As the Covid-19 virus continues to ravage the world, whilst singlehandedly pillaging the world’s economy, the future economic posturing of Nigeria is rather dim, and creates a dystopian feeling. McKinsey as at 9th March 2020 in a survey identified Covid-19 as a threat to global economies more than any other factor. The report identified three broad economic scenarios: a quick recovery, a global slowdown, and a pandemic driven recession. It is forecasted that if the world doesn’t put paid to the pandemic by Q3 2020, global growth will fall between 1.5% and 0.5%.
With Nigeria coming out of recession recently in 2016 and has thus far been threatened with another recession in recent months due to the fast dwindling oil price. There exists a symmetric relationship between recessions and global property markets. The last global recession in 2007 occasioned a giant rise in property prices, unexpected foreclosures, a depreciation of financial securities, and worldwide failure of banks amongst others.
This article will examine the impact of the Covid-19 pandemic on the three most popular property transactions vis-a-vis the available fiscal palliatives put in place by the government. The possible solution to the likely scenarios under the various transactions will also be examined.
Pennington J. in Olowu v. Miller Bros Limited (1922) 3 NLR, 110) defined mortgage as a security created by contract for the payment of a debt already due or to become due. A Mortgagor will lose his right to a mortgaged property if he defaults in the repayment by the legal due date. Mortgagees generally seek three things in a mortgage: to secure trade advantages, to become owner of the mortgage property and to get back more money than advanced.
The ongoing pandemic has seen a sharp drop in income for the majority of Nigerians, thus making commitments to various loan arrangements an issue. According to the National Bureau of Statics Report on Banking released in Q1 2020, Nonperforming Loans dropped by 41% in Q4 2019, which is a drop to N1.05 trillion from 1.79 trillion. This development was attributed to debt recoveries and loan write offs. This positive development was greatly threatened by the lockdown imposed by the Government across the various commercial hubs in Nigeria.
In a mortgage arrangement, there is always a covenant from the mortgagor to the mortgagee to repay the mortgage sum and the interest at a fixed rate. Eimunjeze (Felicia O. Eimunjeze: Real Property Law & Practice in Nigeria (2014) states that “where interest is capitalised, the mortgagee will not be able to exercise his power of sale on the ground that the interest is two months in arrears.” Baker and Langan (P.V. Baker v P. ST. J. Langan: Snell’s Principles of Equity (28th Ed.) Sweet & Maxwell) also state that where there is a provision for capitalisation of interest, interest cannot be said to be “in arrear” even where the mortgagor fails to pay it; they relied on the case of Wrigley v Gill (1906) 1 Ch 165). However, capitalisation of interest clause is mostly used where the mortgagee is in possession of the mortgaged property; it is a rarity these days to see a mortgagee in possession of the mortgaged property due to the responsibilities attached thereto.
As a palliative to ease the burden of loanees, the Central Bank of Nigeria in its circular of 16th March 2020 granted all Deposit Money Banks the leave the leave to consider temporary and time limited restructuring of the tenor and loan terms for businesses and households most affected by the Covid-19 outbreak. There have also been several calls urging banks to reduce their interest rates. However, banks cannot unilaterally do all these without the concurrence of its loanees as seen in Ekondo Community Bank Limited v. Anieting (2013) LPELR-CA/C/72/2011). However if the mortgage has an floating interest rate with a clause that allows the mortgagee to unilaterally review the interest rate and adjust it according to economic realities, the mortgagor will be seen to have consented to the change ab initio can cannot rely on any other extrinsic evidence that says otherwise as it was the case in UBN Ltd. v. Ozigi (1991) 2 NWLR (Pt.176) 677).
In a scenario where the mortgage has fallen due, a mortgagee intends to foreclose the security after is has fallen due, the mortgagor can rely on the handicap caused by the shutdown of businesses as a reason why the Court should not grant the order of foreclosure nisi or absolute. Where it has been made absolute (whether or not the property has been sold by the mortgagee consequent on the order), the mortgagor can apply to the court to open the foreclosure. The grounds for opening a foreclosure are (see: Campbell v Holyland (1877) 7 ChD 166 at 172-174):
- Where an accident occurs at the last moment preventing the mortgagor from raising the money. Accident here would mean an event that happens by chance or that is without apparent or deliberate cause;
- Where the property is of a special value and there is a marked disparity between the value of the property and the amount lent, and the promptness of the application;
- Where the mortgagee pursues another remedy after obtaining an order of foreclosure absolute
Looking at the concept and effect of Force Majeure clause, it is hard to think that there would be a mortgage deed that contains a force majeure clause due to the fact that it is not to the advantage of the Mortgagee. In the absence of that, the mortgagor and mortgagee due to the situation cased by Covid-19 can agree to extend the term of the mortgage, giving the mortgagee more time to pay, and the mortgage can be restructured in a way that makes repayment (monthly or yearly however fixed) lower and more affordable.
