Parties: Eryaku Isaac and Sarah Abuto Vs Stanbic Bank and 2 others, Civil Suit No.28 of 2021. (Before Justice Dr. Henry Peter Adonyo)
Legal Representation: M/S Omongole and Co Advocates represented the Plaintiffs while S&L Advocates and Alliance Advocates represented the defendants
Brief Background:
On 27th October 2011, the 2nd plaintiff entered into a mortgage agreement with the 1st defendant for a loan of UGX 80,000,000.The loan was secured by the plaintiffs properties comprised in LRV, Folio 6, Block 8, Plot No.37 and LRV 3481, Folio 9, Plot 14, Akaikai Lane, Soroti. Upon disbursement of the loan, the 1st defendant unilaterally increased the interest rate from 20.5% to 23.5%. The 2nd plaintiff defaulted on his loan obligation and the bank issued him with notices dated 5th August 2014 and 12th November 2014 and the mortgagor paid the penalties due. He defaulted again and the Stanbic Bank issued him with notice of default dated 16th March 2015 and notice of sale 13th July 2015. Stanbic bank conducted a pre-sale valuation of the mortgaged property much later on 18th November 2015 where it was valued at a market rate of 200 million and forced sale value of 150 million. The mortgaged property was however sold on the 24th March 2016 at 95 million to the 2nd defendant. Stanbic Bank later carried out another valuation dated 25th April 2016 after it had conducted a sale where property was valued at a market price of 120 million without a forced sale value. The 2nd defendant when registering the mortgaged property under declared the purchase price from 95 million to 40 million declaring that there were no developments on the land which actually had buildings.
Court’s Judgment:
Variation of Interest rate without notice to the mortgagor;
Court held that Stanbic Bank breached its legal obligation by failing to notify the Mortgagor upon increasing the interest rate which was a violation of Section 12(1) of the Mortgage Act and it amounted to unjust enrichment/illicit earning. Court ordered that the said amount should be returned to the Mortgagor.
Mandatory Notices prior to foreclosure:
Court held that mortgagor is entitled to 3 mandatory notice prior to foreclosure , the 1st notice is provided under section 19(1) and 19(4) of the Mortgage Act that provides for a demand notice in writing that is required to last for 30 days from the date when the obligation became due, 2nd Notice is a notice of default provided under section 19(2) of the Mortgage Act that lasts for 45 days and the 3rd Notice is a Notice of sale provided under section 26 of the Mortgage Act that lasts for 21 working days. Neglecting to first issue a demand notice in writing rendered the whole process of foreclosure illegal for failure to issue and serve all the mandatory notices in the required sequence.
Service of Notices through a postal address
Court held that service of default Notices is deemed effective when properly addressed, pre-paid and posted on registered post of the mortgagor provided in the mortgage deed.
Contempt of Court Orders
For court to hold a party liable for contempt, there must be proof of service by filling an affidavit of service which must state the time, manner, name and address of the person being served to prove the actual knowledge of the contents of the court order.
Mandatory Pre-sale Valuation
Court held that Failure to carry out a pre –sale valuation of the mortgaged property rendered the sale of the mortgaged property illegal and it was in total contravention of Regulation 11 of the Mortgage Regulations.
Doctrine of Approbation and reprobation.
A party who derived a benefit from a deed is estopped from approving and rejecting the same instrument; it has one choice of either approving the deed or rejecting it. The defendants were estopped from alleging that sale of the mortgaged property dated 24th March 2016 was an error
Sale by Public auction/Private Treaty.
Court held that in a sale by public auction there must be evidence that after offers were made by the bidders, the eventual sale of the mortgaged property must be determined by the fall of the hammer in a public space. In the event the sale doesnot comply with the above, then it’s a sale by private treaty which requires prior written consent from the mortgagor before the sale.
Defrauding government of its revenue through wrong declarations.
Court held that he who acts through an agent acts for himself. The 2nd defendant assiduously and consciously through his agent / lawyer declared that there were no developments on the land and such declarations amounts to fraud which is an illegality and it invalidates the whole registration process of the impugned title.
It is against public interest for a court of law which is part of government to shut its eyes on a despicable illegality yet a party to a suit made an admission acknowledging defrauding government of its revenue.
Relevance of the Judgment on banking sector , mortgagors and legal sector
- Banks must comply with section 12 of the Mortgage Act while increasing interest rates in the mortgage deeds by giving prior notice to the mortgagor and failure to do so amounts to unjust enrichment/illicit earning.
- The mortgagor is entitled to 3 mandatory notices (demand notice in writing, Notice of default and Notice of sale) prior to foreclosure and failure to issue all the notices in the required sequence invalidates the whole fore closure process.
- Pre – sale valuation is mandatory and it must be done within 6 months prior to the sale of the mortgaged property.
- A sale by public auction must be conducted in a public place, there must be competitive bidders and the sale is determined by the fall of the Hammer. Anything short of that is a sale by a private treaty.
- A client is liable for fraud arising from the actions of his/her lawyer who defrauds government of its revenue in order to pay less stamp duty in the processing of registering a client as a proprietor on a certificate of
Editors
- Omongole Richard – Managing Partner
- Andrew Mugisha – Legal Assistant