Court of Appeal Clarifies That A Mortgage Signed by the Registered Proprietor Is Not Void Merely Because the Mortgagee Did Not Sign the Instrument, and Upholds the Bank’s Power of Sale Upon Default.

3 days ago

12 min read

Coram: Kazibwe Kawumi (DCJ), Byaruhanga Rugyema and Alibateese, JJA.

Snapshot

In Bank of Baroda (U) Ltd v Edward Kabugo Sentongo, Civil Appeal No. 212 of 2015, the Court of Appeal of Uganda considered whether a mortgage deed signed by the registered proprietor but left unsigned by the mortgagee was invalid and unenforceable.

The Court held that the absence of the mortgagee’s signature did not, by itself, invalidate the mortgage, emphasising that a departure from the prescribed statutory form does not affect validity where it does not concern a matter of substance.

This decision is important for examining the parties’ intention, the substance of the mortgage transaction, and the applicable statutory provisions, rather than treating every formal irregularity as fatal. It also reaffirms a mortgagee’s right to exercise its power of sale upon default where the mortgage is valid and the sale is lawfully conducted, offering important guidance to financial institutions, borrowers and guarantors involved in secured lending transactions.

FACTS

In 1998 the Appellant, Bank of Baroda (U) Ltd, offered a loan facility of UGX 40,000,000 to Olympic Stores Ltd (the borrower). The facility was secured by a personal guarantee signed by the Respondent, Edward Kabugo Sentongo, and by a mortgage over the Respondent’s land comprised in Kyadondo Block 208 Plot 1408 at Kawempe-Mengo. The Respondent, a qualified accountant, signed the guarantee on 6 April 1998 and the mortgage deed on 9 April 1998, and personally handed over his certificate of title to the bank.

The mortgage deed, titled “Mortgage”, was entered into between the Respondent (described as a surety and registered proprietor) and the Appellant. Only the Respondent signed it, and an advocate witnessed it; the bank did not sign. The deed was registered as Instrument No. KLA 206233, after a caveat previously lodged on the title by the Respondent’s wife, Jane Kabugo, was removed.

The borrower defaulted and the bank issued several reminders and demands to both the borrower and the Respondent, and after a period of over four years the bank foreclosed and sold the property by public auction, advertised in the New Vision and Bukedde newspapers, to Dr. George Asaba for UGX 65,000,000 in 2002.

The Respondent sued the Appellant and two others in High Court Civil Suit No. 166 of 2002, alleging that:

the bank unilaterally advanced over UGX 51,000,000 to the borrower, beyond the agreed UGX 40,000,000, without his consent;
the bank refused to avail him copies of the mortgage deed, guarantee and sale agreement;
the property was sold at UGX 65,000,000, below its market value (which he put at over UGX 300,000,000); and
the mortgage was not binding on him because the mortgagee and the borrower did not sign it, and the caveat was improperly removed.

The Appellant denied the claim and counterclaimed for UGX 38,836,023 as the outstanding balance. They asserted that the mortgage was genuine and properly registered under the Registration of Titles Act (RTA), that the property had been valued at UGX 75,000,000 (market value) and UGX 53,000,000 (forced sale value), and that it was sold to the highest bidder after a public auction.

Decision of the High Court

The trial Judge (Obura, J, judgment of 16 July 2015) held that the mortgage was void and not binding on the Respondent because it was never executed by the mortgagee as required under the Eleventh Schedule to the RTA. It followed, she held, that the foreclosure and sale were unlawful.

She struck out Instrument No. KLA 206233, but found that by depositing his title the Respondent had created an equitable mortgage, ordered that he be given a fresh opportunity to redeem by paying what was outstanding at the time of the sale, declined a permanent injunction and damages for market value, and awarded the Respondent 50% of the costs. The claim against the second and third defendants failed and they were not parties to the appeal.

LEGAL REPRESENTATION

Appellant: Mr. Pope Ahimbisibwe of Hunter & Grieg Advocates.
Respondent: Mr. Chrisestom Katumba of Lukwago & Co. Advocates.

Issues

Whether a mortgage signed by the mortgagor alone is void for want of the mortgagee's signature.
Whether the sale was lawful.
Whether the cross-appeal was properly before the Court.

SUBMISSIONS

For the Appellant (Grounds 1, 2 and 5)

Counsel for the Appellant submitted that the appeal was substantially about whether a mortgage deed is invalid and unenforceable simply because the mortgagee did not sign it, and whether Olinda De Souza Figueiredo v Kassamali Nanji [1962] EA 756 remains good law.

