Much of today’s secured lending legal regimes that accentuate collateral quality in credit risk assessment for loan finance trace their roots to the epochs of ancient Greece and ancient Rome when pawnbrokers advanced loans to people against the security of personal items of value (gold, silver, etc.) for a contractual period of time during which the loan, plus interest, was repaid to reclaim the items.
However, in these modern times, banks consider collateral as a secondary source of security for loan repayment to come into play only when the primary source (business cash flows) fails. Land, particularly improved land in real estate, is the ideal secondary security for many banks.
Be that as it is, Section 37(1) of the Land Act 1999 read together with Clause 3(b) of the Land (Dispositions of Rights of Occupancy) Regulations, 2001 requires the approval of the Commissioner for Lands before making a disposition of a mortgage of a land right of occupancy to secure a loan facility.
A key question then is: whose duty is it to obtain the approval? In accordance with Clause 4 (1) of the above-mentioned Regulations, it is the mandatory duty of the holder of a right of occupancy and the intended mortgagee to obtain the approval of the Commissioner. Yet, many people are unaware of the legal effect of a mortgage transaction that is devoid of the approval. Let’s dive into it!
Section 37 (5) of the Land Act provides that, and we quote, “a disposition carried out without first obtaining the approval of the Commissioner shall be inoperative.” Unfortunately, the word “inoperative” is not defined in the Land Act. So, judicial interpretation is where we should look to find the answer.
In its ruling in Abualy Alibhai Aziz vs Bhatia Bottlers Ltd (Misc. Civil Appeal No. 1 of 1999), the Court of Appeal of Tanzania interpreted the phrase “shall not be operative” to mean valid but unenforceable, adding that, nevertheless, where such enforcement was not prejudicial to public policy, a party can seek the assistance of the court, for example, through the equitable remedy of specific performance.
Now you may be wondering, “How can a deed of mortgage be inoperative and valid at the same time?” Well, what is inoperative is the actual disposition itself i.e. the passing of the interest held in a land right of occupancy. It is not unlawful to execute a deed of mortgage to secure a loan facility prior to obtaining the approval of the Commissioner. The deed does not become void in toto (completely).
It thus follows that where, in a disposition of a mortgage, the Commissioner’s approval has not been obtained, a party to a mortgage transaction can ask the court to intervene and order specific performance to ensure that the other party performs (or will perform) his obligations if there is no fraud, no deceit, no misrepresentation, no contractual incapacity, and no breach of public policy.
The tenable rationale for this is: First, by virtue of the ‘sanctity of contract principle’ courts are reluctant to admit excuses for non-performance of a party’s obligations. Secondly, through the prism of ‘moral law’, it is appalling for a mortgagor who has benefitted from a mortgage transaction to make a U-turn and assert that the transaction is void in toto.
However, in deciding whether or not to make specific performance orders, courts are inclined to take into account the maxim of equity “He who comes to equity must come with clean hands” and to examine the conduct of the parties and the transaction.
Here are two parting questions to ponder: Can an order of mandamus issued by a court lie to compel the Commissioner to exercise his power? Is the Commissioner’s power discretionary or mandatory? Mandamus would not lie to compel the exercise of a discretionary power.
The exceptions to the requirement to obtain the approval of the Commissioner are specifically prescribed. One exception is where a person who lends money needs to sell mortgaged land or mortgaged lease in exercise of the power of sale or lease under Sections 131 and 128 of the Land Act.