In Nigeria, owning property often requires significant financial investment, and for many, the means to acquire real estate is through a mortgage. A mortgage is a loan specifically designed for purchasing property, where the property itself serves as collateral until the loan is fully repaid. While mortgages are a common feature in real estate transactions, they come with complex legal frameworks that both borrowers and lenders must navigate.
This blog post will explore the legal requirements, procedures, and key considerations involved in mortgage transactions in Nigeria.
What is a Mortgage?
A mortgage is a legal agreement where a lender provides funds to a borrower to purchase real estate, with the condition that the borrower repays the loan over a period, typically with interest. Until the loan is repaid in full, the property serves as security for the lender, meaning the lender has a legal claim to the property in case of default by the borrower.
In Nigeria, mortgage transactions are governed by various laws, including:
- The Land Use Act of 1978.
- The Conveyancing Act of 1881.
- The Property and Conveyancing Law of 1959.
- The Mortgage Institutions Act of 1989.
These laws establish the legal framework for creating, registering, and enforcing mortgages in Nigeria.
Key Legal Requirements for Mortgage Transactions
For a mortgage transaction to be valid and enforceable in Nigeria, certain legal requirements must be met:
- Capacity of the Parties
Both the lender (mortgagee) and borrower (mortgagor) must have the legal capacity to enter into a mortgage agreement. The borrower must have a valid title to the property, which will serve as security for the loan. This means the borrower should either be the legal owner of the property or have an interest that can be legally transferred. - Governor’s Consent
Under the Land Use Act of 1978, all land in Nigeria is held in trust by the government. As a result, before any mortgage can be created, the consent of the state Governor must be obtained. The Governor’s consent is required for the mortgage to be valid, and without it, the transaction may be declared void by a court of law. - Mortgage Agreement
The mortgage agreement is the contractual document that outlines the terms and conditions of the mortgage transaction. It must clearly state:
- The loan amount and repayment schedule.
- The interest rate and how it will be applied.
- The property serving as collateral.
- Rights and obligations of both the lender and borrower.
- Remedies available to the lender in case of default. It is essential that the agreement is drafted by legal professionals to ensure compliance with Nigerian law and to protect the interests of both parties.
- Registration of the Mortgage
Mortgages in Nigeria must be registered with the appropriate land registry. This registration gives the mortgagee a legal interest in the property and provides public notice that the property is encumbered. If a mortgage is not registered, it may not be enforceable against third parties. - Valuation of the Property
Before a mortgage can be approved, the lender usually requires a valuation of the property to determine its market value. This ensures that the property is worth the amount being loaned and that the lender has adequate security in case of default. Licensed surveyors or valuation experts are typically engaged for this process.
Types of Mortgages in Nigeria
In Nigeria, there are various types of mortgages that can be created, each with its legal implications. These include:
- Legal Mortgage
A legal mortgage is the most common form of mortgage in Nigeria. It involves transferring the legal title of the property to the lender as security for the loan. However, this transfer is temporary, and the borrower retains the right to recover the title once the loan is fully repaid. - Equitable Mortgage
In an equitable mortgage, the borrower does not transfer legal title but merely deposits the title deeds with the lender as security. Although it offers less protection to the lender compared to a legal mortgage, an equitable mortgage can still be enforced by the courts if the borrower defaults. - Fixed and Floating Charge Mortgages
This type of mortgage is often used for commercial properties. A fixed charge mortgage applies to specific assets or property, while a floating charge covers all the assets of a business, allowing them to fluctuate until the point of default, at which the charge becomes fixed.
Steps Involved in a Mortgage Transaction in Nigeria
Entering into a mortgage transaction in Nigeria involves several key steps. Both the borrower and lender must follow due process to ensure that the mortgage is legally binding and enforceable.
- Application for the Mortgage
The first step is for the borrower to apply for a mortgage from a financial institution, typically a mortgage bank or commercial bank. The application will include information about the borrower’s financial standing, the property to be purchased, and the amount of loan required. - Property Valuation and Due Diligence
Once the application is submitted, the lender will conduct due diligence on the property. This includes verifying the borrower’s title to the property and ensuring that the property is not subject to any legal encumbrances. A valuation will also be conducted to determine the market value of the property. - Execution of the Mortgage Agreement
Once the lender is satisfied with the property’s value and legal status, the parties will enter into a formal mortgage agreement. This document outlines the terms of the loan, repayment schedule, interest rate, and remedies available in case of default. - Governor’s Consent and Registration
After the agreement is executed, the borrower must obtain Governor’s consent, as required by the Land Use Act. Once the consent is granted, the mortgage must be registered at the appropriate land registry. The registration ensures that the lender’s interest in the property is legally protected. - Disbursement of the Loan
Once all legal formalities are completed, the lender will disburse the loan to the borrower, and the borrower can proceed to complete the purchase or construction of the property.
Legal Remedies for Default in Mortgage Transactions
In the event that a borrower defaults on a mortgage, the lender has several legal remedies available:
- Foreclosure
Foreclosure is the most common remedy. It involves the lender taking possession of the property and selling it to recover the loan. In Nigeria, foreclosure must be carried out through the courts, and the lender must obtain a court order to sell the property. - Sale of the Mortgaged Property
If the borrower defaults, the lender can sell the property and use the proceeds to recover the outstanding loan balance. Any surplus from the sale after repaying the loan is returned to the borrower. - Appointment of a Receiver
In some cases, the lender may appoint a receiver to manage the property and collect rents or other income generated by the property to repay the loan.
Challenges in Mortgage Transactions in Nigeria
While mortgages offer an effective way to finance property acquisition, there are several challenges that borrowers and lenders may face in Nigeria:
- High Interest Rates
One of the significant challenges in obtaining a mortgage in Nigeria is the high interest rates charged by financial institutions. These rates make mortgages unaffordable for many potential homeowners. - Complex Legal Processes
The legal processes involved in obtaining Governor’s consent and registering a mortgage can be time-consuming and costly. Delays in these processes can slow down the mortgage transaction. - Foreclosure Delays
Foreclosure procedures in Nigeria can be slow due to the requirement for court involvement. This delay can be frustrating for lenders trying to recover their funds.
Conclusion
Mortgage transactions in Nigeria are a vital part of real estate financing, but they come with legal complexities that require careful attention from both lenders and borrowers. Understanding the legal requirements, procedures, and potential challenges involved in mortgage transactions can help prevent disputes and ensure a smooth process.
Both parties should ensure that all legal formalities, such as obtaining Governor’s consent and registering the mortgage, are completed to protect their interests. Seeking the advice of legal professionals is always advisable when entering into a mortgage transaction.
Clement is a lawyer in Nigeria. He is currently the Managing Partner of KpLaw, LLP., a foremost Law Firm in Nigeria with a wide practice area spanning diverse fields of law. Besides being her Managing Partner, Clement is a member of the firm’s Corporate Commercial Department.