Introduction
A mortgage is a critical concept in property law, acting as a legal arrangement that allows individuals or entities to borrow money by pledging property as security. The Transfer of Property Act, 1882 (hereinafter to be referred as "Act"), is the principal legislation governing the law of mortgages. This Act lays down the legal framework within which mortgages are created, enforced, and dissolved, offering protection to both lenders and borrowers. Mortgages are essential for the functioning of real estate and financial markets, enabling individuals and businesses to access capital while securing the lender's interest in the event of non-payment.
The Act not only categorises the different types of mortgages but also outlines the rights and obligations of the involved parties. For instance, it grants the mortgagor the right to redeem the mortgaged property by repaying the debt and gives the mortgagee the right to foreclose or sell the property if the debt remains unpaid. This blog delves into the concept of mortgage under the Act, types of mortgages, the relevant legal provisions, and the rights and liabilities of both parties, providing a comprehensive overview of law governing mortgage.
What is mortgage under the Act?
Section 58 of the Act defines the mortgage as "the transfer of an interest in specific immoveable 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 which may give rise to a pecuniary liability". In case of a sale, there is a transfer of the absolute interest with all its consequences in the property. As opposed to the sale, in the case of Mortgage, there is a transfer of partial interest in the property and in lieu of that interest the borrower gets the loan and the lender has the property as the security for the loan.
The borrower or the transferor for the purpose of transaction of mortgage is called as "Mortgagor" and lender or transferee is called as "Mortgagee". The money which is the subject matter of the mortgage is called "Mortgage Money" and the instrument executed for this transaction is called "Mortgage Deed".
What are the types of Mortgages?
The Act categorises mortgages into six types, each defined by its unique characteristics, legal implications, and rights of the parties involved. These mortgages differ primarily in how the property is treated, the rights conferred to the mortgagee, and the conditions for repayment. The various types of mortgages under the Act are as follows:
Simple Mortgage
A simple mortgage is the most basic form of mortgage where the mortgagor pledges his immovable property as security for the loan, but the property remains in the possession of the mortgagor. In case of default by the mortgagor in the payment of the mortgage money, the mortgagee has the right to sell the property to recover the loan amount. In this type of mortgage, there is no transfer of the actual possession of the property. In case of default on the payment of the mortgage money, the mortgagee can obtain the money decree from the court and ask for payment of the mortgage money from the mortgagor, or he can sell the property and obtain the order to that effect.
Mortgage by Conditional Sale
In a mortgage by conditional sale, the mortgagor ostensibly sells the property to the mortgagee, but the sale becomes absolute only if the mortgagor defaults on the repayment. If the loan is repaid, the sale is void, and the property reverts to the mortgagor. This is a mortgage arrangement where the mortgagor sells the property to the mortgagee with a condition attached. The condition is that if the borrower repays the loan on or before the agreed date, the sale becomes void, and the property is returned to the borrower. However, if the borrower defaults in repayment, the sale becomes absolute, and the lender becomes the legal owner of the property. This mortgage provides security to the lender while offering a chance for the borrower to reclaim ownership.
In Balubhai jethabhai v Chhananbai, the stipulation in the document described it to be a transaction of conditional sale, the condition provided that, at any time within 10 years of its execution the seller could return the same amount of consideration as paid by the buyer and thereupon the land would be returned to the seller. The question before the court was whether it would amount to be a mortgage by conditional sale or sale with the condition of repurchase?
The Guj HC held that it was a mortgage by conditional sale and there was no outright sale. The court observed that mere description of the transaction in a document that there was a sale does not make the document a sale deed. The relevant factor is the intention of the parties. The court observed further that no buyer intending to purchase immovable property would put his title to jeopardy for a period of 10 years nor would he agree to return the property for the same price at which he has purchased during anytime up to 10 years from the date of purchase.
Usufructuary Mortgage
A Usufructuary Mortgage is a type of mortgage where the mortgagor hands over possession of the property to the mortgagee as a security for the mortgaged money. In this mortgage, the mortgager does not have to pay the mortgaged money when due because the mortgagee is entitled to receive any income, such as rent or profits, generated from the property and from that money the mortgaged money will be set off. The mortgagor is not personally liable for repayment of the amount taken as a loan. Unlike a simple mortgage, the mortgagee does not have the right to sell the property to recover the loan. Once the loan is fully paid off through the income, the property must be returned to the mortgagor, restoring their full ownership.
English Mortgage
An English Mortgage is a type of mortgage where the mortgagor transfers ownership of the mortgaged property to the mortgagee absolutely. However, this transfer comes with a condition that the mortgagee will re-convey the property to the mortgagor upon full repayment of the loan. Unlike the usufructuary mortgage, the Mortgagor in English mortgage remains personally liable to repay the debt, meaning the mortgagee can sue the mortgagor in case of default in payment of the mortgaged money. This type of mortgage provides the mortgagee with strong security, as they hold the ownership of the property until the loan is fully paid.
