MORTGAGES AND CHARGE S

Definitions

These are basically securities for monetary advances loans in whatever banking form. At
its simplest form a loan is a process by which one person allows another the use of
something that belongs to him for a limited period. The lender may be content to rely on
the borrower being able to and willing to honor his part of the bargain or just the lender’s
right of recourse. He may demand more in the form of a security and that is where
mortgages and charges come in.

In the event of land registered under both the GLA and the LTA one will create a
Mortgage while under the RLA and RTA you have Legal Charges. Both take the form of
formal deeds. There are also equitable mortgages and equitable charges.
Equitable Mortgages and Equitable Charges
Banks occasionally lend minus any legal deeds being perfected and registered. A simple
informal memo accompanied with a deposit of the original titles will suffice to create an
equitable mortgage or charge. The basis of an equitable mortgage is the contract by the
proprietor to transfer a proprietary interest by way of security to the lender. The court in
such an instance can compel creation of a legal mortgage or charge so long as the
contract meets the requisite contractual requirements. Case law reveals that an equitable
mortgage or equitable charge will be created in other various ways besides deposit of
title. A defective legal charge or mortgage will create an equitable mortgage or charge. A
formal agreement to create a legal mortgage or charge will also create an equitable
mortgage or charge. A floating charge too can create an equitable charge as will a written
authority to the lender to sell a property and retain the proceeds or even a written
undertaking to hold documents to the order of the lender. Under the GLA /LTA /RTA
such equitable charges are created by registering a formal memorandum of deposit of title
as provided for under the Equitable Mortgages Act Cap 291 of the Laws of Kenya. The
intent to create a legal mortgage or security must be there. Sections 100 and 66 of the
GLA and RTA also provide for equitable mortgages. It has often been argued that the
RLA does not have any equitable charges as the title document is not itself a title per se
and further that the RLA expressly provides for how to create a security[Reflection: can
these arguments hold]. The Court of Appeal has however in KCFC V Ngeny 2002 1 KLR
106 held that section 163 of the RLA imports the common law principles of equity
including equitable charges.
Equitable charges however have various disadvantages. They are not easy to realize as
securities as one must go to court and get the remedy there from. Equitable charges are
also always so uncertain as to terms and finally they are very inferior as the doctrine of
priority may lead to their being watered down when a third party registers an interest.
Legal Mortgages
These are found under the ITPA
S.58(a) defines Mortgages as “ the transfer of an interest in specific immovable property
for the purpose of securing the payment of money advanced or to be advanced by way of
loan….”. It is simply a conditional assignment or conveyance of interest in land as
security for repayment of debt, which assignment or conveyance may become absolute if
the borrower defaults. The mortgagee has basically an abstract lease over the property
which is demised to him pending repayment but the mortgagor retains the reversion. It’s
a method of using property as security for payment of a debt. The word ‘mortgage’ also
refers to the document itself.
Cf. Santley V Wilde 1899 2Ch 474 per Lindley MR
Charges
A Charge on the other hand as found under both the RLA & RTA as well as under the
ITPA (S.100) does not effect any transfer of interest in the property but the land is
basically designated as security for the debt. There is no demise or sub demise. S.65 (4) is
crystal clear.S.46 (1) RTA.
The distinction is that whereas a charge only gives right to payment of a particular fund
or property without transferring that fund or property a mortgage is in essence a transfer
of an interest in specific immovable property. Practically thus a mortgage is a jus in ram
and will be good against any subsequent transferees. In the case of a mortgage a
mortgagee acquires interest in the property whilst in the case of a charge a charge
acquires interest over the property. In case of mortgagee one says take my land until I pay
you the money you gave me but in the case of a charge he says give me money and if I
don’t pay take my land.
While Charges are limited in form, Mortgages are various kinds. This is basically
because of the various interests that are or may be transferred.
Thus
Simple Mortgages-S.58 (b)
Mortgagee by conditional sale-S.58(c)
Usufructuary Mortgage-S.58(d)
English Mortgage-S.58(e)
Anomalous Mortgagee-S.98 ITPA eg Islamic Mortgage

