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The effect of fraud on mortgage transactions

By Andrew Munanura Kamuteera


The High Court of Uganda has reexamined the effect of fraud on mortgage transactions and the grounds on which a mortgage will be voided in two recent decisions: Christine Hope Kanyima v. Mercantile Credit Bank Limited & Chris Kanyima Miscellaneous Cause No. 0085 of 2021 delivered on 30 January 2023 by Justice Stephen Mubiru, and Cwezi Properties Limited v. Uganda Development Bank Miscellaneous Application No. 1315 of 2022 delivered on 25 January 2023 by Justice Thomas Ocaya.

This alert analyzes the two decisions and draws out the key industry and practice takeaways for lenders, borrowers, and legal practitioners dealing with mortgaged property.

Christine Hope Kanyima v. Mercantile Credit Bank Limited & Chris Kanyima Miscellaneous Cause No. 0085 of 2021

This case concerned the use of identity fraud to procure spousal consent for mortgage transactions which is now on the rise. It redefines the key attributes of matrimonial property and clarifies the circumstances under which the lack of genuine spousal consent will justify the voiding of a mortgage.

The Applicant and 2nd Respondent were married in 1982 and lived in Luzira from 1986 on land registered in the names of the 2nd Respondent. In 2001, the Applicant moved to the United Kingdom and has lived there since. Between 2014 and 2019, the 2nd Respondent obtained a series of loans from the 1st Respondent bank secured by a mortgage over the property at Luzira. In all those transactions, the 2nd Respondent presented to the bank an imposter he claimed to be his wife, who used the Applicant’s name and signed as the Applicant. The Applicant was unaware of the transactions until August 2021 when she learnt that the property had been mortgaged and was the subject of foreclosure.

The Applicant sought to have the mortgages taken out by her husband voided for lack of spousal consent. On his part, the 2nd Respondent argued that he was the sole owner of the property and therefore, no spousal consent was required to take out the mortgages.

 Court’s Findings:

 What constitutes matrimonial property

Under the Mortgage Act 2009, matrimonial property is defined as that which at the time of the mortgage is ordinarily occupied by the mortgagor and his or her spouse (and children if any) as their ordinary residence. This is a question of fact that has to be determined on an individual basis depending on the facts of each case. The court provided the following guidance:

  • What constitutes matrimonial property is a question of fact rather than law or desire. It will be determined based on specific factors such as whether both spouses regularly use the property for residential purposes. A matrimonial home is the place where both spouses reside with some degree of continuity apart from accidental or temporary absences.
  • Property can lose its characteristic as matrimonial property where it ceases to serve as the ordinary residence of the spouses, if for example it is converted to some other use.
  • Spouses need not stay in a house full-time for it to be considered matrimonial property. They just have to use it as their residence from time to time. As such, spouses may have more than one matrimonial home.
  • Any accidental or temporary absence does not deprive a person from ordinary residence for as long as they maintain some tie or connection with the place. However, presence over an appreciable period of time and a settled intention to remain indefinitely must be established. Relevant evidence includes control over renovations, decorations and furnishings, managing and maintaining such property, and a regular pattern of use as one’s ordinary residence.

In this case, despite the Applicant having raised children in the suit property, and having contributed financially to repairs and renovations she did not establish a regular pattern of her use of the property for residential purposes since 2001. By relocating abroad with the intention of remaining away indefinitely, the Applicant severed her residential ties with the home in Luzira. On this basis, the court found that the property was not matrimonial property at the time it was mortgaged.

 Materiality of fraud to the transaction

To the extent that the property in this case was neither family land nor matrimonial property at the time it was mortgaged and was therefore not property in respect of which spousal consent was required, the court held that the fraudulent spousal consent presented to the bank was inconsequential fraud and could not justify the cancellation of the mortgage.

This is a departure from the general position of Uganda’s case law which posits that fraud once discovered overrides all other issues and nullifies both the transaction the subject of the fraud and any subsequent transactions. Drawing from that principle, sections 34 and 36 of the Mortgage Act mandate courts to review mortgages obtained through fraud by the mortgagor.

However, in what may be considered a pragmatic approach to the effect of fraud on commercial transactions, the court ruled that a mortgage will not be voided where the false representation made by the mortgagor to secure the mortgage is immaterial to the transaction – that is, where the fraud does not inform the execution of the transaction or affect the ultimate outcome.

Cwezi Properties Limited v. Uganda Development Bank, Miscellaneous Application No. 1315 of 2022

By this case, the High Court has expanded its mandate to void mortgages beyond that granted under the Mortgage Act. The Mortgage Act allows courts to review mortgages obtained through the fraud, deceit, or misrepresentation of the mortgagor. Until challenged and set aside, the position of law now as established in this case is that the High Court may, by virtue of its inherent powers, review and cancel a mortgage obtained through the fraud, deceit, or misrepresentation of the mortgagee.

