This article is written by Paridhi Goel of CPJ College of Higher Studies and School of Law, Delhi, and Vrinda Agrawal of Vivekananda Institute of Professional Studies, Delhi.
A mortgage conforms to the ‘Hypotheca’ of Roman Law, upon the debtor’s failure to pay the debt, the creditor could get the property of the debtor for sale and recover himself. The concept of mortgage has also been recognised under Hindu and Muslim Laws where the property was pledged to the creditor, the debtor was debarred from the possession till the repayment of debt was made, and the profits in the lieu of interest were taken by the creditor.
In other words, a mortgage is to be understood as a transfer of interest explicitly in immovable property as security for a loan. Let’s say that Mr. X lends some money to Mr. Z, he may do so without asking for any security or he may demand some security for the payment of money. If Mr. X does not demand any security and Mr. Z fails to pay the same, the former will have a right to sue the latter for the money lent but if Mr. Z becomes insolvent, Mr. X may lose all of his money. However, in a situation where some security of adequate value is given for the loan, the lender (Mr. X) will be safeguarded if the borrower (Mr. Z) becomes insolvent since precedence is given to security over the claims of other creditors.
The essential element of a mortgage is that it is a transfer of a legal interest in the property with a provision for redemption i.e. upon repayment of the loan, the transfer shall become void or the interest shall be re-conveyed. The provisions pertaining to a mortgage are contained in Section 58 of the Transfer of Property Act, 1882 (hereinafter “TPA”).
Loans may be of two types, secured debt or unsecured debt. Where the loan is secured against any movable property it is called a pledge while where the loan is secured against some immovable property of the debtor it is called a mortgage. A mortgage is a transfer of an interest in specific immovable property as a security for the repayment of debt.
Justice Mahmud observed: “Mortgage, as understood in this country, cannot be defined better than by the definition adopted by the legislature in section 58, TPA.”
The Supreme Court in Kedar Lal v. Hari Lal observed that the whole law of mortgage in India is embodied in the TPA read with Order 34 Rules 1 to 15 of CPC which deals with suits relating to mortgages of immovable property. It is important to note that the court cannot travel beyond these statutory provisions.
Section 58(a) of TPA defines the terms ‘mortgage’, ‘mortgagor’, ‘mortgagee’, ‘mortgage-money’, and ‘mortgage-deed’.
Clause (a) of Section 58 reads:
A mortgage is the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement that may give rise to a pecuniary liability. The transferor is called a mortgagor, the transferee a mortgagee; the principal money and interest of which payment is secured for the time being are called the mortgage-money, and the instrument (if any) by which the transfer is effected is called a mortgage-deed.
Now, as we know, a ‘mortgage’ is a transfer of an interest in immovable property in order to secure a loan, which may or may not give rise to any personal liability. The person who needs a loan and gives his property as security is a ‘mortgagor’ while the person giving loan is a ‘mortgagee’. The principal amount and the interest to be paid for the time being is called the mortgage money, and the instrument through which the transfer of property takes place is called the mortgage deed.
Kinds of mortgage
Simple Mortgage [Section 58(b)]
Clause (b) of Section 58 reads:
Simple mortgage.—Where, without delivering possession of the mortgaged property, the mortgagor binds himself personally to pay the mortgage-money, and agrees, expressly or impliedly, that, in the event of his failure to pay according to his contract, the mortgagee shall have a right to cause the mortgaged property to be sold and the proceeds of sale to be applied, so far as may be necessary, in payment of the mortgage money, the transaction is called a simple mortgage and the mortgagee a simple mortgagee.
The basic elements of a simple mortgage are:
- The mortgagor must have bound himself personally to repay the loan;
- The possession of the property is not given to the mortgagee; and
- To secure the loan he has transferred to the mortgage the right to have the specific immovable property sold in the event of his failure to repay.
Mortgagor’s Personal Obligation
The fundamental element of a simple mortgage is the personal obligation to pay on the part of the mortgagor. Such personal liability or obligation to pay may be expressed or implied from the terms of a transaction since a promise to pay arises from the acceptance of the loan.
The promise to pay is implicit in the borrowing transaction itself but it may be displaced by the terms of the mortgage transaction for instance in the case of a usufructuary mortgage.
