Since the outbreak of Covid-19 in China in December 2019, a severe economic downturn has been induced through the disruption of the economy. Covid-19 has, without doubt, laid bare the fragility of the economy in Uganda. The economic climate has been seemingly suited for individuals and entities to seek refuge in lenders, even for some that had secured debt burdens before Covid-19 emergence.
Whilst the business community and individuals are persevering to navigate a course through the economic hardships, banks and Microfinance institutions are unleashing unprecedented corporate brutality to recover their monies through the sale of mortgaged property.
The sale of the mortgaged property is commonly denoted by a legal nomenclature of “foreclosure.” Foreclosure refers to the legal process by which a mortgagee, for instance, a Bank, in whose favour a mortgage is created recovers the amount owed on a defaulted loan by seizing and selling the mortgaged property (security for the loan e.g land) pledged by and initially belonging to the mortgagor (borrower).
The legal regime on sale of the mortgaged property is under the Mortgage Act No.8 of 2009, Mortgage Regulations 2012, the Land Act, Cap. 227 as amended, Civil Procedure Act, Cap. 71 as amended and established case law.
Basically, a transparent procedure and concrete guidelines should be implored by the lender throughout the process of the sale, as follows:-
The mortgagor must be in default in payment
The mortgagor must be in default in payment and/or must have failed to make payment within a specified time after being served with a demand to pay. Where money secured by a mortgage is payable on demand, a demand in writing creates a default in payment which the mortgagee should require the mortgagor to rectify within 30 days from the date of the demand; when the obligation to pay becomes due. (Sec.19 of the Mortgage Act).
Issuing and serving a notice in default
If the borrower has not made payment after the 30 days, a lender/ mortgagee may issue a notice in writing to the borrower requiring him or her to rectify the default within 45 working days. The notice must clearly show the nature and extent of the default made by the mortgagor, the amount payable to rectify the default and the period within which to rectify the default, which should be by the end of not less than twenty-one (21) working days.
If the default is not rectified within the specified time, a mortgagee is authorized to exercise the remedies stated in the Mortgage laws which include selling the mortgaged land. (Sect. 19, 20, 26 and Reg.22 of the Mortgage Act and Regulations respectively)
Service of notice to sell.
Before sale, the mortgagor must be properly and adequately served with a notice to sell the mortgaged property by the mortgagee, and the mortgagee is precluded from proceeding to complete any contract of sale until 21 working days have elapsed from the date of service of the notice to sell.
A copy of the Notice must be served on a mortgagor, any spouse(s) of the mortgagor in respect of the matrimonial home, a surety, an independent person as provided under the Act or in case of customary land, the children and the spouse(s) (Sect.26 and Reg.25 of the Mortgage Act and Regulations respectively).
The borrower must always, in writing, notify the lender of any change in physical address as required by Reg.7. The spirit of this law is to foster effective communication between the lender and borrower for all purposes and times, for the invulnerability of the borrower.
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In absence of the notification, any act or proceeding taken by the lender or mortgagee cannot be affected by the borrower’s claim of a subsequent change in address. However, the preceding law, Reg.6(2), requires any notice or document to be published in a newspaper of wide circulation in the area where the property is situated, where a mortgagor does not give address.
Valuation of the mortgaged property
The property must be valued and the mortgagee must act in good faith to obtain the true and best market value of the mortgaged property at a date on which it decides to sell.
Under sect. 27 of the Mortgage Act, the duty to obtain the best price is bestowed on the mortgagee and a mortgagee is not entitled to any indemnification arising from breach of that duty. The Mortgage Regulations (Reg.11) require the mortgagor before selling the property to value it to ascertain its current market value and the forced sale value. The Valuation Report must not be made more than six months before the date of the sale and must contain the current pictures of the property.
Thus, as re-emphasized in the case of Majid Akuze V centenary Rural Development Bank Civil Suit No. 87/2015, a mortgagee is under an equitable duty to take reasonable precautions to obtain a “fair” or “true market” value and in the conduct of the sale, the lender or mortgagee must not unduly rush the transaction or sell at a low price that will simply cover the borrower’s debt.
Relatedly, a mortgagee must not sell the property under a forced sale value or at an undervalued price, as doing so is a negligent act entitling the borrower to recover the difference between the true market value of the property and the sale price realized from the sale. (Sendagire Stephen and Nanyombi Gladys Versus Kabiito Karamagi and Kirumira Godfrey Kalule HCCS No. 26/2008 ).
