The Tanzanian Court of Appeal has put forward a judgement in relation to the right of financial institutions to claim the outstanding loan balance from borrowers after sale of the mortgaged properties. We take a closer look at this scenario, specifically after the lender has failed to obtain the full loan amount from the proceeds of a sale of the mortgaged properties. This judgement was delivered on 21 December 2021 and below we set out our analysis on the facts presented by the Court of Appeal.
As per the Judgement, the Court of Appeal has expressly cemented on the position that a mortgagee who fails to realise the full loan amount from the proceeds of the mortgage through a valid sale or auction, is not barred from claiming the outstanding loan balance from the mortgagor.
The Judgement subject to this update is in respect of an appeal registered as Civil Appeal No. 29 of 2019 which was between CRDB Bank PLC (CRDB Bank) v. True Colour Limited (TCL) and James Vicent Mgaya (the Purchaser).
TCL had filed a suit in the High Court of Tanzania against CRDB Bank and others regarding the sale of mortgaged properties which had a forced sale value of over Tshs 1.9 Billion. The said properties had been mortgaged by TCL to CRDB Bank to secure a loan. TCL defaulted on its payments, and the mortgaged properties were sold by auction at the price of Tshs.700 Million less than its forced sale value of over Tshs 1.9 Billion.
In the suit, TCL sought an order for nullification of the sale of the mortgaged properties and in the alternative, to be relieved from liability to pay the loan balance (the remaining balance from Tshs 1.9 Billion after deducting Tshs700 Million).
The High Court of Tanzania dismissed the claim for nullification of sale for want of proof, and further, on the alternative claim, it discharged TCL from further liability for the reason that CRDB Bank had assumed their own risk when they accepted a price of Tshs. 700 Million which was lesser than the secured amount.
CRDB Bank was aggrieved by the High Court's decision and lodged the appeal to the Court of Appeal of Tanzania on the ground that the High Court was wrong to relieve TCL from paying the balance of the loan while TCL had admitted her liability of more than Tshs.1.9 Billion towards CRDB Bank.
On the other hand, TCL submitted that since the purpose behind a secured loan is to ensure that the same is recoverable, CRDB Bank assumed its own risk by selling the mortgaged properties at a low value than the total liability owed. TCL also relied on conflicting decisions of the High Court which held that a lender who sells a mortgaged property at a price less than the loan amount should blame themselves for accepting an inferior security and cannot be allowed to pursue the balance against the borrower.
Court of Appeal’s Analysis:
In response to the arguments raised by both parties, the Court of Appeal of Tanzania started its analysis by discussing the provision of section 133 of the Land Act [Cap 113 R.E 2019] (the Land Act), which states that a lender owes a duty of care to the borrower to obtain the best price reasonably obtainable at the time of sale. Further, the Court of Appeal noted that the rule in section 133 of the Land Act is a longstanding common law principle which subscribes to the position laid down by the Court of Appeal of England, in the case of, Western Bank Ltd v. Schindler  2 All E.R. 393, in which it was held that, “…a mortgagee in exercising his power of sale does owe a duty to take reasonable precaution to obtain the true market value of the mortgaged property at the date on which he decides to sell it.”
However, due to the fact that, TCL had made it clear in its evidence that it had no dispute with the validity of the sale and that, it was no longer seeking for its nullification, the Court of Appeal focused on the issue on whether the High Court was correct to relieve TCL from a duty to pay the outstanding amount while the total liability was not recovered in the auction.
In answering this issue, the Court referred to the position laid down in Sheldon and Fidler, Practice and Law of Banking, 11th Ed., at page 379, that, “If, after sale, the net proceeds are insufficient to discharge the mortgage debt in full, the mortgagee has a right of action against the mortgagor on the personal covenant to pay if, as is usual, one is contained in the mortgage, and if not, he still has a right of action on the debt against… the mortgagor or a third party.”
Court of Appeal’s decision:
Finally, the Court of Appeal made its decision and held that the High Court was wrong in relieving TCL from a liability to pay the outstanding loan balance. The Court of Appeal held so because, the undisputed auction had not realized the full loan amount, hence CRDB Bank as a mortgagee is not barred from claiming the outstanding loan balance from the mortgagor (borrower). Having agreed with CRDB Bank, the Court of Appeal allowed the Appeal and dismissed the High Court’s decision.
It is our observation that the Court of Appeal’s decision confirms that financial lenders are allowed to claim outstanding loan balances from defaulting borrowers, in the event that the sale of the mortgaged properties does not yield the amount owed. This decision also sets a precedent to be used by all Tanzanian courts by clarifying the conflicting High Court's decisions on the same issue.
Read the original publication at Clyde & Co.