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Definition of Mortgage
According to Sec. 58 (a) of the T.P. Act, a “mortgage” is the transfer of an interest in specific immovable property for the purpose of securing
(i) the payment of money advanced (or to be advanced) by way of loan,
(ii) an existing or future debt, or
(iii) the performance of an engagement which may give rise to a pecuniary liability.
A mortgage serves as a form of security provided by the borrower-debtor, known as the mortgagor, to guarantee repayment of a loan to the lender-creditor, known as the mortgagee.
Its primary objective is to secure the debt or other obligations, ensuring the lender's protection even in the event of the borrower's insolvency, as the funds can be recovered from the property pledged as security.
The individual transferring the property is termed the 'mortgagor,' while the recipient is referred to as the 'mortgagee.'
The sum of money and interest secured at the time constitutes the 'mortgage-money,' and the document effecting the transfer is termed a 'mortgage-deed.'
The terms 'mortgagors' and 'mortgagees' also encompass individuals acquiring title from them, respectively.
Unlike a 'sale' or 'gift,' a mortgage does not entail the transfer of absolute ownership of the property.
Additionally, unlike a 'lease'—which involves transferring the right to use a property in exchange for rent—the purpose of a mortgage is to secure loan repayment.
While a lease grants the right to enjoy the property for a specified duration, a mortgage does not necessarily entail transferring possession or enjoyment of the property's fruits.
Elements of a Mortgage
The chief elements of a mortgage are:
(i) Transfer of an interest;
(ii) Specific immovable property intended to be mortgaged; and
(iii) Transfer must be made to secure the payment of a loan or to secure the performance of a contract.
(i) Transfer of an Interest
In a mortgage, certain rights are conveyed to the mortgagee while others remain with the mortgagor, depending on the type of mortgage.
The mortgagor does not transfer ownership to the mortgagee; rather, the mortgagee's rights serve as collateral, solely intended to ensure the repayment of the debt.
Consequently, the mortgagee's interest in the property ceases upon the full repayment of the mortgage-money along with any accrued interest.
A mortgage constitutes a transfer of interest, establishing a right in rem. However, a mere "agreement to mortgage" at a future date does not constitute a mortgage.
Such an agreement merely creates a personal obligation and cannot be specifically enforced.
As a right in rem, a mortgage is enforceable against all subsequent transferees of the mortgaged property and can be asserted against a bona fide purchaser for value, regardless of whether they had prior knowledge of the mortgage.
(ii) Specific Immovable Property
In order to create a mortgage, it is essential to specify the immovable property distinctly. Otherwise it would be void for vagueness.
For instance, the words “all of my property”, “my house and landed property” have been held to be general and vague (c.f. “a house situated in Shakti Nagar owned and possessed by us”).
(iii) Consideration of Mortgage
A mortgage necessitates consideration, which can take the form of money provided as a loan, an existing or future debt, or the fulfillment of an obligation resulting in a financial liability.
If a transfer is executed solely for the purpose of discharging a debt, it does not constitute a mortgage [Nidha Sha v Murlidhar (1903) 25 All 115].
A mortgage isn't always executed to secure an existing debt; it can also be undertaken to secure future advances of money. The act of executing a mortgage itself does not create a debt.
The term "pecuniary liability" refers to a legal obligation to pay damages. For instance, if 'A' borrows paddy from 'B' and mortgages their field to secure repayment of the paddy and any additional paddy as interest, this engagement to return paddy creates a pecuniary liability.
A mortgage entails a transfer of interest in the mortgaged land, not merely a contractual agreement.
Therefore, if a valid mortgage deed is registered, the mortgagee acquires an interest in the mortgaged property, unless there is a contrary agreement, even if the mortgage money has not been given by the mortgagee to the mortgagor.
Failure to pay the mortgage money by the mortgagee does not invalidate the mortgage [Rasik Lal v Ram Narain (1921) ILR 34 AU 273].
KINDS OF MORTGAGE
The nature of the right transferred in a mortgage depends upon the form or kind of the mortgage. There are six kinds of mortgage, as outlined in Sec. 58, T.P. Act.
(1) Simple Mortgage [Sec. 58(b)]
In a simple mortgage, the mortgagor undertakes personal liability to repay the mortgage-money and grants the mortgagee an explicit or implicit authority to sell the property through court intervention to settle the debt.
However, possession of the property is not transferred to the mortgagee, meaning there is no change in ownership.
Because the mortgagee does not possess the property, they cannot use the rent and profits to satisfy the debt, nor can they obtain full ownership of the mortgaged property through foreclosure (i.e., retaining the property in lieu of the mortgage-money).
