charge and mortgage
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This article is written by Siddharth Tiwari.

Introduction

The Transfer of Property Act (“TOPA”) drafted in 1870 and passed in 1882 provides for basic principles to facilitate the transfer of movable as well as immovable properties. As provided in the TOPA, there are various instruments to transfer the property viz sale, lease, gift, mortgage, charge etc. through which a property can be transferred by its owner to another person. Transfer of immovable property by each of the aforementioned modes has its own significance, advantages, and disadvantages. 

The act of borrowing and lending from time immemorial has been part and parcel of human life. Nowadays the act of borrowing depends on the credit score of the borrower. If the person has a good credit score then he can get loans easily but if his credit score is low then the lender asks for security to secure the loan. This paper deals with two significant facets of property law that is mortgage and charge, which help in securing the interests of the creditors. 

Section 58 of the TOPA provides for a mortgage and Section 100 of TOPA provides for a charge as an instrument utilised for transfer of property. Around 40 sections of TOPA have been devoted to both of these instruments. Although both of these concepts may appear to be of similar nature, they are substantially different, highlighting which is the objective of this paper. But before understanding the difference between the two it’s necessary to understand both of these concepts.

Thus, this paper in the next part (part II) discusses the mortgage as an instrument to effectuate the transfer of property and discusses its essentials and types of mortgage. The paper part III will discuss the charge, its features and types of charges. This paper in part IV will draw a detailed comparison between charge and Mortgage by analysing various case laws and finally, part V of the paper sums up with the concluding thoughts.

Mortgage

A mortgage has been defined as an instrument in which transfer of an interest in particular immovable property takes place with the aim to secure the payment of a future or existing debt, loan money either to be advanced or advanced or performance of an engagement which may result in a pecuniary liability. TOPA provides for substantive law on a mortgage while Chapter 34 of CPC deals with the procedural part dealing with “suits relating to the mortgage of immovable property”.

Lord Lindley in Stanley v. Wilde has described mortgage in following words “a mortgage is a conveyance of land or an assignment of chattels as a security for the payment of a debt, or the discharge of some other obligation for which it is given.” Thus, a mortgage is a type of security formed by contract conferring an interest in the property but not ownership, which is defeasible upon the performance of the condition of returning the loan amount with or without interest or performance of some other act or condition.

For example, if a person X furnishes his bungalow as a security to secure a loan from Y, this transaction would be called a mortgage. The transferor X in this arrangement is called mortgagor and Y, the transferee is called the mortgagee. The bungalow in this transaction is the mortgage. The principal money and interest thereon whose payment is to be made is called mortgage money and the instrument used to effectuate the transfer of interest is called mortgage deed.

Upon the return of the loan the interest in the property of the transferee or mortgagee ceases to exist or if the mortgage money is not returned then the ownership of mortgage i.e. in this case, the bungalow gets transferred to the mortgagee. Thus, a mortgage is one of the best ways to secure a loan.

Types of mortgage

Diagram representing various types of mortgages

Essentials of mortgage

The following are the essentials of a valid mortgage:

Transfer of an interest

In the instrument of mortgage, an interest in a particular immovable property gets transferred. This interest is the right to recovery of loan/debt from the mortgaged property which was transferred by a mortgagor to mortgagee. Thus only this interest gets transferred, the remainder of interests in the property still vests with the owner of the property or mortgagor as held in Ali Hussain v. Nilla Kanden. The Supreme Court has also held that without the transfer of interest, there is no mortgage.

Specific Immovable Property

Specific immovable property means that the property to be mortgaged should be sufficiently identified and there should not be any ambiguity in character and general description of the property. For example, if X takes a loan from Y and the contract of the loan says that Y can sell any of his properties and X owns three properties A, B, C. This transaction cannot be called mortgage as security has not been identified specifically. 

Debt or Loan

Every mortgage presumes the presence of debt, existing, future or contingent for securing the repayment of which mortgage of immovable property is made. The consideration of mortgage is to secure debt or loan. Thus, without the existence of debt whether existing or future or actual or contingent or performance of an engagement giving way to monetary liability, there can be no mortgage.

Charge

The charge provided in Section 100 of TOPA is an encumbrance on the property which provides that where immovable property or asset of a person is either by operation of law or act of the parties is made security for the purpose of payment of money to another person and this transaction is not mortgage, a charge is said to be created on the property in the favour of the latter person.

All the provisions that apply to a simple mortgage apply to charge as well. Thus, making the charge security to secure payment. If the person liable to pay does not pay then the amount can be satisfied with the property that was charged. 

