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MORTGAGE
QUESTION BANK
Q.1 Define mortgage and explain various kinds of mortgages.
Q.2 āOnce mortgage, always a mortgageā- Discuss.
Q.3 Discuss fully the right to foreclosure and right of redemption.
Q.4 Distinction between āmortgageā and āchargeā.
SHORT NOTES
1) Subrogation.
2) Foreclosure.
3) Redemption.
4) Usefructory mortgage.
5) Simple mortgage.
6) English mortgage.
7) Mortgage by conditional sale.
Law of Mortgages under the Transfer of Property Act, 1882
I. Statutory Definitions (Section 58)
Section 58(a) of the Transfer of Property Act, 1882 defines the fundamental terms associated with a mortgage transaction:
1. Mortgage: A āmortgageā is the transfer of an interest in specific immovable property for the purpose of securing:
a. The payment of money advanced or to be advanced by way of loan;
b. An existing or future debt; or
c. The performance of an engagement which may give rise to a pecuniary liability.
2. Mortgagor: The transferor of the interest in the property.
3. Mortgagee: The transferee who receives the security interest.
4. Mortgage-Money: The principal money and interest of which payment is secured for the time being.
5. Mortgage-Deed: The legal instrument (if any) by which the transfer of interest is effected.
In Short: A mortgage is the transfer of an interest by way of security in specific immovable property. Unlike a sale, ownership of the property remains vested in the mortgagor, while only a limited interest (the right to secure compliance or recover debt) is transferred to the mortgagee.
II. Essentials of a Valid Mortgage
To constitute a valid mortgage, the following essential ingredients must be satisfied:
1. Transfer of an Interest
There must be a transfer of an interest in immovable property. While a 'Sale' represents the transfer of the absolute bundle of rights (absolute ownership), a mortgage transfers only a limited slice of these rights (e.g., the right to possession or the right to cause a sale upon default), leaving the underlying ownership with the mortgagor.
2. Specific Immovable Property
The interest must be transferred in specific immovable property. The property must be distinctly described, identifiable, and defined in clear terms within the mortgage-deed to avoid ambiguity. General descriptions (e.g., "all my landed property") are insufficient.
3. Purpose of the Mortgage (Consideration)
The transaction must secure a pecuniary liability. The consideration may consist of:
a. Money advanced or to be advanced as a loan;
b. An existing or future debt; or
c. The performance of an engagement creating a financial obligation.
III. Kinds of Mortgages (Section 58)
The Transfer of Property Act, 1882 contemplates six distinct types of mortgages:
1. Simple Mortgage [Section 58(b)]
A simple mortgage occurs when, without delivering possession of the mortgaged property:
a. The mortgagor binds himself personally to pay the mortgage-money; and
b. Agrees, expressly or impliedly, that in the event of failure to pay according to the contract, the mortgagee shall have a right to cause the mortgaged property to be sold.
Important Characteristics:
a. Possession: Retained entirely by the mortgagor.
b. Remedy: The mortgagee has a dual remedy: a personal action for the debt and a right to seek a judicial decree for the sale of the property.
c. Court Intervention: The mortgagee cannot sell the property independently; they must obtain a decree from a competent civil court. The sale proceeds are applied to settle the debt, and any surplus must be returned to the mortgagor.
2. Usufructuary Mortgage [Section 58(d)]
a. Definition-
A usufructuary mortgage arises where the mortgagor:
i. Delivers possession (or expressly/impliedly binds himself to deliver possession) of the property to the mortgagee; and
ii. Authorises the mortgagee to retain such possession until payment of the mortgage-money, and to receive rents and profits accruing from the property to appropriate them in lieu of interest, or in payment of the principal, or both.
b. Important Characteristics:
i. No Personal Liability: The mortgagor does not personally undertake to repay the debt; recovery is strictly through the property's yield.
ii. No Foreclosure or Sale: The mortgagee cannot sue for sale or foreclosure. Their sole remedy is to retain possession until the debt is fully liquidated via usufruct.
iii. Registration: If the principal sum is ā¹100 or more, registration of the deed is mandatory under Section 59.
c. Rights of Parties:
i. Mortgagor's Right to Recover Possession (Section 62): The mortgagor can recover the property when the debt is paid off by usufruct, when the specified term expires, or when the balance is deposited in court.
ii. Right to Accession (Section 63): Any natural or legal accession to the property during the mortgage vests in the mortgagor upon redemption.
3. Mortgage by Conditional Sale [Section 58(c)]
a. Definition-
Where the mortgagor ostensibly sells the mortgaged property on the condition that:
i. On default of payment of the mortgage-money on a certain date, the sale shall become absolute; or
ii. On such payment being made, the sale shall become void; or
iii. On such payment being made, the buyer shall re-transfer the property to the seller.
