By Fortunate Kirabo, Legal Assistant

Third-party mortgages are growing increasingly common in the banking industry. Individuals holding land under any form of tenure possess the legal authority to mortgage their interest in the land—or a portion of it—through an instrument in the prescribed format. This authority encompasses the establishment of third-party mortgages. While the Mortgage Act Cap. 239 and the Mortgage Regulations 2012 outline the form for a standard mortgage deed, they do not offer explicit guidance on the format for a third-party mortgage.

The requirement for a mortgagee to endorse the mortgage deed has been a contentious issue in case law. Some cases maintain that the absence of the mortgagee’s signature is not fatal, while others contend that it is, especially when the mortgage deed also serves as a loan agreement. Although these positions may be reconciled, uncertainties emerge regarding their relevance to third-party mortgages. Is it a question of form or substance for all three parties to sign? Does the lack of the mortgagee’s signature render a third-party mortgage invalid?

The leading case supporting the view that the mortgagee’s signature is not essential is Olinda De Souza Figueiredo v Kassamali Nanji [1963] 1 E.A 381 (CAK). In this case, the mortgage deed was signed by the mortgagor but not the mortgagee, yet it was deemed valid and properly registered. The court held that the absence of the mortgagee’s signature was not a matter of substance. The case of Margherita Millers Limited and Another v Housing Finance Bank Limited and Another [2021] UGCommC 45 purported to follow the position in Olinda De Souza Figueiredo. Although the mortgagor had also failed to properly execute the mortgage deed, the court confirmed the principle that the absence of the mortgagee’s signature does not automatically invalidate the mortgage.

This position is qualified by another line of cases, such as Alice Okiror & Another v Global Capital Save 2004 & Another [2012] UGCommC 62. In that case, the High Court held that the absence of the mortgagee’s signature renders the mortgage invalid when the mortgage deed also serves as a loan agreement. This view was subsequently followed in Diana Nansikombi Bbosa v Stanbic Bank (U) Ltd and Nelima & 2 Others v Bank of Baroda (Uganda) Ltd [2017] UGHCLD 47.

Parties intending to execute third-party mortgages must ensure strict compliance with formalities to avoid invalidation. A third-party mortgage establishes a relationship distinct from the traditional mortgagor-mortgagee dynamic. Although a third-party mortgage secures the payment of a debt or the fulfilment of an obligation by a person other than the mortgagor, it does not imply a covenant requiring the mortgagor to repay the loan. Since third-party mortgages create secondary obligations in the form of a guarantee, the mortgagee assumes positive duties to the mortgagor. These duties include ensuring that the mortgagor’s interest in the mortgaged property is not adversely affected by the mortgagee’s actions or omissions under the loan agreement with the borrower.

In conclusion, third-party mortgages represent a distinct and increasingly significant aspect of the banking industry, necessitating careful consideration of the legal formalities governing their execution. While the absence of a mortgagee’s signature in traditional mortgages is generally not a matter of substance, the unique dynamics of third-party mortgages elevate the importance of the mortgagee’s signature, particularly when the mortgage deed also serves as a loan agreement. To ensure the validity and enforceability of third-party mortgages, parties must adhere strictly to the prescribed formalities and remain mindful of evolving judicial interpretations. As the use of third-party mortgages continues to grow, clarity in both legal frameworks and judicial reasoning will be essential to address the complexities inherent in these unique financial instruments.