CHARGES & MORTGAGES EXPLAINED

 CHARGES & MORTGAGES

Charges and mortgages are basically lending transactions. They are basically designed to provide security for money advanced by creditors.

 In the case of samtley vs. wilde, Lindley J defined a mortgage as a disposition of some interest in land or other property as a security for the payment of a debt on the discharge of some other obligation for which it is given. In simple terms a mortgage is a conveyance of land as a security for the payment a debt or the discharge of some other obligation.

Stratham defines a mortgage as follows; “a mortgage is a transaction in which a borrower transfer to a lender ownership of an interest in land, the condition of the transfer being that the ownership or interest is vested in the lender as security for the loan. The borrower is called the mortgagor and the lender is called the mortgagee, the loan is called the mortgage debts and the land, the mortgage property.

Under the ITPA, a mortgage is defined as the transfer of an interest in specific immovable property for purposes of securing interest in payment of money advanced or to be advanced by way of loan an existing or future debt on the performance of an engagement which may give rise to a pecuniary liability.

A charge on the other hand is defined under s. 3 of the RLA as an interest in land securing the payment of money or monies worth or the fulfillment of any condition (and includes sub-charge and the instruments creating the charge). This is the same definition adopted in s.2 of the land act. Under the land act, a charge includes:

a.        Informal charge

b.       Customary charge

It is important to differentiate what constitutes a mortgage and charge,

A mortgage is peculiar to land registered under Government Lands Act & Land Titles Act; A charge is peculiar to land registered under Registered Land Act & Registered Titles Act

A mortgage transfers an interest in specific immovable property for the purposes of securing the payment of money, advanced, or to be advanced by way of a loan; a charge on the other hand does not transfer any interest in the land but designates the land as security for the debts. A mortgage therefore conditionally assigns/conveys interest in land to secure the payment of a debt. The assignment or conveyance is conditional on the default by the borrower in that in the event that the borrower defaults, the mortgagee’s interest in the land becomes absolute. Where the borrower or mortgagor does not default, the land reverts to the mortgagor.

 A charge on the other hand only gives a rise to payment without aspiring transfers in the title unlike a mortgage. In other words whereas mortgage confers interest on the property, charge confers over the property

  Under s. 78 of the land act the provision of charges have a retrospective event. The land act therefore applies to charges that were created before the act came into force. Reference to charged land has the meaning of charged land, charged lease and a second or subsequent charge.

The land act at s.79  creates informal charges by way of a written and witnessed undertaking to charge in land or interest in land or by way of deposit to title of documents with the charge. This is a form of equitable charge.

Under Registered Titles Act, equitable charge is created by deposit of documents of title to land under the act evidenced by an instrument in writing. Memorandum of deposit of title is to be registered under equitable mortgages act. An equitable mortgage or charge is created when the borrower deposits with the lender the documents of title with intent to create security thereon.

Under the RLA it was controversial as to whether an equitable charge may be created under the act. It was argued on the one hand  that RLA does not provide for equitable charges as the title documents is not itself a title per se and further that the RLA provides for how to create a security. In the case of K.C.F.C vs. Ngeny the court of appeal held that s.163 of the RLA imports the common law principle of equity including equitable charges. The express provision recognizing equitable charges under the land act puts this matter to rest.

Under section79 (3) of the RLA a charge of a matrimonial home shall be valid only if any document or form used in applying for such a charge or used to grant the charge is executed by the chargor or any spouse of the chargor leaving in that matrimonial home or there is evidence from the document that it has been accented to by all such persons.

Issues:

i.                     Who qualifies as a spouse?

ii.                    What is a matrimonial home?

Under the act, matrimonial home refers to any property owned or leased by one or both spouses and occupied by the spouses as their family home.

Under s. 79(5), a normal charge shall take effect only when it is registered in a prescribed register and a charge shall not be entitled to exercise any of the remedies under that charge unless it is registered.

What are the ingredients of a charge?

Every charge instrument must contain the following:

i.                     Terms and condition of sale.

ii.                    An explanation of the consequences of default

iii.                  The reliefs of the chargor including the right of sale

Under s. 81(1) of the act, charges shall run according to the order in which they’re registered. Informal charges are also ranked according to the order in which they are made but a registered informal charge shall have priority over unregistered informal charge.

Subject to the provisions of the act, a charge may make provisions to the charge to give further credit to the chargor to a current or continuing account. This is what is called tacking.

Variation of interest rates

Under s. 84(1) of the act, where it is contractually agreed that the rate of interest is variable, the rate of interest payable under the charge shall not be increased or reduced without a written notice served on the chargor by the charge.

The chargee must give the chargor at least 30days notice of the reduction or increment. His notice must state clearly and in a manner that can be clearly understood the new rate of interest to be paid.