4. Crucial Statutory Proviso:
No such transaction shall be deemed to be a mortgage unless the condition is explicitly embodied in the very same document that effects or purports to effect the sale.
5. Distinguishing Ostensible Sale from Outright Sale:
An "ostensible sale" appears to be a sale on its face but acts strictly as a security for a debt.
a. Possession: Typically remains with the mortgagor.
b. Remedy: The mortgageeās remedy is a suit for foreclosure (Section 67) to debar the mortgagor's right of redemption. The mortgagee does not become the owner automatically upon default; they require a court decree.
Ismail Khatri v. Muljibhai Brahmbhatt, AIR 1994 Guj 8:
The Gujarat High Court held that the document must be read as a whole. Where the first part provided for an outright sale but the subsequent clause contained a clear covenant for redemption, the transaction was construed as a mortgage by conditional sale.
4. English Mortgage [Section 58(e)]
An English mortgage is a transaction where the mortgagor binds himself to repay the mortgage-money on a certain date and transfers the mortgaged property absolutely to the mortgagee, subject to a proviso that the mortgagee will re-transfer it to the mortgagor upon payment.
Comparison: Distinctive Features
Feature | English Mortgage | Simple Mortgage | Usufructuary Mortgage | Mortgage by Conditional Sale |
Personal Liability | Present (Explicit commitment) | Present | Absent | Absent |
Transfer of Property | Absolute transfer with a proviso to re-convey | Transfer of a limited right of sale only | Only possession is transferred | Ostensible sale (Becomes absolute on default) |
Possession | Right to immediate possession | Retained by Mortgagor | Transferred to Mortgagee | Retained by Mortgagor |
Primary Judicial Remedy | Judicial Sale | Judicial Sale | Retention of Usufruct (No Sale) | Foreclosure |
5. Mortgage by Deposit of Title Deeds / Equitable Mortgage [Section 58(f)]
This mortgage occurs when a person delivers documents of title of immovable property to a creditor or his agent with the intent to create a security thereon.
a. Territorial Limits: This is restricted to notified towns, including Kolkata, Chennai, and Mumbai, or other towns specifically notified by the respective State Governments in the Official Gazette.
b. Formalities: Neither a formal mortgage-deed nor registration is mandatory under Section 59, provided the transaction consists purely of depositing title deeds with intent to secure a debt.
c. Remedy: Under Section 96, an equitable mortgagee enjoys the same functional remedies as a simple mortgagee (i.e., filing a suit for judicial sale). They are not entitled to foreclosure.
6. Anomalous Mortgage [Section 58(g)]
A mortgage that does not fall within any of the five standard categories is an anomalous mortgage. It is essentially a hybrid or residuary mortgage tailored by custom or contract (e.g., a combined Usufructuary-Simple Mortgage). The rights and liabilities are governed strictly by the terms of the mortgage-deed.
IV. Rights and Liabilities of the Mortgagor
A. Rights-
1. The Right of Redemption (Section 60)
a. The right of redemtion-
The primary statutory right of the mortgagor is the right to redeem the property once the principal money has become due. Upon tendering the mortgage-money, the mortgagor has the right to compel the mortgagee to:
i. Return the mortgage-deed and all associated title documents;
ii. Deliver possession of the property (if held by the mortgagee);
iii. Execute and register a re-transfer or an acknowledgment of extinction of the mortgage.
Exceptions: This right can only be extinguished by the formal "act of the parties" (such as a subsequent separate sale agreement) or by a "decree of a court" (foreclosure or sale).
b. The Doctrine of "Once a Mortgage, Always a Mortgage" and Clog on Redemption
The right of redemption is an absolute, statutory, and indefeasible right. It cannot be bargained away or restricted by clauses within the mortgage-deed itself. Any provision that acts as a hurdle or seeks to frustrate the right of redemption post-payment is void ab initio as a clog on redemption.
Stanley v. Wilde, (1899) 2 Ch 474:
Lord Justice Lindley observed:
"Any provision inserted in a mortgage deed to prevent redemption on payment or performance of the debt or obligation for which the security was given is what is meant by a clog or fetter on the equity of redemption and is therefore void."