For example, certain property is owned by a person named X. He has a son S and daughter D. He gives away this property to S along with the condition that S would have to pay 10000 out of the property, every year, to DO for her maintenance. This transaction would be known as a charge in favour of D. 

Exceptions

There are two exceptions provided by section 100 of TOPA i.e. Charges, where there is no application of this section thus the charge holder does not have the right to sell the property or properties as in the case of a simple mortgage. The first one is in charge of a trustee on the trust property if he makes any expenditure for the execution of his trust. The second exception applies when a person with bona fide intention purchases any property without notice of the charge.

Types of Charge provided in section

https://lawsikho.com/course/certificate-real-estate-rera

Charges created by the act of parties.

A charge does not require some particular form of words for creation, it is enough if the document depicts an intention to make the property as security for the payment of the amount provided therein. The charge created by the act of parties has the possibility of arising in several situations. For example, B inherits some property from his grandmother and agrees to pay a certain amount of money out of the rents from the property to his sister, S. Now this arrangement will result in the creation of charge in favour of S. 

Charges arising by the operation of law. 

A Charge created by law arises without any agreement between the parties but by the operation of law. For example, charge arises by operation of law in the TOPA under section 55(4) (b), when the seller of a property is left unpaid a charge is created in his favour or under section 55(6)(b) for paying purchase money in advance and not getting the property a charge is created in his favour etc.

Charge and mortgage – A comparative analysis

More often than not charge is understood to be similar to a mortgage, but both of these instruments are conceptually different. Justice Das of Patna High Court has stated the distinction in the following words:

“Now the broad distinction between a mortgage and a charge is this: that whereas a charge only gives a right to payment out of a particular fund or particular property without transferring that fund or property, a mortgage is, in essence, a transfer of an interest in specific immovable property.”

Thus, the main distinction between charge and mortgage is that there is some sort of transfer of an interest in the property in case of mortgage which makes the ownership of the property limited. But there is no transfer of an interest in the case of charge but there is the only creation of the right to payment from a specific immovable property without transfer of any interest in property or property. The only way he can acquire an interest in the property he can pass over to the charge holder is by virtue of a decree of sale.

Another factor that differentiates the two concepts is the nature of personal liability. A charge does not lead to the creation of right in rem but a right which is jus ad rem, sort of more than a personal obligation as the charge is only effective if there is a notice to the subsequent transferee as discussed above but same is not the case with a mortgage as whether the transferee had notice or not has no effect. 

Another distinction that distinguishes both of them is that a mortgage is always created by the act of parties, but charge, in addition, to be created by the act of the parties is also created by the operation of law. Furthermore, to mortgage to subsist there must be a presence of debt as discussed above but the same is not the case with charge as seen in the above-mentioned example of the brother and sister. 

There also exist some technical differences between the two such as that the mortgage needs to be a specific time period but the charge may be for perpetuity, registration of mortgage is compulsory whereas for charge created by operation of law is not compulsory. Thus it is clear there are substantial differences between both of these facets of property law.

Conclusion

A layman may easily confuse charge with a mortgage. The Transfer of Property Act does not clearly lay down the difference between both of these concepts, it just states that charge is not a mortgage and provides that all the provision of simple mortgage applies to charge, which leads to the confusion. The companies act 2013 even goes to the extent of saying that charge includes mortgage which further adds to the confusion. 

Therefore, the failure to understand the difference between both of these concepts is understandable as some of the incidents in both of them are common such as the presence of immovable property as a security, giving a right to the creditor to right to sell the property if the debtor is unable to fulfil the terms of charge and mortgage. But still, there are a lot of incidents that differentiate both of these facets of property law as discussed above such as no transfer of an interest in case of charge and others, right in rem vs right ad jus etc. Thus, both of these are conceptually different concepts.

References

  • The Transfer of Property Act, 1882,
  • The Civil Procedure Code, 1908
  • The Companies Act, 2013.
  • Key Differences, available at https://keydifferences.com/difference-between-mortgage-and-charge.html
  • The Law Study, available at http://thelawstudy.blogspot.com/2014/12/mortage-its-kinds-and-ingredients.html
  •  AP Singh & Ashish Kumar Srivastava, Property Laws, LexisNexis
  • S.P. Sen Gupta, B.B. Mitra Transfer of Property Act (18th Ed.) Kamal law house, Kolkata
  • Dr Poonam Pradhan Saxena’s Property Law(2nd Ed.) LexisNexis
  • Mulla: The Transfer of Property Act, (12 Ed.) LexisNexis

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