He submitted that it was undisputed that the Respondent signed the mortgage deed and the personal guarantee, that the loan was disbursed, and that the borrower defaulted.

He argued that under section 115 of the RTA (Cap 230) and the definition of “mortgage” in section 1 of the Mortgage Act (Cap 229), what is key is that the proprietor signs a document constituting a charge over registered land.

It was submitted that the trial Judge adopted a narrow construction of section 115 and ignored the wider definition in the later, specific statute, the Mortgage Act. Relying on Uganda Railways Corporation v Ekwaru D.O & 5104 Others, SCCA No. 07 of 2019, counsel contended that where two statutes conflict on the same subject, the special statute prevails over the general one.

Counsel further submitted that the mortgage deed contained covenants only by the borrower and the surety/mortgagor and no undertakings by the bank requiring its signature.

He relied on Olinda De Souza Figueiredo for the proposition that the mere fact that a form provides for a party does not make that party’s signature mandatory for legal efficacy, and on Barclays Bank of Uganda Ltd & 2 Others v Emerald Hotel Ltd & 3 Others, CACA No. 70 of 2017, where non-execution by the mortgagee was held not to invalidate a mortgage. He argued that the Respondent, an informed accountant who had benefited from the transaction, could not approbate and reprobate.

For the Appellant (Ground 4)

It was submitted that the trial Judge’s finding that the sale was illegal was premised solely on her erroneous finding that the mortgage was invalid. Counsel prayed that the sale to Dr. Asaba be declared lawful, that the Respondent be ordered to give vacant possession, and that the Appellant be awarded costs here and below.

For the Respondent (Grounds 1, 2 and 5)

Counsel for the Respondent submitted that the Respondent did not entirely associate himself with the Appellant’s background, and stated that the property was worth over UGX 350,000,000.

He submitted that a mortgage is a contract, that no agreement exists unless signed by both parties, and that section 115 of the RTA required a mortgage in the Eleventh Schedule form, which provides for signatures of both mortgagor and mortgagee and their witnesses, a format he said is statutory and must be followed without exception.

He further submitted that under sections 147 and 148 of the RTA, a mortgage must be properly attested and signatures must be in Latin character, relying on Frederick J.K. Zaabwe v Orient Bank Ltd & 5 Others, Civil Appeal No. 04 of 2006, and General Parts (U) Ltd v NPART, Civil Appeal No. 5 of 1999.

It was contended that these requirements were not met: the bank did not sign, the witness’s signature was not in Latin character, and the name and capacity of the advocate who witnessed the Respondent’s signature were not stated.

Counsel also argued that the parties intended a guarantor relationship (the deed referring to a “surety”) rather than a mortgagor-mortgagee relationship, and that the Appellant had unilaterally advanced sums beyond UGX 40,000,000 without the Respondent’s consent.

For the Respondent (Ground 4)

It was submitted that there was no foreclosure in accordance with the law and that the resulting sale was illegal. Counsel argued that the Appellant tendered neither the transfer nor the sale agreement at trial, that the sale occurred without notice to the Respondent, and that in any event, under section 8 of the Mortgage Act, foreclosure could only be by order of court.

On the Cross-Appeal

The Respondent argued the two cross-appeal grounds together. It was submitted that although the trial Judge was right to find the mortgage invalid, she misdirected herself in finding an equitable mortgage.

Counsel argued that this conclusion was contrary to the parties’ intention to create a legal mortgage and to the pleadings (in which the Appellant consistently referred to a mortgage), and that under section 14(2) of the Judicature Act written law is paramount, so that the doctrines of equity could not be applied where the Mortgage Act governed the situation.

Court's Findings

(a) Duty of the first appellate court

The Court noted that, as a first appellate court, it was obliged under Rule 30(1)(a) of the Court of Appeal Rules to re-appraise the evidence and draw its own inferences of fact, bearing in mind that it had neither seen nor heard the witnesses, as emphasised in Fr. Narsensio Begumisa & 3 Others v Eric Tiberaga, SCCA No. 17 of 2002.

(b) Validity of the mortgage (Grounds 1, 2 and 5)

Alibateese, JA observed that it was undisputed that the loan was disbursed, that the Respondent guaranteed it, and that he mortgaged his property and personally handed over his title.

