to redeem.
7. Are there challenges to granting of foreclosure order in Nigeria?
Just like the other proceedings in the Nigeria’s courts, getting an order for foreclosure has its own challenges which could sometimes make the process unattractive and tiring. This is evidenced in the dearth of court decisions on foreclosure order.
One of the major challenges in the exercise of this remedy is that foreclosure processes are seen to be tedious, time-consuming and sometimes complicated.Proceedings in court are done in stages from order nisi to order absolute. Before the foreclosure may be concluded, the foreclosed property may suffer from devaluation due to lack of maintenance, it could serve as a hideout for criminals and hoodlums, amongst other unattractive vices Another challenge is that there is no effective foreclosure mechanism put in place by most states in Nigeria. Thus, for example, if a mortgagee institution files an action in Court against a Mortgagor, it may take many years before the Mortgagee get its judgment in Court, because of several factors outside its control. 7 This has discouraged many financial institutions from advancing loan facilities because of the supposed difficulty to sell the mortgage property to recover sums due to them.
8. Is there a way out to the challenges faced by the Mortgagee seeking a foreclosure order in Nigeria?
There is a way out to the challenges faced by the Mortgagee seeking foreclosure order in Nigeria if the government is ready to make the requisite changes in the process.
Various states in Nigeria can enact laws on foreclosure process to make the process easier. If a state can make a strong and effective law, it could potentially attract funding and capital from the prospective Mortgagees to that State. For instance,under Massachusetts law, a Mortgagee does not have to obtain judicial authorization to foreclose on a mortgaged property, if the power to foreclose is granted by the mortgage itself. The Mortgagee just needs to issue a public notice of intent to foreclose and send notice by registered mail to the subject property.
Indeed, it is high time for the establishment of a specialized real estate/property courts all over the federation in Nigeria. In addition, there should be a provision thatfacilitate non-judicial foreclosure once the mortgage loan is not being denied or the parties have initially agreed on foreclosure as a means to recover the loan granted. In Nigeria unlike some other jurisdictions, foreclosure of a mortgage can only be by order of a court. If we can adopt non-judicial foreclosure, it will go a long way in reducing the volume of such cases in our courts and ultimately impact on the efficiency of the Judicial system.
Foreclosure remains an effective remedy available to a Mortgagee. The importance of foreclosure and other remedies is not to make profit but to recover the mortgage sum and interest as applicable. It is expected that a Mortgagor should know hisduties under the mortgage agreement and should be ready to face the consequence of any default because his actions are also causing the mortgagee some loss. Making the process of obtaining a foreclosure order less tedious and time-consuming are significant catalysts for achieving Nigeria’s real estate targets and economic growth. An efficient foreclosure system will give more guarantee to mortgagee to provide loans for the general public because they are assured of recovering their money without much ado.
1. There exists some practical challenge to exercising this right to sell however, such as the location and state of the property itself which could be attractive or otherwise to intending buyers. Furthermore, upon the exercise of this right, the mortgagee is estopped from exploring any other remedy to recover any balance for the outstanding sum, if any.
2. (2000) LPELR-10722(CA), Per VICTOR AIMEPOMO OYELEYE OMAGE, JCA (Pp 11 – 12 ParasD – A)
3. Ogundiani v Araba & Anor (1978) (vol. 11) NSCC 1334 at 345.
4. ‘Facing Foreclosure’ http://www.depts.ttu.edu/sls/forms/ Facing-Foreclosure.pdf accessed 27 June2022.
5. Oniekoro, F.J. Mortgages in Nigeria Law and Practice, (Enugu: Chenglo Ltd. 2007) 297.
6. Oldham v Stringer (1884) 33 W.R. 251
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.