Murarilal v. Devkaram, AIR 1965 SC 225:
The Supreme Court of India reaffirmed that a mortgage cannot be made irredeemable. A clause stating that the property would automatically convert into an absolute sale if not redeemed within 15 years was struck down as a classic clog on the equity of redemption.
c. Partial Redemption-
A mortgage debt is characteristically indivisible. A person interested in only a share of the mortgaged property cannot demand to redeem their fraction of the property by paying a proportionate share of the debt. Exception: Partial redemption is allowed only where the mortgagee (or all mortgagees jointly) has acquired the share of a mortgagor in the property.
2. Right to Transfer to Third Party (Section 60A):
The mortgagor can direct the mortgagee to assign the debt and transfer the property to a designated third party instead of re-conveying it to himself.
3. Inspection and Production of Documents (Section 60B):
Right to inspect and copy title deeds in the mortgagee's custody at reasonable times and at his own cost.
4. Separate or Simultaneous Redemption (Section 61):
In the absence of a contract to the contrary, a mortgagor who has executed multiple mortgages in favour of the same mortgagee can redeem them individually or collectively when due.
5. Accessions & Improvements (Sections 63 & 63A):
Entitled to any natural accession or improvement made to the property upon redemption, without liability for costs unless covered under statutory exceptions (e.g., preservation of property).
6. Power to Lease (Section 65A):
A mortgagor in lawful possession can execute a lease binding on the mortgagee, provided it meets standard statutory benchmarks (e.g., reasonable rent, no premium, duration limits).
7. Non-liability for Waste (Section 66):
A mortgagor in possession is not liable for standard deterioration but is restricted from committing active, destructive waste that renders the security insufficient.
B. Liabilities of the Mortgagor (Section 65 - Implied Contracts)
In the absence of a contract to the contrary, the mortgagor implicitly covenants that:
1. The title professedly transferred to the mortgagee exists and is valid;
2. He will defend the title or enable the mortgagee to defend it;
3. He will pay all public charges and government revenues while in possession;
4. He will pay rents due if the property is a leasehold;
5. He will pay interest due on any prior encumbrances.
V. Rights and Liabilities of the Mortgagee-
A. Rights of the Mortgagee
1. Right to Foreclosure or Sale (Section 67)
Once the mortgage-money has become due and before a redemption decree is passed, the mortgagee has the right to obtain a decree for foreclosure or sale from the court.
a. Co-extensive Nature: The mortgagor's right to redeem and the mortgagee's right to foreclose/sell are co-extensive.
b. Ramesh Kumar v. Yashpal Batra, AIR 2006 Del 286: The court ruled that a mortgagee does not automatically become the owner of the property upon the expiration of the mortgage term. Ownership can only be claimed through a formal legal process within the prescribed limitation framework.
2. Right to Sue for Mortgage-Money (Section 68)
The mortgagee can file a personal suit for recovery of the mortgage-money under four specific conditions:
a. Where the mortgagor binds himself personally to repay;
b. Where the mortgaged property is wholly or partially destroyed without the fault of the mortgagee, and the mortgagor fails to provide additional security;
c. Where the mortgagee is deprived of security due to the wrongful act or default of the mortgagor;
d. Where the mortgagor fails to deliver promised possession to a mortgagee entitled to it.
3. Power of Sale (Section 69):
Power to sell the property without court intervention under specific restricted situations (e.g., where the power is expressly given and the mortgagee is the Government or the property is situated in specific presidencies).
4. Appointment of a Receiver (Section 69A):
Right to appoint a receiver to manage income generated from the property to settle outstanding dues.
5. Right to Accession and New Lease (Sections 70 & 71):
Security interest automatically extends to accessions and renewed leaseholds obtained by the mortgagor.
6. Proceeds of Revenue Sale (Section 73):
If the property is sold due to default of revenue payment by the mortgagor, the mortgagee can claim his debt from the surplus sale proceeds or compulsory acquisition compensation via the Doctrine of Substituted Security.
B. Liabilities of a Mortgagee in Possession (Section 76)
When a mortgagee takes physical management and possession of the property, they assume the duties of a prudent trustee. They are legally bound to:
1. Prudent Management: Manage the property as a person of ordinary prudence would manage it if it were their own.
2. Collect Rent and Profits: Use best endeavors to collect dues accruing from the estate.
3. Discharge Public Dues: Pay Government revenue and public charges out of the property's income.
4. Necessary Repairs: Execute necessary repairs out of the surplus income.
5. Avoid Active Waste: Restrain from any act that permanently injures or destroys the property.
6. Account Keeping: Maintain clear, full, and accurate accounts of all financial inflows and expenditures, making them available to the mortgagor.
7. Post-Tender Accounting: If the mortgagor tenders or deposits the full mortgage amount, the mortgageeās right to claim expenses or interest drops significantly from that date, and they must strictly account for all subsequent income generated from the property without deductions.