No Delivery of Possession
Possession remains with the mortgagor in the case of a simple mortgage. The security which is obtained by the mortgagee is of the mortgaged property, not of the rents and profits accruing from it. As per Section 68, if a simple mortgagee sues for enforcement of his security, a decree for possession would be illegal. It would also not operate as foreclosure rather it would convert a simple mortgagee into a mortgagee having possession.
Right to cause the Property Sold
The mortgagee is empowered to sell the property in the case of non-payment of the mortgaged money. However, the power of sale is not to be exercised without the intervention of the court. This implies that the mortgagee needs to get a decree from the court to execute the sale. Upon the sale of property by the intervention of the court, the mortgagee shall get the money advanced by him with interest and the remaining portion of proceeds of sale shall be given to the mortgagor whose property was sold.
A simple mortgage can be created only through a registered document. According to Section 59, even when the sum of money secured is less than rupees 100, a simple mortgage needs to be effected by a registered instrument.
In case the mortgagor fails to repay the loan within the stipulated date, the following two remedies are available to the mortgagee:
- Since in a simple mortgage the mortgagor holds a personal obligation to repay the loan, the mortgagee may sue the mortgagor personally for the recovery of the money. In such a case, he shall get a simple money decree.
- The mortgagee may also move to the court for the sale of mortgaged property in order to recover his money. In such a case, he obtains a decree for the sale of the property.
However, the mortgagee may put both the cause of actions in one suit. He may sue the mortgagor personally and may also request the court for a decree in his favour for the sale of the property but in both cases, the suit must be filed within 12 years from the date on which the loan i.e. the mortgage money becomes due.
Mortgage by Conditional Sale [Section 58(c)]
Clause (c) of Section 58 reads:
Mortgage by conditional sale.—Where, the mortgagor ostensibly sells the mortgaged property— on condition that on default of payment of the mortgage money on a certain date the sale shall become absolute, or on condition that on such payment being made the sale shall become void, or on condition that on such payment being made the buyer shall transfer the property to the seller, the transaction is called mortgage by conditional sale and the mortgagee a mortgagee by conditional sale: Provided that no such transaction shall be deemed to be a mortgage unless the condition is embodied in the document which affects or purports to affect the sale.
The concept of a mortgage by conditional sale (known as ‘bye-bil-wafa in Islam) was introduced by the Muslims due to the prohibition in their religion to not take interest on the money which is lent by way of loan. This type of mortgage enabled them to realize their principal amount as well as interest, at the same time keeping their conscience clear.
Basic elements of a mortgage by conditional sale are:
- The mortgagor must ostensibly sell the property to the mortgagee.
- There must be a condition on such sale that either,
- on the repayment of the debt on a certain date,
- the sale shall become void or the buyer shall transfer the property to the seller, or in default of payment on the agreed date, the sale shall become absolute.
- The condition must be contained in the same document.
In other words, when the mortgagor ostensibly sells the mortgaged property to the mortgagee with a certain condition such as:
- If the mortgagee makes any default on repayment of the debt (if the loan is not repaid), the sale would become absolute and binding, or
- If the mortgagee does not make any default in the payment (repayment of the debt has been made), the sale would become void, or
- If the mortgagee makes the payment, the buyer shall transfer the mortgaged property to the seller (the mortgagor shall transfer the property back to the mortgagee), such a transaction is called a mortgage by conditional sale.
However, it is to be noted that no such transaction will be considered to be a mortgage where no condition is mentioned in the same document which shall affect the sale.
Condition in the Same Deed
Provided that no such transaction shall be deemed to be a mortgage unless the condition is embodied in the document which affects or purports to affect the sale.
It states that any deed which intends to effect sale would be termed a mortgage by conditional sale only when it fulfills the above-mentioned elements. This amendment is not retrospective in nature. After this proviso, for a transaction to be treated as mortgage by conditional sale and not a sale itself the condition of repurchase must be included in the same document that provides for ostensible sale.
With the amendment in the clause, great emphasis is placed on inculcating the provision of repurchase in the original sale deed itself rather than the transaction being carried out through two documents (one being the sale deed, other being the document containing conditions of reconveyance). Where they are in separate documents the mortgagor then the nature of transaction would not be a mortgage by conditional sale even if they are executed simultaneously.