Instead, they only hold the right to sell the property, and even this can only be done through court proceedings [Kishanlal v Gangaram (1891) 13 AU 28].
The mortgagee can also initiate legal action based on the personal covenant, as the mortgagor commits to repayment. Consequently, the mortgagee can sue the mortgagor for the mortgage-money or take action against the property, or pursue both avenues.
If the mortgagee chooses to sue based solely on the personal undertaking, they obtain a monetary judgment. However, if they sue based on the mortgage, they secure an order for the sale of the property (Sec. 68).
(2) Mortgage by Conditional Sale [Sec. 58(c)]
In a Mortgage by Conditional Sale [Sec. 58(c)], the mortgagor appears to sell the mortgaged property, but with a condition outlined in the document:
(i) if the mortgage-money is not paid by a specified date, the sale becomes absolute,
(ii) if the payment is made, the sale is void, or the buyer transfers the property back to the seller.
This type of mortgage is essentially a security for the debt, with the sale being only apparent and not actual. The term "ostensible" implies that while it seems like a sale, it's not genuinely so. Possession is not necessarily transferred in this form of mortgage.
Unlike other mortgages, there is no personal liability on the mortgagor to repay the debt in a mortgage by conditional sale. The mortgagee's recourse is limited to foreclosure, which involves obtaining a court declaration barring the mortgagor's right of redemption.
This declaration converts the apparent ownership of the mortgagee into absolute ownership.
It's important to differentiate between a mortgage by conditional sale and a sale with a condition for repurchase. In the former, the sale is only superficial, while in the latter, it's a genuine sale. In a mortgage, the debt remains, and the debtor retains the right to redeem the property.
Conversely, in a sale with a repurchase condition, there's no lending and borrowing, and there's only a personal right to repurchase reserved for the seller.
The proviso to Sec. 58(c) specifies that a transaction can't be considered a mortgage by conditional sale unless the condition for retransfer is stated in the same document that appears to effect the sale.
If separate documents for sale and reconveyance are executed for the same property in the same transaction, it doesn't qualify as a mortgage by conditional sale [Sunil K. Sarkarv Aghor K. Basu AIR 1989 Gau 39; Pandit Chun Chun Jha v Ebabat Ali (1955) 1 SCR 174].
(3) Usufructuary Mortgage [Sec. 58(d)]
In this type of mortgage, the property serves as security for the mortgagee, who is granted possession and allowed to offset his dues using the property's rents and profits.
The mortgagor must either hand over possession to the mortgagee or commit to doing so, either explicitly or implicitly, to ensure compliance. The mortgagor is not personally liable unless there is a separate agreement stating otherwise.
The mortgagee retains possession until the debt is repaid (without a fixed timeline) and receives rents and profits as interest or mortgage payment, or a combination thereof.
If the mortgagee is not in possession or loses it, they can sue for possession and past profits, and also for the mortgage debt under Sec. 68. However, they cannot sue for sale or foreclosure.
Case Laws
In the case of Pratap Bahadur v Gajadhar [(1904) 24 All 521], the mortgagor promised to give the mortgagee possession of a village on a future date and pay interest at 24 percent until then, deemed a 'usufructuary mortgage'. Conversely, in Yashaswini v Vithal [(1897) Bom 267], a covenant allowed the mortgagee to take possession if interest payments were missed, classified as a 'simple mortgage'.
Two different usufructuary mortgages cannot exist on the same property simultaneously, as possession can only be granted to one party. Occasionally, usufructuary mortgages involve no change of possession, with the mortgagee leasing the property to the mortgagor, who retains possession and pays rent equivalent to the interest on the loan.
Conversely, in a Zur-i-peshgi lease (a usufructuary mortgage in the form of a lease), the mortgagee is the lessee and has physical possession. The mortgagor receives an advance as future rent and ostensibly leases the property.
In exchange for the advance rent, the person providing the money enjoys the property for a set number of years. In a usufructuary mortgage, the mortgagee has the benefit of repaying himself using the property's income.
However, in a mortgage by conditional sale, where possession is not transferred, the mortgagee lacks this advantage.
(4) English Mortgage [Sec. 58(e)]
An English mortgage occurs when the mortgagor commits to repaying the mortgage-money by a specific date and transfers the mortgaged property outright to the mortgagee.
However, this transfer is subject to the condition that the property will be retransferred to the mortgagor upon debt repayment.
The term 'absolutely' underscores that an English mortgage exhibits more characteristics of a sale, yet it does not imply an absolute transfer akin to a sale. Indeed, an absolute transfer cannot constitute a mortgage; only an interest in the property is transferred [Ramkinkar v Satyacharan (1939) 1 MLJ 554].
