What equitable mortgage means
An equitable mortgage is security over land that falls short of a legal mortgage.
A legal mortgage is created by deed, with the formality that involves, and for Nigerian land it requires the Governor's consent and registration to be complete. That process takes months and costs a percentage of value.
An equitable mortgage arises in less formal ways. The classic method is the deposit of title documents with the lender, with the intention that they be held as security. An agreement to create a legal mortgage, or a mortgage of an equitable interest, also creates an equitable mortgage.
The attraction is speed and cost. A lender can take a deposit of title deeds today and lend, rather than waiting through consent and registration.
The cost of that convenience is enforcement. An equitable mortgagee generally does not have the statutory power of sale a legal mortgagee has, and must apply to the court to realise the security.
How it is used
Nigerian lending practice uses the equitable mortgage in two ways.
As interim security. A bank lends against a deposit of title deeds and a memorandum recording the intention, with an undertaking from the borrower to execute a legal mortgage and to pursue consent and registration. The equitable mortgage covers the period until the legal mortgage is perfected.
As the whole arrangement. For smaller facilities where the cost of perfection would be disproportionate, the lender takes and holds the documents and lends on that basis, accepting the weaker enforcement position.
For a borrower, the practical points are three.
Understand that handing over your title documents creates security, whatever the conversation sounded like. A deposit made with the intention of securing a debt is an equitable mortgage even where nothing formal was signed.
Get the arrangement in writing, recording what is secured and on what terms, because an undocumented deposit produces arguments about what was intended.
And get the documents back and the security discharged when the facility is repaid, because lenders hold documents against facilities that closed years ago.
Key features
- Security over land created without a full legal mortgage
- Commonly created by deposit of title documents with intent to secure
- Faster and cheaper than a legal mortgage, which needs consent and registration
- The mortgagee generally lacks a statutory power of sale
- Enforcement usually requires an order of court
- Ranks behind a properly perfected legal mortgage
How this works in Nigeria
The reason equitable mortgages are so common in Nigeria is the cost and delay of perfection.
A legal mortgage over land requires the Governor's consent, stamping and registration, with charges assessed as percentages of value and a process measured in months. For a facility of moderate size, that cost is disproportionate, and both lender and borrower prefer to proceed on a deposit of title deeds.
The consequences show up on default.
An equitable mortgagee cannot simply exercise a power of sale. It must go to court, which takes time during which the debt grows and the asset may deteriorate.
An equitable mortgage also ranks behind a legal mortgage properly perfected. A borrower who deposited documents with one lender and then granted a legal mortgage to another, and obtained consent and registration, has created a priority problem in which the equitable mortgagee is second.
For lenders, the practical answer is to treat the equitable mortgage as interim, take an undertaking to perfect, and actually pursue perfection rather than allowing the position to drift for years.
For borrowers, the point is more immediate. Handing over an original certificate of occupancy or deed of assignment to somebody who has lent you money is not a gesture of good faith. It is the creation of security, and recovering the documents afterwards requires the debt to be settled and the security discharged.
Legal mortgage vs equitable mortgage vs lien
Three positions a creditor can hold over property, in descending order of strength.
A legal mortgage is created by deed and, for Nigerian land, perfected by consent, stamping and registration. The mortgagee has the statutory power of sale and other remedies, and it ranks first among competing interests properly perfected.
An equitable mortgage arises from a deposit of title documents with intent to secure, or from an agreement to create a legal mortgage. It is quick and cheap to create, generally requires a court order to enforce, and ranks behind a perfected legal mortgage.
A lien is a right to retain possession of something until payment. It is passive: the holder can refuse to release the goods but generally cannot sell them without a further right.
A lender choosing between the first two is trading cost and speed against enforceability, and the trade only becomes visible at the point of default.
Limits and risks
Enforcement is the central weakness. Without a statutory power of sale, realisation requires a court application, which is slow.
Priority is the second. A perfected legal mortgage takes precedence, so an equitable mortgagee can find its security subordinated.
Evidence is the third. Where the deposit was informal and nothing was written, the parties argue about whether security was intended at all and what it secured.
And for the borrower, the documents are effectively immobilised. A borrower whose title documents are held cannot sell, cannot mortgage elsewhere and cannot complete perfection while the lender holds them.
Worth knowing
Never hand over an original certificate of occupancy or deed of assignment without a written agreement recording exactly what it secures and when it will be returned. In Nigeria that deposit creates security whether or not anybody said so, and recovering the documents afterwards means settling the debt first.
Questions people ask
What is an equitable mortgage?
Security over land created without a full legal mortgage, most commonly by depositing title documents with a lender with the intention that they be held as security.
Why do Nigerian lenders use them?
Because a legal mortgage requires the Governor's consent, stamping and registration, with charges assessed as percentages of value and a process taking months. An equitable mortgage can be created immediately.
How is an equitable mortgage enforced?
Generally by application to court, because the mortgagee does not have the statutory power of sale a legal mortgagee has. That makes enforcement slower and more expensive.
Does it rank behind a legal mortgage?
Yes. A properly perfected legal mortgage takes priority, so a borrower who deposited documents with one lender and granted a registered legal mortgage to another has subordinated the first.
Does handing over my title documents create security?
If it was done with the intention of securing a debt, yes, even where nothing formal was signed. That is precisely how an equitable mortgage by deposit of title deeds arises.
How do I get my documents back?
By settling the debt and obtaining a discharge of the security. Ask for the release in writing and confirm it, because lenders hold documents against facilities that closed years earlier.