Nigeria: Exploring Mortgage Transactions And Stamp Duties In Nigeria's Business Landscape – Part 2

In the first part of this series, "Exploring Mortgage Transactions and Stamp Duties in Nigeria's Business Landscape," we delved into the intricate relationship between mortgage transactions and stamp duties, shedding light on their historical origins and the evolving landscape of financial practices. We discussed the creation of mortgages, the roles of different parties, the significance of legal and equitable avenues, and the essential legal instruments that guide the journey.

In this second part, we will continue our exploration, delving even deeper into critical aspects of mortgage transactions and stamp duties. We will examine key individuals responsible for paying duties on executable mortgage instruments, the crucial timeframes within which mortgage instruments must be stamped, and the far-reaching consequences of failing to adhere to stamping requirements. By understanding these intricacies, businesses and financial professionals can make informed decisions, ensuring compliance and strategic advantage within Nigeria's evolving business climate.

Persons Liable to Pay Duty on Executable Mortgage Instruments

The payment of stamp duty is a legal requirement. The parties responsible for fulfilling this duty, as well as the precise amounts or rates applicable, are explicitly outlined rather than inferred. These particulars, though, are contingent upon the specific type of documents necessitating stamping. The individuals obligated to fulfill the duty and the corresponding rates, as specified by the Stamp Duty Act, are comprehensively presented in the table provided below¹:

In various jurisdictions such as Singapore, the party responsible for paying stamp duties on documents is determined by the terms and conditions outlined in the agreement or legal instrument.² In cases where the instrument does not specify such terms, the Commissioner for Stamp Duties wields discretionary authority to designate the payer, as detailed in the Third Schedule of the Act. This schedule explicitly indicates that in mortgage transactions, the responsibility of paying stamp duty rests with either the mortgagor or the obligor.³

In Nigeria, the SDA definitively establishes that the duty on mortgage instruments, the process of enhancing a legal mortgage, and the guarantor's form lies squarely with the mortgagee. However, it is common in practice for the mortgagee to transfer this responsibility and any other applicable charges to the mortgagor. This practice is deeply ingrained through the inclusion of a "net of tax clause" in contractual documents duly executed by the involved parties. To illustrate, let's delve into the practical application of the net of tax clause.

Illustration:

JAPA Ltd, a corporate entity, employed one of its owned properties in Lagos as collateral for a substantial credit facility amounting to N160 million from KOLERE Bank Ltd. During the process of formalizing the legal mortgage, a specific clause was included in the agreement, reading as follows:

"The party offering the property as collateral (mortgagor) assumes the responsibility for covering all applicable taxes, fees, charges, and any ancillary expenses arising from this transaction or pertaining to the mortgaged property."

This clause effectively assigns the obligation of settling all tax obligations, including stamp duties, to the mortgagor, thereby shifting the financial responsibility to the other party, notwithstanding prevailing legal provisions.

Judicial Precedent in Favor of Clause Enforcement

In a notable legal case, Total Nig Plc v Moshood Akinpelu⁴, the Court of Appeal ruled in favor of the party enforcing the obligation outlined in the covenant. The court's perspective was that since the party (Total Nig Plc) had committed in the covenant to make the payment on behalf of the other party (Moshood Akinpelu), the mere intention and determination to fulfill the covenant were sufficient for the payment to be made directly from the appellant's funds. The court justified this stance by highlighting the absence of a legal restriction on another party making the withholding tax payment and the covenant's explicit assignment of responsibility.

Unsettled Legal Contention

This perspective seems unsettled, especially if the party (mortgagor) who agreed to pay the tax (as per this instance) refuses or neglects the duty. Should the mortgagor bear liability and potentially be sued by the relevant tax authority? The viewpoint is that no legal cause exists between the tax authority and the party agreeing to pay the tax. Instead, the cause of action rests with the party designated with the legal responsibility as mandated by law.

The aforementioned judgment seems to legitimize the practice of transferring tax liability to another party through contracts or agreements. However, this does not absolve the statutory duty to pay tax by the party obligated by law. It's essential to note that the precedent set in Total Nig Plc v Moshood Akinpelu is distinguishable from the mortgage transaction. Although personal income tax in the form of withholding tax (WHT) on rent paid to the lessor is involved, the law mandates that the rent payer holds the obligation to withhold and remit the tax to the Revenue Authority, thus reinforcing the law. This contrasts with the liability to pay stamp duties on mortgage instruments, which the SDA explicitly imposes on the mortgagee.

