The Commercial Court has ordered Centenary Rural Development Bank to pay a loan defaulter UGX 5M in damages for foreclosing on her land pledged as security for a UGX30M loan and subsequently selling it, without giving her the required mandatory notice of default in the legally prescribed manner.
Lady Justice Anna B. Mugenyi found that the bank, instead of sending the notice of default to the client’s postal address or publishing the notice in a newspaper of wide circulation, the bank sent the notice to its own postal addresses and the WhatsApp number of the client’s “independent adviser” who the client denied ever meeting in evidence before the Court and that the Court found, generally, to be unreliable.
The Bank, also, according to the evidence in Court, dropped a copy of the notice of default at the borrower’s residence with her father but the Judge took the view that “none of those alternative channels is the mode of service Regulation 6 requires” and therefore the defects in service of the notice were incurable.
Section 18(2) of the Mortgage Act, Cap. 239 requires a mortgagee, in this case, the Bank, to serve a notice of default on a loan defaulter (mortgagor) that allows him or her 45 working days to rectify the default before the mortgagee can exercise a power of sale of the security (foreclosure).
That notice under Regulation 6(1) and (2) of the Mortgage Regulations is required to be sent to the address of the borrower that was recorded in the lending/mortgage agreement, and where it is not effective, by publishing it in a newspaper of wide readership.
In this case, the bank’s mortgage agreement with the borrower did not indicate the address of the borrower.
However, it indicated the contact of an individual referred to as an “Independent adviser” who had signed a document/certificate termed as “Independent Advice on the Terms and Conditions of a Mortgage of Your Matrimonial Home” and contained a space for a “Borrower/Spouse’s Declaration”, yet the borrower was an unmarried woman who understands “some English.”
The Bank’s Manager of Business Banking, according to the Judge, also failed to “satisfactorily” answer why the signature on that document said to belong to the Borrower was inconsistent with her signature “elsewhere” in the credit file and if there was any “independent record” beyond the document “itself” that the borrower ever in fact appeared before the said, independent adviser.
“I do not treat that certificate as reliable proof that independent advice specific to this transaction, still less an oral explanation in Luganda as required by Clause 8(1) (d) of the Bank of Uganda Financial Consumer Protection Guidelines, 2011 was in fact given and I accept that… a lender who fails to disclose material facts and to deal fairly and transparently with a borrower before she signs loan documents is in breach of its statutory and regulatory duty of disclosure.” The Judge said
“ I find that the 1st defendant [the Bank] did not serve the Plaintiff [the borrower] with a notice of default in the manner Regulation 6 required, that this was a breach of a mandatory precondition to the exercise of a power of sale under Section 18(2) of the Mortgage Act, Cap 239 and that the foreclosure of the suit land [the security] was as between the plaintiff and the 1st defendant unlawful. This is reinforced by the 1st defendant’s related breach of its duty under Section 3(1) (a) and (b) of the Mortgage Act, Cap 239 and clauses 5,6, and 8 of the Bank of Uganda Financial Consumer Protection Guidelines to deal fairly, transparently and in good faith with the Plaintiff, including in its reliance on the Independent Advice Certificate I have already found unreliable.” She added.
Nonetheless, the Judge declined to invalidate the entire mortgage transaction and the sale of the borrower’s land to another person (the Buyer).
The borrower, in a bid to invalidate the mortgage, had argued before the Court that she did not have the “power” to mortgage the land in question because the land had not been transferred into her name at the time the mortgage agreement was signed.
Understand: that the money she was borrowing was to be used to pay the seller of the UGX 76M land, his balance, and that the mortgage agreement indicated that the land so bought, along with another piece of land, was to form part of the security for the loan.
The borrower claimed she had understood that the second piece of land was the only one to be used as security for the loan. (a plea of non est factum).
“It defies commercial sense, and I do not accept it that a lender advancing money expressly to enable a borrower complete the purchase of a specific parcel of land would simultaneously agree to leave that same parcel entirely unsecured while it remained for well over a year in the lender’s physical custody of title.” The Judge said.
On the evidence, the Court found that the borrower had in fact coordinated the delivery of the land title from the seller of the land to the bank for purposes of the bank facilitating the transfer of the land she had bought into her name, left the land title with the Bank and never asked for its return in the period of the loan and the sale of the land upon default.
The Judge was therefore convinced that the borrower knew the nature and consequences of the transaction she was entering into and that at the time the mortgage was registered as required by the Registration of Titles Act, the land had been transferred into her name, meaning that she was the registered owner of the land.