The Court noted that the Eleventh Schedule form did provide for the signatures of both mortgagor and mortgagee, and set out the trial Judge’s reasoning that where a mortgage is drafted as an omnibus document, the requirements of a valid contract must be strictly met and all three parties must sign.

The Court disagreed, holding;

“In my view, from the conduct of the parties and the documentation signed by the Respondent, the parties were clear on the intentions of their transaction which was for the Appellant to offer a loan to the borrower with the Respondent securing its repayment. It is clear to me that the arguments pertaining the signing of the mortgage deed were matters of form rather than substance.”

The Court relied on Olinda De Souza Figueiredo, which held that the absence of the mortgagee’s signature cannot be a matter of substance invalidating a mortgage, and on Godfrey Magezi & Anor v Sudhir Ruparelia (SCCA No. 16 of 2001) for the principle that a written contract is construed to discover the parties’ intention in light of its commercial purpose and factual background.

The Court examined the Respondent’s own evidence on record. It was noted that he acknowledged signing the mortgage deed, that UGX 40,000,000 was extended to the borrower, that he knew the mortgage would be registered, that he freely gave his title as security, and that he willingly signed as a qualified accountant.

The Court also noted correspondence in which the bank warned of sale if the debt was not settled and in which the Respondent, on 7 July 1999, undertook to follow up the borrower’s indebtedness.

Of this, the Court said:

“These correspondences to me indicate that the Respondent clearly acknowledged the relationship between him as a mortgagor and the Appellant as a mortgagee and that given the default in settling the loan, there was a threat of sale of the mortgaged property.”

On the statutory position, the Court held that section 200(1) of the RTA (now section 184(1) of Cap 240) permits the Schedule forms to be modified, and quoted its terms:

“The forms contained in the several Schedules may be modified or altered in expression to suit the circumstances of every case; and any variation from those forms respectively in any respect not being matter of substance shall not affect their validity or regularity.”

It further relied on section 43 of the Interpretation Act (Cap 2), under which an instrument purporting to be in a prescribed form is not void by reason of a deviation that does not affect substance or is not calculated to mislead.

The Court followed its own earlier decision in Stanbic Bank Uganda Ltd v Diana Nansikombi Bbosa, Civil Appeal No. 223 of 2016, where a departure from the Eleventh Schedule format and the absence of the bank’s signature were held not to invalidate the mortgage. It stated;

“In the instant case, what was critical was for the mortgagor to sign and ensure the payment of the debt … What was essential was for the mortgagor to freely endorse the mortgaged deed accepting to mortgage his property which was done.”

The Court found that the Respondent could not benefit from the transaction and then deny it:

“One cannot approbate and reprobate and cannot use form to escape the eyes of the law.”

It added that the Respondent defaulted, was fully engaged with the bank over the debt, and then chose to challenge the very deed he had willingly signed, observing that:

“Business would suffer if parties freely entered into legally binding agreements and instead of honouring them, seek to have them invalidated merely because of the format.”

“The signature of the mortgagee would have made no difference to the substance of the matter especially given that the parties were clear on the intentions of their transaction.”

The Court concluded that the lack of conformity with the signature part of the Eleventh Schedule could not overshadow a deed voluntarily signed, and that it was the duty of the court to enforce it. It determined that the mortgage deed was valid.

(c) Registration and the removal of the caveat

The Court agreed with the trial Judge that the Respondent had no capacity to complain on behalf of the caveator, his wife, who had received notice to vacate the caveat, and that the Registrar of Titles followed the prescribed process. It found no fraud in the registration of the mortgage.

Accordingly, the trial Judge’s decision to strike out Instrument No. KLA 206233 solely because the deed was invalid was an error. Grounds 1, 2 and 5 were allowed. The Court also recalled the principle, affirmed in Olinda De Souza Figueiredo (relying on Waimiha Sawmilling Co. Ltd v Waione Timber Co. Ltd [1926] AC 101), that under the Torrens system “the register is everything”.

(d) Validity of the sale (Ground 4)

The Court noted that the trial Judge herself had observed that, had the mortgage been valid, the sale would have been lawful because clause 5 of the deed expressly conferred a power of sale by public auction or private treaty. Alibateese, JA agreed, and construed clause 5 as follows;

“My understanding of the above clause is that the mortgage deed out rightly gave the mortgagee power to sale the mortgaged property by either public auction or private treaty and as such there was no need for the mortgagee to first acquire a court order before sell.”

