Abstract
Most times, loan/credit transactions are entered into
when the parties are in good terms and in a positive relationship. Reasons for
such transactions are usually for important purposes as such money can be used
by the debtor as capital to start up or expand His/her business. After a
certain period of time debtors run out of money and/or excuses, and lenders run
out of patience. It is at that point that lenders look to enforce their
securities, and it is at that point that everyone starts to look very closely
at the security agreement entered into in better times. Thus it is important
for the parties to know what principle of law they want to adopt as regards the
loan/credit transaction. It is on this premise that we will be considering
charge of land as a way of securing loan transactions.
Although there is the charge by deed expressed to be
by way of a legal mortgage. This is also referred to as a legal charge. A legal
charge is essentially a statutory form of legal mortgage. Under such a
statutory form of legal mortgage there is no conveyance of any estate to the
mortgagee, but the chargee has the same protection, powers and remedies as if a
mortgage by demise had been made.
So far as a legal charge is concerned, the formalities
are fairly straightforward. It is in relation to equitable charges that the
position becomes more complicated.
In this work, we will be looking at issues like the
creation of charge as an equitable security, its formalities, nature and
enforcement. We will also be looking at the unique feature of charge of land
that distinguishes it from other securities.
Charge of Land
A charge is essentially an equitable security. An equitable
charge by way of security is a devise in equity through which property is
specifically appropriated as security for a loan, it is usually an agreement
creating in equity a right to have the actual property applied to the
satisfaction of the dept so that a Chargee is a secured creditor in the event
of bankruptcy[1].
The nature of
the equitable charge was explained by Denman J. in Tancred vs Delagoa[2] as
follows:
“A document given by way of a charge is not one which absolutely
transfers property with a condition for re-convergence, but is a document which
only gives a right to payment out of particular fund or particular property, without
transferring that fund or property”
The Chargee takes no estate whatsoever in the land but has
merely a right to payment out of the property. Thus, the Chargee unlike the
mortgagee cannot foreclose because he acquires no title under the charge and
therefore has nothing which can be made absolute though he can realize his
security by either applying to court for an appointment of a receiver or for an
order of judicial sale[3].
Simply put, an equitable charge does
not involve a conveyance of land to the creditor unlike a mortgage. It is a mere
appropriation of the land to the contract of loan with an assurance that upon
default by the debtor the land maybe attached for the purpose of liquidating
the indebtedness.
According to I.O Smith[4], a
charge at best gives the creditor a personal action in contract and does not
create an estate whatsoever in favor of the creditor.
Idigbe JSC in Ogundiani V Araba[5],
Succinctly distinguished the nature of an equitable charge from an equitable
mortgage in the following words:
“Where the mortgage is by way of charge and
not by conveyance, the mortgagee takes no estate whatsoever in the land or in
the property but he has generally only an equitable interest to be enforced by
sale upon an order of court. The equitable charge simpliciter only gives a
right to payment out of the property; it does not amount to an agreement to
give a legal mortgage at all. The strict mode of enforcing the charge is,
however by sale (or appointment of a receiver under an order court) but never
by foreclosure.”
Thus the Chargee unlike the mortgagee
has no inherent right to enter into possession of the land and cannot therefore
overstretch the power accruing to him in law as a creditor; the primary entitlement
of creditors being entitlement to the principal sum and interest. Thus the Chargee
cannot exercise possessory rights like the creation of leases etc[6]
.
Where the charge is registered under
the Registration of Titles Act, it vests in the Chargee the rights, powers and
remedies conferred by the charge and the right to recover and receive the money
secured thereby free from all estates whatsoever including those of the state.
However the state of every registered owner of a charge is subject to any
registered charge or encumbrances having priority to his charge.
Charge
and pledge
A pledge is created
when the Pledgor transfers the possession and use of his land to the Pledgee as
a guarantee for the payment of a loan or debt. Before a transaction can qualify
as a pledge, possession and use of the land in question must be given over to
the pledgee and this in effect is the main distinguishing factor between a
charge and a pledge. In a charge, possession is not transferred to the Chargee.
Creation
of Equitable Charge
Equitable charge maybe
created by the consensus of parties to a credit arrangement or by operations of
law.
1. By consensus (Agreement) of parties: this may
arise where a document given “by way of a charge” is given to the lender by the
borrower or where the borrower delivers to the lender, land titled deeds as
security for a loan[7]
In the case of a
document given ‘by way of a charge”, a simple contract is created between the
parties whereby defined property is specifically made responsible for the
discharge of the borrower’s financial obligation. It shall state the
particulars of the parties, the amount of credit facility, the mode and date of
repayment and the particulars of the property.
Where a party pursuant
to a parol agreement deposits his title deeds with a creditor, an equitable
charge is created. Thus where the original parol agreement between the parties
was that defined property be made specifically responsible for the discharge of
the debtor’s financial obligation without transferring interest in the property
to the creditor, the deposit is a further assurance and will not be construed
as an agreement to create a mortgage which was not within the contemplation of
parties.
2. By operation of law: an equitable charge may
evolve by operation of law in favour of a third party in circumstances where a
Mortgagor’s financial obligation to the Mortgagee is met by a third party who
then takes custody of the title deeds[8]
but although the third party steps into the shoes of the former creditor,
he is only a Chargee as opposed to a Mortgagee since the delivery of title
deeds to him does not vest title in the property whether legal or equitable in
him.
Requirement
of Consent
Since a charge does not
involve a transfer of either proprietary or possessory right in land, neither
the consent of the Governor nor of the Local Government Chairman is required to
create it[9].
Enforcement
Upon default by the
chargor to repay the loan, the chargee may apply to court for an order of
judicial sale or for an appointment of a receiver by the court [10] .
An equitable charge cannot foreclose because he has no title vested in him
whatsoever to make absolute.
Conclusion
The charge of land by
its nature seems to be more of a contract in the sense that if the creditor
default, fails, refuses or neglects to pay back the borrowed sum, the only
option left to the charge is to turn to the court, he has no rights whatsoever
to foreclose or deal with the property in anyway inconsistent or contradictory
to the rights of the owner. This very factor seems to dissuade or discourage
the employment of charge of land as most money lenders feel better with mortgage
because it affords them the right of foreclosure.
In creation of
equitable charge where a party pursuant to an agreement deposits his title
deeds with a creditor, it is advisable for the sake of both parties that such agreements
are in writing. This is because deposit of document can be understood as being
merely for the purpose of safe keeping or it can be construed to be an
equitable mortgage also, in Lagos and the PCL states[11]
, statutes follow the case law position. Section 5(i)(c) of the Law
Reforms(Contacts) Law of Lagos state[12] requires
“every contract to enter into any mortgage or charge on land to be in writing,
while section 78(i)(c) PCL provides that “a disposition of an equitable
interest must be in writing signed by the person disposing of the same”
[1] I.O.
Smith, Nigerian Law of Secured Credit,(reprinted 2006), Ecowatch Publications
nigeria Ltd. Pp. 120 - 124
[5] (1978)
11 NSCC p. 242
[6] I. O.
Smith (supra)
[7] I. O
Smith (supra)
[8] See
Knoury Vs Azar (1982) WACA p268
[9] I. O.
Smith (supra) @ 123
[10] Ogundiani’s
case (supra).
[11] The PCL
states are Oyo, Ogun, Osun, Ondo, Ekiti, Edo, and Delta states of Nigeria.
[12] Cap 114
Laws of Lagos state of Nigeria 1994.
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