The intention of the Parties
It must be kept in mind that documents containing reconveyance conditions would not in any way claim to be mortgaged. The intention of the parties is one of the crucial factors to determine the nature of the transaction and evidence needs to be produced before the court if one’s claim is in contrast to the written words of the deed in question. (Pandit Chunchun Jha v. Sheikh Ebadat)
In a mortgage by conditional sale, there is no personal liability on the part of the mortgagor to pay the debt and consequently, the mortgagee is not permitted to make other of his properties a part of this transaction. It is an exception to the rule of No Debt No Mortgage.
The Privy Council in the case of Thumbuswamy v. Hossain Rowthen observed that the essential characteristic of a mortgage is that on breach of condition, the sale deed would be executed itself and the transaction would become an absolute sale without any kind of accountability between the parties.
The mortgagee does not have possession of the property in this type of mortgage i.e. it gets only qualified ownership which may lead to absolute ownership in case of default by the mortgagee.
The remedy with the mortgagee is by way of foreclosure and not sale, which is possible only through a decree of the court. The mortgagee can file a decree for foreclosure according to Section 67 of TPA, Rules 2 & 3 of Order 34, CPC only when the mortgagor does not pay the amount on time and the sale becomes absolute.
Usufructuary Mortgage [Section 58(d)]
Clause (d) of Section 58 reads:
Usufructuary mortgage.—Where the mortgagor delivers possession or expressly or by implication binds himself to deliver possession of the mortgaged property to the mortgagee and authorises him to retain such possession until payment of the mortgage-money, and to receive the rents and profits accruing from the property or any part of such rents and profits and to appropriate the same in lieu of interest, or payment of the mortgage-money, or partly in lieu of interest partly in payment of the mortgage money, the transaction is called a usufructuary mortgage and the mortgagee a usufructuary mortgagee.
The basic elements of usufructuary mortgage are:
- The mortgagor either delivers possession or expressly or impliedly binds himself to deliver possession of the mortgaged property to the mortgagee.
- The mortgagor authorises the mortgagee till the payment of the mortgage money is satisfied:
- to retain such possession;
- to receive the rents and profits or any part of such rents and profits arising from the property; and
- to appropriate such rents and profits in lieu of interest, or payment of the mortgage money, or partly in payment of the mortgage money.
Delivery of Possession
The possession of the mortgaged property is delivered to the mortgagee by the mortgagor as a security for the payment of mortgage money. The mortgagee is entitled to retain the ownership of the property till the debt remains unsatisfied. The physical delivery of possession is not necessary to be made at the time of execution of the deed and express or implied undertaking may be given by the mortgagor to deliver possession.
Rent and Profits
The mortgagee is entitled to receive rent and profits accruing from the mortgaged property till the money is repaid. The method by which the rents and profits are to be appropriated depends on the terms of the mortgage deed. Such rents and profits or part of the rents and profits may be appropriated:
- in lieu of interest,
- in lieu of principal, or
- in lieu of principal and interest.
In the first case, the mortgagor recovers possession at the time of the payment of the principal amount. In the second case, the mortgagor continues to pay interest and becomes entitled to recover possession once the rents and profits obtained by the mortgagee become equal to the principal amount. In the last case, the mortgagor does not recover possession until the principal and interest are paid from the rents and profits.
No Personal Liability of the Mortgagor
The mortgagor does not take any personal responsibility for the payment of mortgage money in the case of a usufructuary mortgage. The mortgagee is required to utilise rents and profits from the property for the satisfaction of his mortgage money. There is no time limit whatsoever for the mortgage to subsist since it is difficult to predict the time within which the debt will be satisfied.
The mortgagee can sue for possession or recovery of advanced money if the mortgagor fails to deliver possession of the property but if he has been given possession, his only remedy is to retain property till his debts are satisfied. The right of foreclosure or sale is not available for the usufructuary mortgagee. The mortgagee enjoys the advantage of repaying himself.
Rights of Usufructuary Mortgagor
A usufructuary mortgagor has been given a right under Section 62 to recover possession of the mortgaged property from the mortgagee in the cases where:
- The mortgagee was authorised to pay himself the amount of mortgage money from the rents and profits of the property and the mortgage money is paid,
- The mortgagee is authorized to pay himself from the rents and profits and the terms stipulated for the payment of the mortgage money have expired and the mortgagor pays the mortgage money or balance of the same to the mortgagee or deposits it in the court.
