DISTINCTION BETWEEN LEGAL MORTGAGE CREATED BY ASSIGNMENT AND LEGAL MORTGAGE CREATED BY SUB-DEMISE

Banks prefer the legal mortgage by sub-demise for two reasons:

1.Lack of Privity - In a legal mortgage created by an assignment, even though there is no privity of contract, there is privity of estate, and under the principles in Tulk v. Moxhay 41 ER 1143, the burden of restrictive covenants that run with the land in equity bind the mortgagee, who is therefore bound to observe and perform such covenants. This opens the mortgagee to liability for breach of the covenants. On the other hand,in a mortgage by sub-demise
, there is neither privity of contract nor privity of estate between the Governor/head-lessor and the mortgagee, so the mortgagee is not open to any liability for breach of covenants.

2.Uniformity – The sub-demise is common to both under the CA as well as under the PCL, hence there is uniformity, which is attractive to the Banks that have branches all over Nigeria.

Notwithstanding the advantages of legal mortgage by sub-demise over that by assignment, legal

mortgage by sub-demise suffers one technical problem in respect of the power of the mortgagee

to enforce his/its security. The problem is that the mortgagor did not convey his reversionary

interest to the mortgagee, thus when the mortgagee is enforcing the security, it cannot sell that

reversionary interest. The question now is, since the mortgagee cannot validly sell the mortgage property in a mortgage created by sub-demise, how then will the mortgagee be able to deal with the reversionary interest of the mortgagor and be able to sell the property if the mortgagor defaults?

NOTE:

A) this problem is peculiar to the CA States; the problem does not arise in the PCL Statesbecause section 112(1) of the PCL 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.

B) the problem does not arise in legal mortgage by assignment, since there is no reversionary interest in the mortgagor.

In the CA States, the problem of reversionary interest can be taken care of as follows:

a)POWER OF ATTORNEY CLAUSE: By a power of attorney clause in the mortgaged deed, the mortgagee, in consideration of the mortgage sum is appointed attorney with authority to deal with the entire estate and including the reversionary interest.The power of attorney is expressed to be irrevocable until the loan is discharged and by this device, the mortgagee can sell the legal estate by virtue of the clause.

OR

b)TRUST DECLARARTION: the mortgage may provide for a trust declaration. The mortgagor will be made to declare himself a trustee of the property in favour of the mortgagee and he would convey the property to the mortgagee as a beneficiary. The trust may provide that the mortgagor may be removed as trustee and be replaced and the mortgagor shall make a declaration vesting all his estate including his reversionary interest in the new trustees. 

To be continued with ADVANTAGES OF LEGAL MORTGAGE 

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