Securitization & completion of Mortgages and Charges

Process basically starts with an application by the Borrower,then follows the Bank’s due
diligence process which includes both credit-assessment of borrower and valuation of
property to ascertain mortgage value and ultimately the preparation of a Facility letter or
offer letter.
The Lenders Adv always drafts the security document which more often is standard.
Particulars for preparation will be in Facility letter & incl.:
-Details of parties
-Loan Amount
-Repayment period
-Interest Rate-not mandatory
-payment mode
-particulars of property to be mortgaged.
-nature of mortgage /charge to be created
Duties of Lenders Adv.
-Conduct search on the property both official & historical
-Get title docs
-send requisitions,if necessary
-Advise lender to inspect & value
 -confirm capacity to create mortgage or charge
-Draft Mortgage & send for approval (?)
-Engross(?) & send for execution
-Obtain consent if not availed
-confirm independent legal advise obtained
-Get Lender to execute
-Stamp doc and lodge for regn at Lands/companies-form214details
-Forward docs to lender and obtain chq for loan for transmission
-Complete by accounting & get fees.
-Approve and get lender to sign reconveyance or discharge

Responsibilities of Borrower’s Adv

-obtain consent
-forward docs to lender’s adv on undertaking to pay the loan amt
and to use same only for charging or mortgaging
-Approve mortgage/charge
-Get client(s) to execute and advise them as appropriate
-Obtain adequate funds for stamping & registering
-ultimately prepare discharge or reconveyance

Process is same with the Further charge or mortgage with perhaps no investigation of title
Reflection: whats the difference between a further mortgage and a second mortgage?

Important covenants in a Mortgage or Charge

First thing is to ensure that the doc .satisfies all the legal reqts from those in the land
laws (ITPA & RLA ) to the traditional contract law requirements as well as the Law of
Contract Act (Cap 23).Both the procedural laws under the RLA and RTA and the
respective substantive laws must be good and complied with.
S.65(1) RLA requires that the charge be in a prescribed form but this can be varied vide
S.108 and its often done.This section also demands that the Chargor signs a certificate
that he understands the effect of S.74. The non-signing is however not fatal .See: Ngeny V
Kenya Commercial Finance Co Ltd 2002 1 K.L.R 295 C.A where the Crt of Appeal held
lack of cert did not void the Charge nor the chargee’s right to sell
For the ITPA see Labelle International. Ltd V Fidelity Comm.Bank 2003 2 E.A 541

Secondly, the document itself ought to have certain basic covenants.The crucial
covenants in a Mortgage or Charge that you will ensure are not only there but are also
properly drafted are:
-proper description of parties and their addresses
See: Simiyu V HFCK Ltd [2001] 2 E.A 540
Per Ringera J on statutory notices and chargor’s address
-covenant to repay-otherwise known as “the 1st testatum”
-covenant to keep property in good repair and condition
Property must continue to be there
RLA buttressed this vide implied terms in S.69
-Charging Clause-iow-2nd testatum
See: Equip Agencies Ltd V Credit Bank Ltd [2004]2 E.A 61 where
the charging clause did not include chattels and fixtures.
-Redemption clause-at times part of 2nd testatum

Remedies
Whilst the Mortgagor or the Chargors chief remedy lies in the equity of
redemption,statute has availed various remedies to the Mortgagee or the Chargee in the
event of default by the Mortgagor or Chargor. Note that for purposes of the RTA Charges
the remedies right and powers availed to a Chargee under the ITPA apply.S.100 of ITPA
equates an RTA Charge to an English Mortgage.