Furthermore, there's no justification for the relevant tax authority to initiate legal action for unpaid stamp duties against the mortgagor. Unpaid stamp duty is considered a government debt and is recoverable solely from the mortgagee.⁵

To navigate this scenario, the "responsibility for own tax clause" can be included in the agreement. This clause ensures fairness, as multiple legal instruments are often involved in the lifespan of a mortgage transaction. Both mortgagee and mortgagor bear specific responsibilities to pay relevant stamp duties for each instrument, as outlined in the table above. A sample clause might read:

"Each party shall assume tax responsibilities based on the nature of the mortgage transaction. Moreover, neither party shall transfer any taxes to the other except where such taxes are legally mandated to be withheld and remitted by the deducting party."

Alternatively, the "tax compliance clause" could be introduced, stipulating that party tax liabilities conform strictly to applicable law, as follows:

"Each Party shall be strictly bound to comply with relevant tax treaties in the manner and extent as prescribed by the applicable law."

With this in mind, a legislative amendment is recommended to safeguard the mortgagor's negotiation power and strike a balance against the mortgagee's unequal influence on bargaining power, which could compromise the mortgagor's equity of redemption right.

Timeframe for Stamping Mortgage Instruments

Every legal instrument subject to duties under the SDA is bound by specific timeframes for stamping and duty payment. In the context of mortgages executed within Nigeria, a stipulated period of 40 days is provided. For documents executed outside of Nigeria, the timeframe is 30 days from the delivery date of the said document within Nigeria.⁶

Ramifications of Failing to Stamp Mortgage Instruments

Non-compliance with the stamping requirement carries significant implications. A noteworthy legal consequence of such non-adherence is the document's inadmissibility as evidence in civil court proceedings.⁷

However, this consequence was subject to reconsideration by the Supreme Court in the case of R.G. Okwuwobi V Jimoh Ishola⁸. The Court's conclusion attenuated this consequence, emphasizing that the primary intent of the stamping requirement is to ensure compliance and generate government revenue. As such, the failure to comply would not necessarily render the documents inadmissible as evidence. The Court's perspective was expressed as follows:

We think that it was wrong for the learned Chief Magistrate to have held a document inadmissible merely on the ground of non-stamping, since the purpose of the requirement of stamping is to ensure that Government does not lose revenue thereby. The learned Chief Magistrate could have directed the document in question to be duly stamped and then received it in evidence⁹

Conclusion and Key Takeaways

The landscape of mortgage transactions, whether pertaining to immovable or movable assets, has evolved significantly. Acknowledging this evolution is pivotal, given that the domain of mortgages now extends to cover both asset types. Additionally, the execution of a mortgage deed, irrespective of its written or electronic form, holds significant legal weight as a dutiable component. Parties actively participating in such transactions must not only comprehend the distinct characteristics of the document at hand but also discern its intended purpose. This understanding, in turn, dictates the specific obligations binding the involved parties concerning the imperative task of stamping the instrument.

A Fundamental Imperative

For those individuals, as stipulated by law, burdened with the responsibility of shouldering stamp duty expenses associated with mortgage instruments, proactive measures are of the essence. Such measures serve to preclude the emergence of avoidable legal disputes that can disrupt the smooth executability of the mortgage transaction.

Strategic Insight

During the intricate process of negotiating mortgage terms, a pivotal element demands utmost attention: understanding the latitude at which parties can transfer tax liability to the opposing party within the specific context.

Utmost Significance

Superseding all other considerations, every party partaking in mortgage transactions must internalize that, irrespective of the contractual tenets upheld by courts, tax authorities are primarily concerned with one critical objective: ensuring the settlement of pertinent taxes. The essence of the tax authority's focus transcends the agreements made amongst parties, centering on securing the fulfillment of due taxes. It is imperative to grasp that the tax authority reserves the right to initiate legal action solely against the individual legally entrusted with the statutory duty.

Given the intricate nature of such matters, soliciting the expertise of legal practitioners becomes an indispensable step to navigate this intricate legal landscape successfully.

Footnotes

1. Section 23(3)(c) and 31 of SDA 2004 (as amended)

2. Article 9(1) of the SDA Singapore 1929

3. See the 3rd Schedule to the SDA Singapore 1929

4. (2004) 17 NWLR (pt. 903) 509

5. Section 114 of the SDA

6. Section 23(3)(a) of SDA

7. Princewell Asuquo & Ors v Grace Eyo & Ors (2013) LPELR – 20199. The provision of Section 22(4) of the SDA is to the effect that in civil cases, such unstamped documents shall be inadmissible in evidence in any court.

8. (1973) All NLR 233

9. R.G. Okwuwobi V Jimoh Ishola (1973) All NLR 233. This decision seems to modify the inadmissibility consequence of an unstamped document.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.