Mortgage by Deposit of Title Deeds
A Mortgage by Deposit of Title Deeds, also known as an Equitable Mortgage, is a type of mortgage where the mortgagor delivers the title deeds of the property to the mortgagee as security for a loan. This type of mortgage does not require a formal written agreement or registration. The delivery of the title deeds itself creates a security interest in the property for the mortgagee. The mortgagor retains ownership and possession of the property, while the mortgagee holds the title deeds until the loan is repaid. It is commonly used in cities notified by the government for this purpose.
Anomalous Mortgage
An Anomalous Mortgage is a mortgage that does not fit into the specific categories of mortgage described under the Act, such as simple mortgage, usufructuary mortgage, or mortgage by conditional sale. It is essentially a hybrid or combination of different types of mortgages or contains unique terms that make it distinct. The rights and obligations of both the mortgagor and the mortgagee in an anomalous mortgage are determined by the specific terms and conditions agreed upon between the parties, which are legally binding.
Rights and Liabilities of Mortgagor
In a mortgage transaction, the mortgagor pledges their immovable property as security for a loan, retaining certain rights while being bound by certain liabilities. These rights are designed to protect the interest of mortgagor in the property and ensure that they have the legal means to recover the property once the loan is repaid. The liabilities, on the other hand, serve to safeguard the mortgagee's interest, ensuring that the mortgagor fulfills their obligations.
Rights of the Mortgagor
- Right to Redemption
Section 60 of the Act gives the mortgagee the right to redeem the mortgaged property once he pays the mortgage money along with the interest payable. This right can be exercised at any time before the mortgagee either forecloses or sells the property. Mortgagee cannot impose any condition in the mortgage deed that will restrain the redemption of the mortgaged property by the mortgagor
2. Right to Accession
Section 63 of the Act provides that if any improvements or additions are made to the mortgaged property while it is in the possession of the mortgagee, the mortgagor has the right to benefit from these additions or improvements when they redeem the property. This right safeguards the mortgagor’s interests by ensuring that any enhancements to the property, whether natural or man-made, are included in the redemption process without additional costs to the mortgagor.
3. Right to Transfer to a Third Party
Section 60A of the Act provide the right to the mortgagor to transfer to the third person to get the property and on payment by him. This right allows the mortgagor to transfer the mortgaged property to a third party and require the mortgagee to assign the mortgage to that third party. The mortgagee will be bound by such arrangement. It offers flexibility to the mortgagor, enabling them to shift their obligations to another party. This can be useful in cases where the mortgagor wishes to sell the property or involve another person in settling the mortgage debt.
4. Right to Inspect and Produce Documents
The mortgagor has the right to inspect the title deeds and other related documents held by the mortgagee at any time under Section 60B of the Act. This right ensures transparency and allows the mortgagor to verify that their property documents are in order, helping to prevent fraudulent activity or mismanagement by the mortgagee. It also facilitates the mortgagor’s access to necessary information during the mortgage term.
5. Right to Lease
Section 65A of the Act provides the mortgagor's right to retain the right to lease the mortgaged property, provided the lease does not violate the mortgage terms. This right allows the mortgagor to continue utilizing the property for income generation or other purposes, even while it is under mortgage. The mortgagor cannot make any covenant in the deed which allow the renewable of the lease. If the lease deed is related to lease of building or the land on which it stands, it cannot be more the three years.
Liabilities of Mortgagor
1. Liability to Pay Mortgage Money
Section 58 of the Act cast an obligation on the mortgagor to repay the loan amount on the agreed time. The primary liability of mortgagor is to repay the loan amount, along with any interest, as per the terms of the mortgage. This repayment forms the essence of the mortgage contract, with the immovable property serving as security. Until the full mortgage money is paid, the mortgagee holds an interest in the property. Failure to fulfill this liability can lead to foreclosure, where the mortgagor loses their right to redeem the property, and the mortgagee can proceed with selling the property to recover the unpaid debt.
2. Liability to Prevent waste of the property
The mortgagor is responsible under section 66 of the Act for using the mortgaged property in a manner that preserves its value and condition. They cannot engage in activities that result in the property’s deterioration or diminish its worth, such as causing waste or neglecting essential maintenance. If the mortgagor is in possession of the property, they must ensure it is properly cared for, preventing any damage or reduction in its market value that could affect the mortgagee’s security interest in the property.
3. Liability to Indemnify the Mortgagee
Section 65 provide that the mortgagor must indemnify the mortgagee against any losses or damages arising from the mortgagor’s failure to meet their obligations under the mortgage agreement. This includes reimbursing the mortgagee for any costs incurred due to the mortgagor’s breach of terms, such as failing to pay taxes or maintaining the property. Indemnification ensures that the mortgagee is not financially harmed by the mortgagor’s negligence or failure to uphold their responsibilities in protecting the property.