The recourse for an English mortgagee is through sale rather than foreclosure, and in certain cases, they have the right to sell the property without court intervention.
An 'English mortgage' shares similarities with a 'mortgage by conditional sale' in that both involve the potential transfer of property ownership from mortgagor to mortgagee upon default.
However, unlike a mortgage by conditional sale, in an English mortgage, the mortgagor typically agrees to personally repay the debt. Additionally, while the mortgagee in a mortgage by conditional sale acquires only a conditional ownership, in an English mortgage, they gain absolute ownership.
(5) Equitable Mortgage [Sec. 58(f)]
A 'mortgage by deposit of title deeds' is commonly referred to as an equitable mortgage, drawing from a similar concept in English law. In this arrangement, the borrower delivers documents of title to immovable property to the creditor, or their agent, with the intention of creating security on the property.
This type of mortgage can be established in certain designated towns like Calcutta, Madras, and Bombay (as well as other towns notified in the official gazette), even if the property itself is located outside these towns.
No specific writing or formalities are required for this type of mortgage. The legislative intent behind this provision is to provide flexibility to the business community, allowing them to raise funds quickly when the need arises before a formal mortgage deed can be prepared. In India, the recognition of such mortgages dates back to the decision in Verdu Seth Sam v Luckputty (1862) 8 M.I.A. 307.
In England, this form of mortgage is considered an equitable security rather than a legal or actual mortgage. As a result, it may not be enforceable against a bona fide purchaser for value of the legal estate without notice.
However, in India, it is treated as a legal mortgage and can therefore be enforced against a bona fide purchaser or subsequent transferee.
Physical delivery of documents from the debtor to the creditor is not the sole method of creating a deposit. Constructive delivery, such as when the principal instructs an agent to hold the title deeds as security, can also establish a mortgage.
The court clarified in K.J. Nathan v Maruthi Rao (AIR 1965 SC 430) that there is no legal presumption that the mere deposit of title deeds constitutes a mortgage; rather, the intention for the deeds to serve as security for the debt is determined on a case-by-case basis.
The provisions that apply to a simple mortgage also apply, to the extent possible, to a mortgage by deposit of title deeds. In both cases, there is no transfer of possession of the property, and the mortgagee's recourse is through a lawsuit for sale or for the mortgage-money.
(6) Anomalous Mortgage [Sec. 58(g)]
This type of transaction falls under the category of mortgages as defined in the Transfer of Property Act, but it does not fit into any of the specific types of mortgages discussed earlier.
The rights and obligations of the parties involved in such a mortgage are determined by their contractual agreement, as evidenced in the mortgage deed, and in the absence of such provisions, by local customs and practices.
In this form of mortgage, possession of the property may or may not be transferred to the mortgagee. The mortgagee's recourse in such a scenario is through sale, and if permitted by the terms of the mortgage, also through foreclosure.
An anomalous mortgage encompasses two main types:
(i) a simple usufructuary mortgage, and
(ii) a conditional sale usufructuary mortgage.
The former combines elements of both a simple mortgage and a usufructuary mortgage. In this arrangement, the mortgagee takes possession of the property and uses the rents or profits to repay the debts.
Additionally, there is a personal undertaking by the mortgagor, along with the right to sell the property if the debt is not repaid by the agreed-upon date.
A conditional sale usufructuary mortgage represents another example of an anomalous mortgage. Here, the mortgagee takes possession of the property as a usufructuary mortgagee for a predetermined period.
If the debt remains unpaid at the end of this period, the mortgagee gains all the rights associated with a mortgagee by conditional sale.
Sub-Mortgage
As an immovable property, a mortgage-debt grants the mortgagee the right to assign their interest in the mortgaged property.
When the mortgagee assigns their interest under the original mortgage, it gives rise to what is known as a sub-mortgage.
In such a scenario, the sub-mortgagee holds rights over the property that are subordinate to the rights of the original mortgagor.
Despite this subordination, a sub-mortgagee is still entitled to seek a decree for the sale of the mortgage rights held by their mortgagor.
Another concept related to mortgages is that of a puisne mortgage. This situation occurs when an individual, let's say A, mortgages their property to another party, B, through a legal mortgage.
Subsequently, A mortgages the same property again, this time to a third party, C. This subsequent mortgage created by A, whether it's an equitable mortgage or the establishment of a charge on the same property, constitutes a puisne mortgage. In essence, it represents a secondary mortgage that comes after the initial legal mortgage arrangement.
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