Also, where a property is subject to several successive mortgages, and it appears that the mortgagor is unable to redeem during this period, one of the successive mortgagees can redeem the mortgage. This concept is known as “redeem up, foreclose down”. Megarry’s “Manual of the law of real property” explains that this applies where there are several incumbrancers and one of them seeks by action to redeem a prior mortgage. He must while doing this, redeem any mortgage standing between him and that first prior mortgage, and must also foreclose all subsequent mortgages as well as the mortgagor. He cannot foreclose a mortgage that ranks above his in priority. To do this, he needs to apply to the court as the principle doesn’t apply to redemptions out of court. See the English cases of Anderson v Stather (1845) 2 Coll. C.C., 209); Richards v Cooper (1842) 5 Beav. 304); Smith v Green (1844) 1 Coll. C.C., 555).
In the event of the death of the Mortgagor during the Covid-19 pandemic, his equity of redemption will pass to his estate or heirs unless contrary intention is shown in the will of the mortgagor. The estate or personal representatives of the deceased will be entitled to redeem the property and the mortgagee can also call on them to pay the debt due. The case of Ejikeme v. Okonkwo and anor (1994) 8 SC) is well illustrative on this point. Same applies where the Mortgagee dies, his personal representatives will be able to exercise all rights and enjoy such remedies as he would have.
The reality of the impact of Covid-19 on leases (tenancies included) is that cases of forfeiture of leases will arise. In some Countries, part of the governmental palliatives was the suspension of rents in exchange for some concessions for the landlords. A tenant/lessee’s failure to pay rent when due can be remedied with forfeiture. However, the Lessor/landlord must still make a formal demand for the arrears of rent, serve a notice of forfeiture and apply to court for possession; see the case of Obioha v Dafe (1994) 2 NWLR (Pt. 325) 157).
Many businesses in metropolitan parts of the country like Lagos, Kano, Kaduna, Abuja, Port-Harcourt etc. usually take out long leases for their business premises. The lockdown due to Covid-19 means that they will not be able to access the demised premises for the period when the lockdown subsisted. Usually, rent is to be paid whether or not they can enjoy the demised premises and the lockdown months will count where the rent has been paid in arrears. However, where the lease contains a rent abatement clause, the lessee would have reprieve amidst the pandemic. An abatement of rent clause ensures the protection of the lessee where he is unable to use the property due to some frustrating circumstances not of his own fault. The effect of this is that the payment of rent is suspended until when the lessee/tenant can use the demised property without any hindrance.
Also, depending on the situation, it is possible for a lease to be frustrated. However, the courts are always reluctant to declare a lease as frustrated. The House of Lords in Taylor v Caldwell (1863) 122 ER 309), emphasised that “frustration of leases is only likely to occur very rarely, or to paraphrase a Gilbert and Sullivan operetta: not never but hardly ever.” The Supreme Court in Araka v. Monier Construction Co. Nig. (1978) 6-7 S.C. 7), stated that:
“We are inclined to accept the views of Viscount Simon and Lord Wright as being the correct statement of the law that the doctrine of frustration may in certain circumstances apply to a lease. We think that it may tantamount to injustice to deny a tenant the benefit of frustration in cases where, owing to circumstance of an intervening event or change of circumstances so fundamental as to be regarded by the law as striking at the root of the agreement, it has become impossible for the tenant to enjoy the fruits of his lease and at the same time to expect him on account of the abstract estate concept to honour his obligations under the lease. Such denial may also suffer in justice to a landlord who finds himself in the same situation as the landlord in DENMAN v. BRISE(Supra) “ Per BELLO, J.S.C. (Pp. 17-18,paras. G-C)
The question will then arise as to whether or not Covid-19 can frustrate a lease. In Gold Link Insurance Company Limited V. Petroleum (Special) Trust Fund (2008) LPELR-CA/A/233/2006), the court held that frustration will not occur in the following instances:
- The intervening circumstance is one which the law would not regard as so fundamental as to destroy the basis of the agreement.
