Mortgage Priority, Tacking, and a Sale to an Insider
In 2018 Kemi borrowed ₦20 million from First Bank, secured by a registered mortgage over her house. In 2020 she borrowed ₦10 million from Second Bank. First Bank's mortgage deed secured "all sums now or hereafter owing", but the clause was not noted in the register and Second Bank did not search the register; Second Bank registered its mortgage in 2021. In 2022 Kemi borrowed a further ₦5 million from First Bank under an oral agreement; First Bank advanced the money without a written variation. First Bank now sells the house for ₦28 million to a company owned by its credit manager. The valuation was ₦40 million; the sale was by private treaty without advertising. Kemi has been in arrears for four months. She alleges the sale is void, Second Bank claims priority for its ₦10 million, and Kemi seeks an account. The mortgage statute requires a power of sale to be exercised in good faith and for a proper purpose, and requires 30 days' notice to the mortgagor after default.
1. Rank the competing claims. Does First Bank's 2022 further advance of ₦5 million have priority over Second Bank's 2021 mortgage?
Read the worked answer
First Bank's 2018 mortgage ranks first for the original ₦20 million. Second Bank's 2021 mortgage ranks second for ₦10 million. The further advance of ₦5 million in 2022 raises tacking. A first mortgagee may tack further advances ahead of a subsequent mortgage only if the first mortgage secures further advances and the first mortgagee had no notice of the subsequent mortgage when the advance was made. Here First Bank had notice, because Second Bank's mortgage was registered in 2021, so the ₦5 million does not gain priority over Second Bank. It ranks after Second Bank's ₦10 million, though it remains secured by the first mortgage as against Kemi and other later interests. Second Bank's failure to search does not assist First Bank: registration is constructive notice. The unregistered "all sums" clause does not defeat a registered subsequent mortgage; at most it defines the debt as between Kemi and First Bank.
2. Can Kemi set aside the sale to the credit manager's company? What must she prove, and what remedies follow?
Read the worked answer
A mortgagee's power of sale is exercised in good faith and for the purpose of recovering the debt, not for the mortgagee's own benefit. The mortgagee must take reasonable care to obtain the true market value. A sale by private treaty, without advertising, at ₦28 million against a ₦40 million valuation, to a company owned by the credit manager who is handling the loan, is a classic case of self-dealing and breach of duty. The 30-day notice requirement also appears not to have been met. The sale is not automatically void, but it is voidable in equity; Kemi can seek to set it aside, or damages and an account of the profit. Because the purchaser is connected to the mortgagee, the court will scrutinise the sale closely and may presume unfairness. If the property has passed to an innocent third party for value, setting aside may be unavailable and the remedy will be damages or an account against First Bank.
3. Identify the ethical issues for the credit manager and First Bank.
Read the worked answer
The credit manager has a direct conflict of interest: he is approving and executing a sale to a company he owns while acting for the lender. He must not use his position to obtain a personal benefit, must disclose the conflict, and should be excluded from the transaction. First Bank is vicariously responsible for his conduct and must have an independent valuation, proper marketing and arm's-length negotiation. The bank also owes Kemi duties of good faith and confidentiality; using confidential valuation and loan information for the manager's company is a breach. Ethically, the manager should be reported to the professional body and the transaction should be unwound or re-tendered. The bank should not rely on Kemi's default to justify a sale at an undervalue to an insider.