English Mortgage [Section 58(e)]
Clause (e) of Section 58 reads:
English mortgage.—Where the mortgagor binds himself to repay the mortgage money on a certain date, and transfers the mortgaged property absolutely to the mortgagee, but subject to a proviso that he will re-transfer it to the mortgagor upon payment of the mortgage-money as agreed, the transaction is called an English mortgage.
Basic elements of an English mortgage are:
- There is a consensus to pay the amount on the due date. The mortgagor has to repay the mortgage money on the due date.
- There is an absolute transfer of property to the mortgagee.
- Such absolute transfer needs to be subject to a proviso that the mortgagee will transfer the property to the mortgagor upon payment of mortgage money on the agreed date.
In the case of English Mortgage, the mortgagor transfers the ownership of the mortgaged property absolutely to the mortgagee as security. The mortgagee shall return or re-transfer the property once the mortgagor repays the amount as agreed on a particular date.
In an English mortgage, there is a personal liability of the mortgagor to repay the amount of mortgage debt on a certain date as agreed. An agreement to pay is an important part of such a mortgage.
In case of default by the mortgagor, the remedy available with the mortgagee is to sell off the mortgaged property and recover himself.
No Absolute Interest
The property is transferred absolutely but it is subject to the provision of re-transfer of that property if the mortgagor repays the amount. Therefore, interest is transferred which is subject to the right of redemption.
Where the mortgagor absolutely transfers the property to the mortgagee and the mortgagor is committed to repaying the money to the mortgagee on a fixed date. Two circumstances are prevalent in this scenario:
- Mortgagor repays the amount: If the mortgagor repays the agreed upon to the mortgagee on the date specified, the property which was absolutely transferred by him shall be reconveyed to the mortgagor.
- Mortgagor makes default in payment: If the mortgagor does not repay the amount on the mentioned date, then the remedy with the mortgagee is to sell off the property and recover its debt. However, there is a personal liability on the mortgagor to pay the debt.
Right of the Mortgagee
The mortgagee in this form of mortgage gets the right of possession whether the right of entry is expressed or not, and can retain the same till the said amount is not paid to him. But when the mortgagor is in possession he is entitled to profit but is not accountable to the mortgagee. However, where the mortgagee is in possession and is enjoying the profits from such property, it shall apply them in reduction to mortgagees dues.
For instance, B, a mortgagor absolutely sells the property to A through a sale deed. Here if B makes any default, A has to do nothing except registration of the sale deed, as an absolute right has been given to A.
Mortgage by deposit of title deeds (Equitable Mortgage) [Section 58(f)]
Clause (f) of Section 58 reads :
Mortgage by deposit of title-deeds.—Where a person in any of the following towns, namely, the towns of Calcutta, Madras, and Bombay, and in any other town which the State Government concerned may, by notification in the Official Gazette, specify in this behalf, delivers to a creditor or his agent documents of title to immovable property, with intent to create a security thereon, the transaction is called a mortgage by deposit of title-deeds.
In English Law, this type of mortgage is called an ‘equitable mortgage’ as opposed to a ‘legal mortgage’ because there is just a deposit of a document of the title without writing or without any other additional formalities. The intention of the legislature in providing such a mortgage is to give facilities to the mercantile community in situations where it may be necessary to raise money all of a sudden before any opportunity of preparing a mortgage deed can be afforded. Thus, this type of mortgage does not require any writing, and being an oral transaction is not affected by the Law of Registration.
The basic elements of this type of mortgage are:
- There must be a debt.
- There must be a deposit/delivery of the title deeds.
- There is an intention that the deeds shall be security for the debt; and
- Territorial restrictions
It is important to note that such a mortgage can be made only in certain areas and not everywhere in India. The said restriction to certain areas means the place where the deeds are to be delivered and not the situation of the property mortgaged. Also, a deposit of deeds beyond that area will neither create a mortgage nor an exchange.
Existence of Debt
A debt may be existing or future in nature. A transfer of an interest in any property to secure the payment of money advanced or to be advanced, or an existing or future debt, or the performance of any engagement which results in a pecuniary obligation is said to be a mortgage and clause (f) containing equitable mortgage gives just one of the modes of creating mortgage.
Deposit of Title-Deeds
It is not necessary to make physical delivery of documents, a constructive delivery of documents is sufficient. A valid equitable mortgage does not require all the documents of title to be deposited or the documents deposited to show a complete title. It is sufficient if the deposited deeds are bona fide, relate to the property, and are material evidence of title. If any title of deed is not shown at all in the deposited document and there are documents in existence showing his title to the property but they are not deposited then an equitable mortgage is not created.