- The terms of the agreement show that the parties contemplated the possibility of such an intervening circumstance arising.
- One of the parties had deliberately brought about the supervening event by his own choice.
Flowing from this, it is obvious that where a lease contemplates situations such as covid-19 pandemic that can lead to an operational halt and includes devices in the leasehold agreement or deed of lease to salvage such a situation, frustration will not be deem to have occurred in such an instance. For example, where the deed of lease contains an abatement of rent cause of where it contains a force majeure clause that doesn’t have the effect of terminating the transaction, the lease will not be said to have been frustrated in this instance.
Also, as the court noted in Gold Link Insurance Company Limited V. Petroleum (Special) Trust Fund (Supra), frustration depends on the time construction of the terms of the contract read in the light of the relevant circumstances when the contract was entered into. In the instance where the lessee is only prevented from enjoying his lease due to the lockdown for a period of time that is not substantial in the total number of term granted (e.g. 2 months out of a term of 2 years), such a lease will not said to be frustrated; this will resonate well in long leases See National Carriers Ltd. v. Panalpina (Northern) Ltd. (1981) A.C. 675). A lockdown of 3 months will not reasonably frustrate a long lease of 50 years. In Cricklewood Property and Investment Trust Ltd v Leighton Investment Trust Ltd (1945) A.C. 221), the lessee obtained for 99 years. Due to war time restrictions on the supply of building materials, the lessee was unable to erect a building as covenanted on the lease. The lessor sued for rent, the lessee pleaded frustration; the House of Lords was divided on whether or not frustration would apply to a lease. However, on the facts of the case, it was held that the interruption caused by the war time disruption would only cover a small part of the duration of the lease, and as such there had been no frustration.
ASSIGNMENT OF REALTY
For the conveyance of legal interest in land in Nigeria, the process starts with the grant of Governor’s Consent and ends with registration of title. Anything short of that, is equitable as stated in the cases of Onagoruwa v Akinremi (2001) 13 NWLR (pt. 724) pg. 38); Ojemedah v Baruwa (2012) LPELR 8581).
The implication of the lockdown of government offices on assignment is that applications for searches, Governors’ consent and registration of title will take longer than usual. The Land Information Management System (LIMS) of Lagos State is an online database for conducting still requires a physical visit to the registry. The lack of a hands-off approach similar to the process of registration of a company with the Corporate Affairs Commission is an obvious pitfall of the LIMS invention.
It is advised that purchasers should take steps that will serve as notice to the entire world of their purchase/occupation of the land, so as to undercut sharp practices and double dealing by dubious vendors. Steps like taking of possession, construction of temporary structures etc. The dubious sale of one land to multiple persons has been judicially noticed as far back as 1951 in the case of Ogunbambi v. Abowaba (1951)13 WACA 222 at 223). This advice is also predicated on the maxim that equity aids only the vigilant and based on the doctrine of notice.
On a lighter note, the pandemic has affected valuation of property and has driven the prices higher, and it would continue as a halt in inflation is not expected soonest. Physical inspection of property due to the various restrictions has also been cumbersome.
The pandemic will no doubt change the way we conduct commercial transactions. The situation has forced many parts of Africa, Nigeria inclusive to adopt advanced virtual technology. Even the Courts have begun conducting virtual hearings.
This is a wakeup call to the legislators to start drafting laws that will embrace technological aides, so as to enable ease of property transactions. Inspiration can be drawn from the Central Securities Clearing System (CSCS). There is need for a secured database backed by the appropriate registries that will enable property transactions from negotiation stage up to consent and registration stage. This will help decrease the time spent in perfection of land transactions e.g. assignment, mortgages and registration of leases. There is also need for the simplification and unification of the process of seeking consent and registration of titles. These archaic bottlenecks in guise of processes are massive impediments.
Many of the multi-sectoral palliatives by the various tiers of the government did little to affect property transactions, due to the fact that there’s almost no statutory authority to do this. For instance, there is no tax palliative that directly affects property transactions during the pandemic. It would be suggested that tenancy laws should be amended to give the Governor the powers to suspend the payment/collection of rents for a limited period in exchange for suspension of tenement rate/land use tax, tax reliefs/credits on the part of the landlords. There is need for the amendment of the various property laws to reflect the realities of technological advancements and to give room for the sustenance of property transactions during future global or national economic disruptions.
Akintola Phillips (LL.B, B.L, ACArb)
Tax and Dispute Resolution Counsel
Hermon Legal Practioners.