The Sunday Mail
By Tichawana Nyahuma
Chido Churucheminzwa (not her real name) wishes to acquire a dwelling house for herself but is not endowed with adequate financial resources to do so.
Luckily for her, she has a good job whose salary qualifies her access to a housing loan from a bank or other financial institution.
In order to obtain the loan, however, the finance house requires that Churucheminzwa provides collateral which, again, she does not have. This is when and how the financial instrument called the mortgage bond steps in.
What happens is that the financial institution will simply cause the property being purchased to be the security for the funds being borrowed by Churucheminzwa.
This is achieved by registering a mortgage bond over the property concerned. Once that process is complete, the purchaser will have the luxury of paying for the property in instalments over a period of time which can stretch from only a few years to as much as 25 years.
In this discussion, I wish to shed some light on the workings of the mortgage bond. For the sake of clarity, the terms creditor, bank, financial institution, bond holder or mortgagee, shall be referred to as “the lender” unless the context demands otherwise.
Inversely, the terms debtor, borrower or mortgagor, shall be used interchangeably as the situation also demands.
Legally speaking, a mortgage bond is an instrument that gives a real right by which one person, the creditor, has in the immovable property of another, the debtor, to secure an obligation due to the holder of that right.
Until and unless the obligation is satisfied, the creditor will have the right to continue to hold onto the mortgaged property as security or collateral. The security may only be called up if the obligation remains in existence after the due date.
The reason why financial institutions that lend money demand security is that the funds involved do not belong to themselves. They belong to the depositors who are their customers. Consequently, these financial institutions cannot afford to be reckless by giving out the loans without ensuring that the borrowers cover the banks’ backs by providing collateral.
The same requirement applies even where the money lent actually belongs to the finance house. The logic behind this approach is simple. It is to guarantee that in the event the debtor defaults or fails to repay the loan, the creditor will be able to recover the funds by causing the sale of the borrower’s property concerned. This is called prudence without which the financial institution would surely soon face ruin.
Although the lender, upon granting a loan to the borrower, normally insist on the security to be in the form of immovable property, there are situations where even movable property may be regarded as competent security.
This discussion is, however, limited to immovable property as the form of security concerned. Mortgage bonds do not apply where the property concerned is movable. There is some other instrument that is employed in a situation where the security is movable property. The mortgage bonds themselves come in different forms and shapes depending on what is intended to be achieved. Those other mortgages as well as how movable property may be used as security for a debt are for discussion on another day. The focus today is on the circumstances of a mortgage bond as sought by Churucheminzwa.
So the establishment of the creditor’s right over the debtor’s mortgaged property is perfected by registration in the office of the Registrar of Deeds at Bulawayo or Harare. Once the debt is paid in full, the mortgage bond ceases to be of any use and is then cancelled, the effect of which will be to free the property from bondage.
This enables the owner to then deal with his/her property as he or she pleases. If on the other hand, the borrower defaults on her obligations, then the lender will have the right to sell the mortgaged property to recover its dues. Note, however, that the lender’s right to dispose of the mortgaged property is normally enjoyed after a court of law has granted an order that the property be attached and sold.
The route to such a court order is relatively easy as the mortgage bond is generally considered to play a dual role of being an acknowledgement of debt and a deed of hypothecation both in the same breath. Accordingly, in a suit brought on the back of a mortgage bond, the debtor will hardly have a defence to the creditor’s claim owing to the fact that the debt was secured by the bond. It is what the law calls a liquid claim.
Consequently, in the absence of the court’s authority to dispose the property, the property concerned remains in the name of the debtor but with the creditor’s interests continuing to be firmly embedded thereon. The circumstance when the property may be sold without first involving a court is when the mortgagor freely and voluntarily agrees with the mortgagee that the property may be sold by private arrangement whereupon the proceeds will then be paid over to the creditor.
Otherwise, the mortgagee would have to sue the borrower on the mortgage bond and once the order is obtained, the property is then attached and sold by the Sheriff of the High Court through a public auction. Thereafter, the lender is paid its dues. Any excess funds realised from the sale will be paid to the debtor after deducting all attendant costs and charges.
But what if the person seeking that the mortgaged property be sold is not the bond holder but a complete stranger, a third party? Put differently for the sake of simplicity and clarity, what happens if the debtor also owed another person but that other debt was not secured by the debtor’s immovable property through a mortgage bond?
In such a situation, can the borrower’s immovable property that is already encumbered by the lender be sold to satisfy the third party’s claim? Surprisingly, the answer is a big yes. Apparently, the fact that the property is mortgaged does not prevent the same from being sold at the instance of a third party. The only comfort is that upon the property being sold, it is the bond holder who has to be paid first. There is a problem with this approach as I shall demonstrate.
Even though the bond holder, the mortgagee, may take comfort from being paid first upon the disposal of the bonded property at the instance of a third party, in all probability, at that stage, the contract between the lender and the debtor will still be alive. In other words, it is unlikely that at the point at which the third party seeks to dispose of the bonded property, the debtor would have breached the terms of the mortgage bond at play.
This means that the relationship between the borrower and the lender is likely to be spoilt by the action of that third party, the consequence of which will be that the debtor, in this case, our dear Churucheminzwa, will be left homeless again. Regrettably, there seems to be no solution as to how this may be prevented.
It has been suggested that may be if the lender, apart from registering the mortgage bond over the debtor’s property, also causes a caveat to be placed against the same property. This, however, does not assist the situation in any way as such an approach amounts to duplication since the mortgage bond is effectively a caveat. Both instruments prevent the owner from selling, further encumbering or dealing in any way with the property without the knowledge and or consent of the bond holder. The caveat and the bond serve as notices to the whole world that another person apart from the owner, has interests over that property.
When it comes to disposal of the mortgaged property, the Sheriff of the High Court whose duty it is to enforce orders of the court, is not under obligation to directly notify mortgage bond holders before attaching and selling a mortgaged property. It seems this used to be the case but it would seem this is now no longer.
The Sheriff now tells the whole world by causing the publication of a notice in the Government Gazette and or a newspaper that circulates in the area in which the property in issue is situated that a particular property, whether or not it carries a mortgage bond, has been attached and is about to go under the hammer. It will be up to the bond holder as an interested party, to then respond and notify the Sheriff accordingly.
It must be noted that throughout the period that a particular property is under a mortgage bond, the relevant Title Deed will normally be in the hands of the creditor, the bond holder. If, however, the property is sold at the instance of a third party, the Sheriff is not obliged to rely on that original Title Deed to effect transfer to the purchaser but can use one that the Registrar of Deeds issues for judicial purposes. So creditors are not to take comfort from the fact they hold the Title Deeds to the properties they would have encumbered through mortgage bonds.
Finally I wish to comment on the issue relating to those creditors who lend money against Title Deeds but without legally completing the processes of noting their interests thereon through registration of mortgage bonds in the Deeds Office. Such an approach seems irrational to me as it does not afford full cover.
In the event that the debtor’s estate is sequestrated or liquidated, such creditors will be considered as unsecured and their claims will rank outside the preferred creditors resulting in little or no payment all.
Tichawana Nyahuma is a lawyer and he writes in his personal capacity. For feedback, [email protected]