The Court thus did not accept the Respondent’s argument based on section 8 of the Mortgage Act. It found that the numerous demands and warnings to the borrower and the Respondent showed that the Respondent was in breach and the money was owing. Citing Housing Finance Bank & Another v Edward Musisi, SCCA No. 22 of 2010, it held that the power of sale arises once an instalment has become due and remains unpaid.

On the conduct of the sale, the Court applied Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] 2 All ER 633, under which a mortgagee exercising a power of sale must act in good faith and take reasonable precautions to obtain the true market value. It found, from the Appellant’s valuation report, that the market value was UGX 75,000,000 and the forced sale value UGX 53,000,000; that the Respondent had been given several years to clear the loan; that the sale was advertised in two widely circulated newspapers; and that the property went to the best bidder at UGX 65,000,000.

Referring to BFP v Resolution Trust Corporation, 511 US 531 (1994), it noted that the price obtained at a foreclosure sale can be reasonable even where it differs from fair market value. The Court stated that it had “seen no evidence of foul play by the Appellant”, found that the Appellant acted in good faith, and held the sale valid.

Ground 4 succeeded.

(e) The cross-appeal

The Court noted that the Appellant filed no response to the cross-appeal. It then considered Rules 91(1), 91(2) and 93 of the Court of Appeal Rules, which require a respondent wishing to contest part of the High Court’s decision to lodge a notice of cross-appeal within thirty days and to serve it on affected parties. It held:

“The Respondent did not comply with the above provisions because he did not file a notice of cross appeal as required.”

Following Stanbic Bank Uganda Ltd v Diana Nansikombi Bbosa (above), where a cross-appeal was struck out for non-compliance with Rule 93, the Court struck out the cross-appeal on that ground alone, and did not determine the equitable mortgage question on the merits.

(f) Concurring judgments

Rugyema, JA agreed with the lead judgment and added his own reasoning on validity. He explained that the mortgagor, not the mortgagee, “executes” a mortgage, and that the mortgagee merely accepts the security, registers the charge and advances the funds. He held:

“Therefore, the failure by the mortgagee to sign the mortgage which is duly signed by the mortgagor who is offering his/her property as collateral to the loan does not render the mortgage void and or invalid.”

He observed that shortfalls in a mortgage document cannot be used to the detriment of the mortgagee unless they unlawfully block or restrict the mortgagor’s fundamental right of redemption, referring to the right of redemption as a core principle of mortgage law (citing Sun North Investments Pty as Trustee v Dale & Anor [2013] QSC 44 and Fairclough v Swan Brewery [1912] AC 565).

He held that the Eleventh Schedule is “merely for guidance in the format to be followed”, that a surety’s liability is co-extensive with that of the principal debtor, and that the attestation complaint was unfounded because the deed was witnessed by M/s Kateera & Kagumire Advocates, the firm that drew it, and disclosure of the firm was sufficient for attestation. He also agreed that one cannot complain about the removal of a caveat he did not lodge.

Kawumi, DCJ agreed with the decision and orders.

HOLDING

The Court of Appeal unanimously allowed the appeal and made these orders:

The judgment and orders of the trial court are set aside.
The mortgage deed over Kyadondo Block 208 Plot 1408, Kawempe-Mengo District, is valid and legally enforceable.
Mortgage Instrument No. KLA 206233 of 6 August 1999 was lawfully registered. The order cancelling it is set aside.
The sale of the property by the Appellant was valid.
The cross-appeal is struck out.
The Respondent shall hand over vacant possession within 90 days.
The Appellant has the costs of the appeal and the cross-appeal.

Key Takeaways

A mortgage signed by the registered proprietor is not void merely because the mortgagee did not sign or because the format departs from the Eleventh Schedule. Section 200(1) of the RTA (now section 184(1) of Cap 240) and section 43 of the Interpretation Act protect instruments from invalidity where the deviation is not a matter of substance.
A mortgagor or surety who has taken the benefit of a facility and handed over his title cannot, on default, escape liability by relying on technical defects in the document.
Departures from the Eleventh Schedule form do not invalidate a mortgage that shows the parties' intention.
Where the deed expressly authorises sale by public auction or private treaty, the Court read it as removing the need for a prior court order. Lenders should nevertheless keep records of default notices, valuations and advertisements.
Guarantors who sign, deposit title and acknowledge default cannot later rely on technical defects.

Read the full case