One of the ways in which a mortgagee’s compliance with the duty to sell at the true market value is satisfied is by using competent and qualified Valuers to make an independent valuation of the property before selling it.
Very pertinent to understand is that the sale of the mortgaged property under the Mortgage Act does not include the sale of movable properties thereon. The court strongly condemned the wrongful retention of the furniture and livestock found on the mortgaged property in the High Court case of Sendagire Stephen and Nanyombi Gladys Versus Kabiito Karamagi and Kirumira Godfrey Kalule HCCS No. 26/2008.
Conducting the sale by public auction
The sale should be by public auction unless the mortgagor consents to a sale by a private treaty. The rationale for this was stated in the case of Sendagire and Nanyombi -V- Kabiito (Supra) that, “public auction is competitive and more transparent…”
Public advertisement of the sale of property
The mortgagee must publicly advertise the sale in advance of the sale by public auction for at least thirty days. The advert should be placed in a Newspaper of wide of wide circulation in the area concerned. (S.28(2) Mortgage Act and Regulation 8(2) and (4) of the Mortgage Regulations).
During the sale process, an adjournment of a sale can be done if there is a bidder at the end of the prescribed period for the advertisement, and a reasonable cause. The law requires that the property be publicly re-advertised if the adjournment is for a period of longer than 14 days. (Reg.13 and Majid Akuze V centenary Rural Development Bank (Supra).
While pursuing the sale process, there must not be any foul play or collusion between the lender and the purchaser of the borrower’s mortgaged property. The law expressly prohibits a sale to a mortgagee, its employee or an immediate member of his family, its agent or an immediate member of his family, a person in a position to influence the sale/matter or a person in a position of any other privileged information regarding the transaction, without the permission of Court, and such permission can only be granted where Court is satisfied that the sale to that person is the most advantageous to obtain the best price. (S.30 Mortgage Act).
Such illegal and prohibited instances were reprehended in the High Court case of Macdowel Foods & beverages Versus Stanbic bank and Myraid Investments Club Ltd Miscellaneous Application No.568 of 2020, where Court made an apt finding on Stanbic bank’s conduct(mortgagee), that its employees fraudulently disposed of a customer’s mortgaged property to a company, as a shabby disguise, they purposely formed with a motive to purchase the securities that had been deposited by a customer as collateral for a loan.
Noteworthy, the borrower, under the concept of redemption, is allowed to retain ownership and full rights over the property if he/she reimburses the outstanding loan amount and expenses before the sale. The law under Sect. 32 and Reg.13 of the Mortgage Act and Mortgage Regulations respectively, provides for the right of a mortgagor to discharge the mortgage on payment of sums due any time before the sale.
Therefore, before the sale, there is no clog on the equity of redemption. This law was upheld in the Court of Appeal case of Kiyaga V Segujja & Anor  UGCA 26, where Court re-emphasized that, “it is an established rule that if money is lent on the security of land, the lender will get security and nothing more. Therefore, if the borrower wishes to redeem the land within a reasonable time, he will be allowed to do so, even though the due date is past. This rule is so strict that not even an express agreement will be allowed to exclude the borrower’s right to redeem.”
Once the contract of sale comes into force, the equity of redemption by the lender is no more and the borrower, if he wishes, can only buy the property from the purchaser. Subsequently, the loan and all its accruals become extinguished after the sale of the mortgaged property and the mortgagee is accountable for the actual proceeds from the property. Money from the sale is dispensed to clear the rates, rents and taxes on the mortgaged land, any other mortgage subject to the sale, reasonable expenses and costs incurred in the sale, outstanding loan and interest due under the mortgage, any subsequent mortgages in order of their priority and the remainder is paid to the person entitled to discharge the mortgage instantly prior to the sale (Sect.31of the mortgage Act).
After a complete fulfilment of all the financial obligations secured by the mortgage, and any costs arising out of the initial obligations, the mortgage must be wholly released or discharged by the mortgagee(lender) and the lender-borrower relationship on a specific loan and property is dissolved. (Sec. 14, 15 of Mortgage Act and Reg.20 of the Mortgage Regulations).
Strict compliance with the above procedure and guidelines is an absolute prerequisite for a prudent sale to be conducted by the mortgagee. Such adherence prevents the mortgagee from acting in secrecy, in a haste at the peril of the unsuspecting-ignorant public. If a borrower discovers any irregularity in compliance with the above process, various remedies, within the ambit of the law, are available to the mortgagor(borrower) to be indemnified from any loss.