Covenants, conditions and powers implied in charges

Under s. 88(1) of the land act, in every charge there shall be covenants binding the chargor to:

a.        Pay the principle money on the day appointed in the charge agreement.

b.       To pay all rates, charges, taxes, rent and other outgoings that are payable in respect to the charged land.

c.        To repair and keep in repair all buildings and improvements upon the charged land and to permit the chargee and chargee’s agent to inspect the state and condition of the building.

d.       To ensure by insurance or any other means that maybe described or which are appropriate.

e.        In the case of agricultural land, to use the land in a sustainable manner.

f.         Not to lease or sub-lease the charged land or part of it for a period longer than one year without the consent of the chargee.

g.       Not to transfer, assign or lease the land or part of it without the consent of the chargee.

h.       In the case of a charge of a lease, during the continuance of the charge to pay, perform and observe the rent, covenants and conditions contained in or implied by and in the lease.

i.         If the charge is a second or subsequent charge that the chargor will pay interest from time to time accruing on the prior charge when it becomes due and will at the proper time pay the principle sum.

j.         If the chargor fails to comply with any of the covenants implied, the chargee may spend any money which is reasonable to remedy the breach and they add the money to the principle sum.

Remedies of a chargee

The remedies that obtain to a chargee under the RLA included the realization of security by way of statutory power of sell, appointment of a receiver and institution of a suit by the chargee to recover the loan amount as a civil debt.

RLA outlawed the remedies for closure and the right of possession.

Exercise right of sale

Institute a suit

Appoint a Receiver

Under the ITPA the chargee or mortgagee would be titled to exercise statutory power of sale, appoint a receiver right to for closure and the right to take possession.

Under s.90 (1) of the Land Act, if a chargor is in default of any obligation fails to pay interest or any other periodic payment or any part therefore due under any charge or in the performance or observation of any covenant, express or implied, and continues to be in default for one month, the chargee may serve on the chargor a notice in writing to pay the money owing or to perform and observe the agreement as the case may be.x

The notice is required to notify the recipient (chargor) on the following:

i.                     Nature and extent of default by the chargor

ii.                    If the default is about failure to perform or observe any covenant in the charge, the thing that the chargor must do or desist from doing so as to rectify the default and the time being not less than two months by the end of which the default must have been rectified

iii.                  If the default consists of non-payment of any money due under the charge, the amount that must be paid to rectify the default and the time being not less than 3 months by the end of which the payment in default must have been completed.

iv.                  The consequences that if the default is not rectified within the time specified in the notice the chargee will proceed to exercise any of the remedies referred to in the act.

v.                   The right of the chargor in respect of certain remedies to apply to the court for the relief against those remedies. If the chargor does not comply within two months after the debt of service of the notice then the chargee may :

a.        Sue the chargor for any money a due and owing  under the charge

b.       Appoint a receiver of the income of the charged land.

c.        Lease the charged land or if the charge is of a lease, sub-lease the land.

d.       Enter into possession of the charged land

e.        Sell the charged land.

Chargee sues for money owed if:

a.    The chargor is personally bound to pay the money.

b.    If by any course other than the wrongful act of the chargor or chargee, the security is rendered insufficient and the chargee has given the chargor sufficient time to give additional security.

c.    If the chargee is deprived of the whole or part of the security through a wrongful act or default of the chargor

Under s. 92(1) the court may order the postponement of any proceedings brought under this section until the chargee has resolved all the remedies relating to the charged land.

A chargee may exercise a power to sell the land. Before exercising the power of sale, the chargee shall serve the charger with a notice to sell which has to be in the prescribed form and shall not proceed to complete a sale until at least 45 days have elapsed from the date of service of that notice of sale.. A copy of the notice is supposed to be served among others;

i.                      the commission if the charged land is a public land;

ii.                    the holder of the land out of which the lease has been granted if the charged land is a lease;

iii.                  spouse of the chargor who had given the consent ;

iv.                  Any leasee and sub-leasee of the charged land.

v.                   Guarantor of the money advanced under the charge

Before a chargee exercises the right to sale:

i.                      A forced sale valuation has to be done.

ii.                    If the sale is to proceed by public auction, the chargee shall ensure that the sale is publicly advertised in such a manner and form as to bring it to the attention of interested buyers.

iii.                  The sale shall be made in a prescribed form and the registrar shall take it as sufficient evidence that the sale has taken place.

Courts have intervened where a statutory notice issued is not valid.

Case St. John vs. cooperative bank of Kenya; the court held that the commission to serve a valid statutory notice is a fundamental breach of statute and it delegates the chargor’s equity of redemption. If a statutory notice is not valid, the chargee’s statutory power of sale does not approve.