The Applicant in this case sought a review of the mortgage executed between the parties on the premise that the Respondent bank concealed material facts concerning the mortgaged property, particularly, a fraudulent alteration of the condominium plan. According to the Applicant, the initial condominium development plan for the property registered in 2005 included a parking area and a swimming pool as part of the common area. The Respondent financed the purchase of the property and executed a mortgage deed with the Applicant in 2012. However, when the Applicant obtained the condominium titles from the Respondent in 2021, the condominium plan for one of the blocks had been fraudulently altered by the previous owner to exclude those amenities.

The Applicant alleged that the Respondent fraudulently conspired or concealed the fact that the new condominium plan excluded the parking area and swimming pool, and sought a review of the mortgage granted in 2012 for having been secured through the fraud of the mortgagee.

Courts Findings:

The power to review and void a mortgage

As counsel for the Respondent, we raised a preliminary objection to the application challenging its institution under section 34 of the Mortgage Act. We highlighted to the court that what section 34 mandates is the review of a mortgage obtained through the fraud, deceit, or misrepresentation of the mortgagor, and since what was being alleged by the Applicant was fraud by the mortgagee, the application was misconceived.

Whereas the court agreed that section 34 and related provisions of the Mortgage Act restrict the right to apply for review of a mortgage on account of fraud, deceit, or misrepresentation by the mortgagor, it held that notwithstanding that restriction, a mortgagor can apply for review where the mortgagee is guilty of fraud, deceit, or misrepresentation by invoking the broad (inherent) powers of the High Court under section 98 of the Civil Procedure Act Cap 71 and section 33 of the Judicature Act Cap 13. As such, whereas the Applicant had proceeded under the ‘wrong’ law, the Court had jurisdiction to grant the relief sought.

Fraud and the burden of proof

Despite the above finding, the application was dismissed because the alleged alteration of the condominium plan happened before the execution of the mortgage in 2012 and therefore, would have been discovered by the Applicant then had it exercised due diligence. Failure to do so rendered the application res judicata because the alleged fraud was a claim that could have been included in the Applicant’s earlier suit in 2014 challenging the same mortgage.

On the allegation of fraud levied against the Respondent, the court reiterated that it is not sufficient for an applicant to simply make an allegation of fraud. That allegation must be supported by evidence which brings the fraud “to the door” of the adverse party and exceeds a balance of probabilities. A transaction shall not be set aside on a claim of fraud where the fraud is not proved against the adverse party.

In evaluating the evidence in this case, the court rejected the Applicant’s assertion that the Respondent bank undertook the issuance of the condominium titles and concealed the fraudulent alteration of the condominium plan. The court observed that: (i) the registration of the original plan was done by the developer in 2005; (ii) any subsequent modifications to the property titles could only be done by the condominium corporation – of which the Applicant was a member; (iii) the Respondent was not party to the transaction between the Applicant and the previous owner; and (iv) the Applicant could not abdicate its responsibility as a purchaser to conduct due diligence during the purchase of a property to the Respondent.

On that basis, the court concluded that it was insufficient for the Applicant to merely allege that the Respondent knew or ought to have known of the fraudulent modification of the condominium plan by the property’s previous owner, and had failed to prove fraudulent concealment by the bank that would justify a cancellation of the mortgage.

 Key industry and practice takeaways:

  • To determine whether or not property constitutes matrimonial property for which spousal consent is required, regard must be had to the specific facts and circumstances of each individual case. Property may cease to be matrimonial property where it no longer serves as the ordinary residence of either of the spouses, for example where there is proof of relocation with an intention to remain away indefinitely.
  • Financial institutions are still expected to exercise the highest level of diligence in dealing with mortgaged property. It is now standard practice and procedure to require spousal consent or a declaration of marital status before accepting security. However, enhanced client data verification measures must be adopted to guard against identity fraud.
  • The powers of courts to review mortgages have been expanded beyond the scope of the Mortgage Act. A mortgage will now be voided upon proof that it was obtained by the fraud, deceit, or misrepresentation of the mortgagee. This means that banks and other lenders must ensure that all mortgage transactions are free of any acts of fraud or misrepresentation on their part. Moreover, to the extent that the acts of the lenders’ agents such as bank officers, valuers, advisors, and any other third parties acting on their behalf may be attributable to the lenders, additional caution must be taken to ensure that no aspect of the mortgage transaction is tainted with fraud.
  • The Ugandan law position on the effect of fraud on mortgage transactions has been adjusted such that a mortgage will not be voided by court on a claim of fraud if the fraud is inconsequential or immaterial to the transaction. It remains to be seen if the materiality test will be upheld on appeal and affirmed in subsequent decisions.

Pius Kitamirike - Junior Associate

Ruth Muhawe - Junior Associate

This article is intended as a case digest and is only a discussion of the issues dealt with. This information is not intended to be, and should not be used by any person as legal advice. S&L Advocates is not responsible for any actions taken or not taken based on this article.