When your property is used to secure loan for someone else.

It is common practice for businesspeople to secure loan from financial institutions for purposes of financing their working capital to generate more profit and or expand operations.

Financial institution being vested with the duty of lending money to their clients also have to secure money to lend to their customers  hence securities or collateral are collected from borrowers or any person who consent to support the borrower in securing the loan granted.

Various forms of securities are accepted by lenders to secure credit facilities granted. These can be land, lease, debentures, guarantees and so on. It is however in normal circumstances not possible for every businessperson or every bank customer to be in possession such securities or collateral.

In dealing with this gap, our business laws have in place commercial arrangement which invites a third party to use his or her collateral to secure money issued to the borrower. This arrangement is what is called third party arrangement. In this article, we shall deal specifically with third party mortgages.

We have been experiencing many land disputes in and out of courts of law involving landed property securities offered by third parties to secure credit facilities granted to borrowers. Upon looking into most of such disputes, what comes into mind quickly is that most of the owners of the securities are not aware of some key issues regarding third party mortgage.

It should be known that ignorance of the law is not an excuse. Therefore, in view of the above introductory part, this article intends to give some insights relating to third part mortgage.

First and foremost, mortgage is among securities in the form of right of occupancy or lease of the land issued by the land owner to secure facility granted to the borrower. Under Tanzanian law, right to mortgage does not constitute transfer of ownership. Rather, the borrower transfers interest to the lender subject to redeem the same upon compliance with rights and obligations agreed between the parties, particularly on payment of the loan.

The mortgage property can be owned by the borrower or other person in the transaction. When it involves another person different from the borrower of the loan, then it is called third party mortgage.

Now third party mortgage arises when the security for the borrowing is given by individual or entity (third party) for liability of the borrower as ruled in the case of Guma vs Bank of Africa (U) Ltd & others (2018) UGHCCD 28. There are various laws which deal with issues relating to mortgage, including Land Act Cap 113 R.E. 2019, Land Registration Act Cap 334 R.E 2019, Law of Contract Cap 345 R.E 2019 and Law of Marriage Act Cap 29 R.E 2019.

Section 113 of the Land Act recognizes applicability of third party mortgage transaction. There are two types of mortgage namely legal mortgage and equitable mortgage. Legal mortgage is transfer of interest in the mortgaged property to the lender upon compliance with legal provisions of the law. Once provisions of the law are complied with, then legal mortgage is created.

These requirements of the law include creation of deed of mortgage in which the same should be signed by the lender in whose favour the mortgage is created and known as mortgagee and the owner of the land known as mortgagor.

The said deed of mortgage should contain terms and conditions related to payment of the loan and consequences of default. Other relevant issue is that it should be registered at the office of the Registrar of Titles under Land Registration Act.

Once the same is registered, legal mortgage is created and the mortgagee or the lender can enforce those terms and conditions without an order of the court such as to sale the mortgage property by way of auction or private sale depending on what parties have  agreed and the prevailing circumstances.

Equitable mortgage is derived from the word equity, meaning strictness on applicability of the law is reduced as compared to legal mortgage. Here, the intention of the parties is what is being looked at. It is not required to be registered, therefore, its enforceability requires the lender or mortgagee to obtain court order and not otherwise.

What is important is that the same need to be in writing under strict terms and conditions. This is mostly used by individual person who opts to enter into transactions which require security because legal mortgage is only allowed to be registered by financial institutions for quick recovery of loans upon default by the borrower.

Practically, third party mortgage is a triplicate transaction involving the borrower, the mortgagor and the lender or mortgagee. Third party is different from indemnity agreement because in third party duty of the mortgagee or the lender is not to compel the mortgagor to pay the outstanding sum of money as required in the indemnity agreement but only to inform the mortgagor of the borrower’s default.

Therefore, upon expiration of certain period of time, the lender enforces its rights based on the terms and conditions available in the deed of transfer. Upon being informed, the owner of the mortgaged property has the right to clear the outstanding loan or opt to enter into mutual understanding with the lender to clear the debt or whatever they agree on while in indemnity agreement all the parties are responsible for clearing the debt.

An arrangement between a borrower and a mortgagor whose title deed is used to secure the loan advanced to the former has nothing to do with the lender or mortgagee.

We have been experiencing situations whereby when a lender commences recovery processes such as auctioning the third party mortgaged property, various unwarranted arguments arise from the owner such as breach of some agreed terms between them and the borrower.

Unfortunately, at that stage, such arrangements are time-barred. What the third party is required to do is to allow the lender to exercise the right of recovery or to clear the debt and proceed with enforcement of those rights against the borrower and not the lender who is a stranger to their arrangement.

There are some rights of the owner of the right of occupancy in third party mortgage. First, right of redemption of the property. Issuing a property to secure loan advanced to someone does not mean absolute transfer of ownership. Rather, the mortgagor can redeem his or her property once the entire money and its interest is paid in full pursuant to agreement or early payment can also make the property be redeemed before lapse of the agreed time. Right of redemption is available at any time upon full payment of the advanced money and its interest therein.

Second is right to be given notice of default. As explained above, the third party is not an integral part of the contract of borrowing who can monitor day to day activities of the borrower’s account. Rather, his or her role is only to issue property to secure the loan advanced with condition of redeeming the same once the same is paid in full.

So, since he or she is not in day to day operation and correspondences between the borrower and lender, then once default has occurred, he or she has the right to be given notice of default with a time provided to rectify be situation before commencement of remedies available in the deed of mortgage. The law requires 60 day notice of default to be given.

Third, recovery from the third party is limited to the third party mortgage property offered only. In the event the lender managed to recover less money in the auction, the recovery cannot be extended to other properties of the third party.

But on the other side, the same can be extended to the borrower’s other properties but subject to court order which may permit the lender to do the same or in the indemnity agreement. It is a matter of law that liability of the third party mortgage is limited to such property so once the same is sold, his or her involvement in the matter ends.

Fourth is the right to be paid excess money after the sell of the mortgaged property. When the mortgaged property is sold and proceeds realized exceed the outstanding amount required to be paid, then the balance shall be refunded to the owner of the property.

Five is the tight to be involved in any variation of the terms of the loan granted. It is a matter of contractual principle that mortgaged property is subject to loan advanced between the borrower and the lender. Therefore, any variations of terms and conditions in the loan agreement without involving the owner of the property have the effect of completely discharging the property from that transaction and the third party from any liability.