Rights and Liabilities of the Mortgagee
In mortgage, interest of both parties is protected and for that certain rights are given to the mortgagee against the mortgagor with respect to the mortgaged property. Along with this mortgagee is bound by certain obligation.
Rights of the Mortgagee
- Right to Foreclosure
The mortgagee has the right to initiate foreclosure proceedings under section 67 of the Act if the mortgagor fails to repay the loan within the stipulated time. This right allows the mortgagee to terminate the mortgagor’s right to redemption and either retain or sell the mortgaged property. The purpose of foreclosure is to enable the mortgagee to recover the loan amount, ensuring that the mortgagee’s financial interest is protected. However, this right can only be exercised in specific types of mortgages like a mortgage by conditional sale or an anomalous mortgage, depending on the agreement.
2. Right to Possession
Section 58 of the Act provides that in some types of mortgages, specifically in the case of the usufructuary mortgage, the mortgagee has the right to take possession of the mortgaged property to protect their security interest. Once the mortgagee is in possession of the property, the mortgagee is entitled to enjoy the income or rent derived from the property, applying it toward the repayment of the loan. This right allows the mortgagee to ensure the property’s value is maintained while they have control over it, giving them a safeguard in case of default. However, the mortgagee is also liable to manage the property responsibly during their possession.
3. Right to Sale
The mortgagee, in certain cases, has the right to sell the mortgaged property without the intervention of the court under section 69 of the Act to recover the debt if the mortgagor defaults on payment. This right is particularly available in English and equitable mortgages and on condition mentioned in section 69 of the Act. The right to sell allows the mortgagee to bypass the lengthy process of foreclosure and directly recover the loan amount through the sale proceeds. It is a crucial remedy for the mortgagee to ensure they are not left without recourse in the event of non-payment, but it must be exercised in accordance with the terms of the mortgage and the law.
Liabilities of the Mortgagee
- Liability to Manage the Property
Section 76 of the Act imposes obligation on the transferee, who is in possession of the property, obligation to manage the property. It provides that if the mortgagee takes possession of the mortgaged property, they are responsible for its management. This includes the duty to preserve the property and ensure it is not wasted or damaged. The mortgagee must maintain the property’s value, pay necessary taxes, and ensure it remains in good condition. Mismanagement of the property can lead to the mortgagee being held liable for any reduction in its value, which would affect the security interest of the mortgagor. This liability ensures that the mortgagee cannot exploit their control over the property.
2. Liability to Account for Rents and Profits
When the mortgagee is in possession of the mortgaged property, they are required to account for any income generated from it, such as rent or profits. These amounts must be applied toward the repayment of the loan amount with the required interest. The mortgagee cannot retain these earnings for their personal gain and must ensure that all profits are accounted for transparently. This liability ensures that the mortgagee does not unfairly benefit from the property while holding it as security and that the debt is repaid in a fair and lawful manner.
3. Liability to Return the Property upon Redemption
Once the mortgagor exercises their right to redemption by repaying the full mortgage amount, the mortgagee is obligated to return the property to the mortgagor. This includes handing back any property documents and relinquishing any claim or interest in the property. The mortgagee’s failure to return the property or related documents after repayment can result in legal action. This liability ensures that the mortgagor can regain full ownership and control of the property upon fulfilling their financial obligations, maintaining the fairness of the mortgage process.
Conclusion
Mortgage play a vital role in securing loans while safeguarding the rights and interests of both the mortgagor and mortgagee. The various types of mortgages offer flexibility in structuring financial agreements, with each type providing unique advantages based on the nature of the transaction. While the mortgagor enjoys important rights like redemption, accession, and transparency, they are also bound by crucial liabilities such as maintaining the property’s value, repaying the debt, and protecting the mortgagee from losses.
Understanding the intricate balance between rights and liabilities is essential for both parties to avoid disputes and ensure the smooth execution of mortgage agreements. The right to redeem, in particular, underscores the principle that the borrower’s property is only temporarily transferred as security, not permanently alienated unless the mortgagor fails to meet their obligations. On the other hand, the mortgagee's security interest is preserved through the mortgagor's liabilities, ensuring that the property remains a viable asset.
Frequently Asked Questions
Question: What is a mortgage without the possession?
In such cases, the possession of the property is not transferred to the mortgagee except in the case of a usufructuary mortgage where the possession of the property is transferred.
Question: What is the right of redemption?
The right of redemption is the right of the mortgagor to get the property back from the mortgagee once the mortgage money is repaid along with the requisite interest.
Question: What is Mortgage?
Mortgage is the partial transfer of the immovable property by the mortgagor to the mortgagee to secure the loan taken by the mortgagor from the mortgagee.