There are 5 remedies namely:

-Statutory Power of Sale

Provided for under S.69 ITPA
This power arises only after the Mortgagor or Chargor is in default and an appropriate
valid statutory notice has been served upon him which is not heeded.The Mortgage deed
or Charge deed must itself be valid and enforceable the mortgagor must have signed the
deed and his signature attested to as required. See generally Eros Chemist V Trust Bank
[2000]2 E.A 550 (Held that your notice must state 3 clear months after service).
- Notice must specify that if you do not pay property will be sold
Sale is by public auction or private treaty and even the mortgagee may buy.
See: Maranya V NBK Ltd [1995-98] 1 E.A 177
Cf. also Cuckmere Brick Co. Ltd V Mutual Finance 1971 2 All E R 633
How do you apply the proceeds
-prior encumbrances
-expenses of sale
-mortgage debt and interest
-subsequent encumbrances
-balance to mortgagor

Appointment of a Receiver
Exercisable as in the case of statutory sale of power.He can only appoint after the power
of sale has arisen.He must be having the power to sale already.The two powers are
however independent and mortgagee can sale even after he has appointed a receiver.The
receiver though appointed by the Mortgagee is an agent of the Mortgagor and he is
responsible for his deeds.He’s responsible for his acts and default.He is however
accountable to the mortgagee.His duty is mainly to collect the income and profits of the
property but he also has a collateral duty to keep and maintain the property. He will thus
insure and repair same.Monies or profits collected are used for
-discharge rent & other liabilities eg rates and taxes ,outgoings
- reduce all priority payments and debts
- pay himself,insurance,repairs
- pay interest on the principal
- pay principal sum
- pay mortgagor the residue
Foreclosure
This is the mortgagee’s right to obtain a court decree barring the mortgagor from ever
redeeming the mortgage.It is a legal term which implies that the relief given by equity
against forfeiture of the property is withdrawn.You can only exercise it after mortgage
money is due and no order for redemption has been made. Noteworthy that under RLA
it is abolished .S.80 RLA
Suit on covenant to repay
This is a right available on the basis of the contractual rights under the Mortgage or
charge.The Mortgagee sues to enforce the mortgagor’s covenant to repay.Under the ITPA
S 68 the suit can only be commenced after sale of the property.The suit is to help recover
the deficiency or the shortfall of the amount due.The mortgagor or charger must have
bound himself to repay.Hence important to comply with S.3(3) of Cap 23.
Qtns:
-Which limitation applies-contract (6 yrs)or claim for an interest in land (12 yrs)?
It is a suit for enforcement of a personal covenant so it will be 6 yrs.But this ought
to apply only where he has bound himself to repay and not where its coz he has
refused possn or he has destroyed property or its wasted & insufficient.
- If it is personal covenant can you sue a transferee of mortgage / purchaser / legal
repr.?
Right to take possession
This is the fifth remedy available to the mortgagee.
This is available to usufructuary mortgagees.He enters into possn and exercises rights as
if he was mortgagor.He acquires the rights and duties of the mortgagor he is however
liable for any .

The RLA Securities

The RLA recognizes only a Charge not mortgages.The Charge is in substance like an
RTA Charge but the form was originally prescribed.Ordinarily you look for or ensure the
following salient clauses:
Parcel clause:on top of charge or the recitals.
Consideration:amount advanced and for what.
 Charging clause:a must
Interest clause
Execution clause
Remedies
These are
Statutory power of sale under S.74(2)b
Non service of notice means sale even if completed is void
Ochieng V Ochieng ’95-98 2 ea 260
Sale is by public auction unless S.77 ,unless right to sell by private
treaty was reserved and is sanctioned by crt.
-Appointment of receiver .S.74(2)a
Just as in case of statutory power of sale. Give notice on default
You also can not just sell unless you give another 3 months notice
See also S 76 for appointment,remuneration,removal of receiver
and application of monies collected
-Thirdly,
He has right to sue for the money secured-S.74(3) .He need not sell and
sue for deficit.But crt has discretion to stay suit till he has exhausted all
the other remedies.
Note: S.80 expressly outlaws remedy of foreclosure and possn.
This was to buttress the equity of redemption as given under
S.72 and strengthened byS.73 (discharge) & S.79(no variation)
Qtn: do you as Mortgagee or Chargee have a choice which one you take as your first
remedy? Court of Appeal has held that the choice of which remedy you apply is yours as
the mortgagee or chargee. See: Aberdare Investments Ltd V HFCK Ltd [1999] 2 E.A 1

JLO-Sept 08
[email protected]