Intention to Create Security
The gist of the transaction lies in the intention that the title deeds shall be security for the money borrowed (debt). Merely handing over the title deeds to Mr. X by Mr. Z does not create a mortgage. The deeds need to be delivered in the performance of that agreement that they are security for the debt.
The intention for creating security is a question of fact, not of law, which needs to be determined in all cases just like any other fact-based on presumptions and oral, documentary, or circumstantial evidence.
Anomalous Mortgage [Section 58(g)]
Clause (g) of Section 58 reads:
Anomalous mortgage.—A mortgage that is not a simple mortgage, a mortgage by conditional sale, a usufructuary mortgage, an English mortgage, or a mortgage by deposit of title deeds within the meaning of this section is called an anomalous mortgage.
In order to protect various customary mortgages prevailing in different parts of the country, clause (g) was enacted by the legislation. An anomalous mortgage is said to be a combination of two or more mortgages.
This section shall be read with Section 98 of the TPA which reads :
Rights and liabilities of parties to anomalous mortgages.—In the case of an anomalous mortgage the rights and liabilities of the parties shall be determined by their contract as evidenced in the mortgage deed, and, so far as such contract does not extend, by local usage.
Such agreement which is made between the mortgagor and the mortgagee according to their terms and conditions is called an anomalous mortgage. Where it is not a simple, usufructuary, mortgage by conditional sale, etc. is termed as an anomalous mortgage.
For instance, a usufructuary mortgage may also have the right of sale (as stated above, a usufructuary mortgage only possession is given to the mortgagee and it does not have the right of sale). Here, possession of the property is given to the mortgagee for a certain period with a condition that on non-repayment of debt the mortgage shall be deemed as mortgage by conditional sale. Thus, making it a usufructuary mortgage as well as a mortgage by conditional sale, making such mortgage an anomalous mortgage.
In this case, the mortgage has the right of ‘foreclosure’ as well as ‘sale’ if the agreement of mortgage permits the same; and if the debt is not repaid, the mortgagee would become the owner of the property.
Mortgagor’s Right of Redemption
The right of redemption can be exercised by the mortgagor through mortgage deed and can be exhausted only if there is an agreement between the parties, or by way of a decree of the court, or through any statutory provision which prohibits the mortgagor from redeeming the mortgage. The redemption right of mortgagor comes into existence when payment is made to the mortgagee, it is only when this right can not be exercised is due to the act of parties.
There are two other terms as well which are used in relation to mortgage, which the reader must know. These are:
Where a mortgaged property is mortgaged again is termed as sub mortgage, or where the mortgagee mortgages its interest in the said property.
For instance, where Mr. X mortgages his house to Mr. Z for ₹15,000 and Mr. Z further mortgages its mortgagee rights( it can be the right to sue the mortgagor in case of default or possession, rents, etc) on the property to Ms. B for ₹5,000. Here Mr. Z created a Sub Mortgage.
Puisne mortgage (also called pari pasu mortgage)
When the mortgagor mortgage a property to one person and mortgages the same property to another person in order to secure another loan, the second mortgage is termed as Puisne Mortgage.
For instance, the property value of ‘Z’ is ₹1,00,00,000 (1 crore) has been given as security to the ‘Bank of Baroda’ for the loan of ₹10,00,000 (10 lakh). If an additional loan is required, the same can be taken from another bank due to the difference in interest rate. So here the same property can be used as security for securing another loan from ‘Syndicate Bank’ of ₹5,00,000 (5 lakh). This transaction of taking a loan from ‘Bank of Baroda’ would be referred to as the first mortgage while the loan from ‘Syndicate Bank’ would be referred to as the second or puisne mortgage. Here syndicate bank becomes puisne mortgagee and can recover its debt once the first mortgagee i.e. Bank of Baroda claims its money.
A puisne mortgage is allowed only after the 1st mortgagee permits to use the same property as security for another loan, by the valuation of the mortgaged property.
Hence, a mortgage is defined as an express transfer of an interest in immovable property as collateral for a loan. The most important feature of a mortgage is that it is a transfer of a legal interest in the property with a provision for redemption, which means that the transfer will become void or the interest will be re-conveyed upon repayment of the debt.
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