“… a Mortgage of registered land takes effect as a legal charge from the date of its registration under the Registration of Titles Act, not the date of execution of the underlying instrument. The mortgage was registered on 18th August 2022 by which date the plaintiff had since 26th July, 2022 already become registered proprietor. There is no point in time at which a legal mortgage stood registered against the suit land while it belonged on the register to anyone other than the plaintiff. I find the mortgage validly created and perfected and that the plaintiff both pledged and had capacity to pledge the suit land as security.” The Judge found and held.
Having found that the mortgage was valid but the foreclosure by the Bank was unlawful on account of service of a notice of default (which meant the sale of the land was invalid), the Judge was now left to determine whether the Buyer (the 2nd defendant) of the land sold by the Bank at UGX 56 Million could be protected or he had bought “air.”
She noted that the finding that the foreclosure by the Bank was unlawful “does not…avail the plaintiff [the borrower] a return of the land itself” but that her [plaintiff] “remedy for it lies in damages against the 1st defendant (the Bank).”
Accordingly, the Judge assessed the circumstances of the sale and purchase of the land and found that the Buyer was “a genuine bona fide purchaser for value” who had conducted “real diligence” before purchasing the land.
The Buyer, on the evidence, had inspected the relevant notices (notice of default and notice of sale), the advertisements, the mortgage endorsement on the land title, visited the land, made independent inquiries from a neighbour and the area LC1 Chairperson and crucially had no actual or constructive notice (knowledge) that the notice of default behind the sale of the land had not been served in the manner required by the law.
The Bank’s defect was not visible on the face of any document that was put before him.
“A purchaser exercising reasonable diligence cannot be expected to interrogate a mortgagee’s internal postal records.” The Judge said.
“Section 29 of the Mortgage Act, Cap 239 and Section 176 of the Registration of Titles Act, Cap 240, protect a purchaser in his position and I decline to set aside the sale or disturb his registration” She added.
Meanwhile, the buyer had countersued the borrower and the Bank.
He claimed that despite buying the land, the borrower had refused to leave it and allow him to use it in the 2 years since the purchase.
“That is a clear and continuing violation of his proprietary rights for which he is entitled to a remedy.”
The Judge said, but declined to find any fault on the part of the Bank because when it sold him the land, it had not guaranteed him “vacant possession.”
“The land sale agreement between the Bank and the Counterclaimant [the Buyer] is silent as to any warranty of vacant possession, it was the auctioneers rather than the Bank directly who are said to have purported to avail possession and there is no evidence that the Bank promised or was under any obligation to eject a sitting occupant before completing a mortgage sale. The counterclaim against the Bank must fail.”
Outcomes
- General Damages in favour of the Plaintiff against Centenary Bank for unlawful exercise of its power of sale: UGX 5,000,000/= at 10% interest per year, from the date of Judgment, but “in all other respects, the Plaintiff’s suit is dismissed.”
- The borrower/plaintiff is ordered to vacate the land in favour of the counterclaimant/2nd defendant in the main suit within 30 days from the date of the Judgement.
- The borrower is ordered to pay 15M to the Buyer as general damages at 10% interest per annum from the date of judgment.
- Court declines to award costs to the Plaintiff or the Bank in the main suit, but awards costs to the Buyer to be paid by the Plaintiff.
- Plaintiff ordered to pay costs to the Buyer in the Countersuit, and Buyer is ordered to pay costs to the Bank in the countersuit.
Takeaways
- A mortgage being a registrable instrument, takes effect when it is registered, not when it is entered into.
- A person defaulting on a loan is not a license to the Bank to flout loan recovery procedures.
- Sometimes, settling matters out of Court is the best option. Why couldn’t the borrower and the buyer of her land agree on an amicable solution, especially where the buyer was an innocent purchaser? Proving fraud requires more than rumours and speculation.
Lawyers Involved
Mr Emmanuel Balemezi and Mr Opio Isaac Peter, holding his brief from KSMO Advocates for the plaintiff/Borrower
Mr Silas Baguma of Kalenge, Bwanika, Kisubi & Co Advocates for the 1st Defendant/the Bank
Ms Winnie Namayenje of Lubulwa Peter & Co Advocates for the 2nd Defendant/Counterclaimant/Buyer
Benjamin is a Ugandan lawyer and legal eagle on commercial and corporate legal practice.
