The conundrum of holding mortgage bonds as security for multiple lenders

Financing of large scale projects or infrastructure requires substantial funding to the extent that a bank or a financial institution is often not prepared or does not have the capacity to fund the project or infrastructure solely. To deal with this, lenders often form a consortium to finance the project or infrastructure collectively.

However as it is the order of finance, lenders require security. A hurdle with this is the time, costs and cumbersome process where there are multiple lenders involved as each of them requires their own individual security.

Increasingly, lenders are finding it attractive to create a Special Purpose Vehicle in the form of a company (“SPV”) owned by a security trustee to collectively hold security and have the security placed in its name for and on behalf of the consortium of lenders as beneficiaries. The SPV would guarantee the obligations of the lenders and the borrower would indemnify the SPV.

Currently, the form of security that is generally acceptable with the SPV structure is taking security by way of cessions. However the preferred form of security being a mortgage bond over immovable property has always been uncertain because of section 52 of the Deeds Registry Act Cap 33;02 (“Act”). The said section 52 provides that a mortgage bond may not be passed in favour of an agent of a principal.

The obvious mischief that section 52 of the Act intends to prevent is registering mortgage bonds in favour of a person with no obligations arising (causa) which is not the case with the SPV. In respect of the SPV, actual obligations exist in the form of the SPV guaranteeing the obligations of the Borrower and its Subsidiaries (“Obligors”) for the benefit of the consortium of lenders and in turn the SPV obtaining a counter indemnity from the Obligors.

We recently engaged the Registrar of Deeds and the Registrar of Deeds provided a caveat approval to the effect that we can register mortgage bonds in favour of the SPV for and on behalf of a consortium of lenders against the provisions of section 52 of the Act. The caveat approval provided certain conditions one of the material ones being that the obligations in the mortgage bond should be clearly outlined (the causa be explicitly provided in the mortgage bond).

This is a welcome development and provides a level of comfort to lenders.

   Tatenda Dumba
Senior Associate | Corporate & Commercial