Different Types of Mortgage Under the Transfer of Property Act

The Transfer of Property Act encompasses a comprehensive framework for mortgages, which play a crucial role in real estate transactions. A mortgage allows individuals to secure loans by offering their immovable property as collateral. 

However, not all mortgages are the same, as they can vary regarding rights, obligations, and legal implications. There are different types of mortgages defined under the Transfer of Property Act. 

Mortgage Under Transfer of Property Act

A mortgage is a legal transaction that involves transferring an interest in a specific immovable property to secure the repayment of a loan, whether it is an existing debt or one that may arise in the future. The party who transfers the property is the mortgagor, while the recipient of the property and lender of the loan is called the mortgagee. 

The amount of money borrowed, including any accrued interest, is called the mortgage money. Property transfer is typically formalized through a document called a mortgage deed. In summary, a mortgage is a means for individuals to obtain a loan using their property as collateral, with defined roles and terms for the parties involved.

Types of Mortgage Under the Transfer of Property Act

Simple Mortgage [Section 58(b)]

Section 58(b) describes a type of mortgage called a simple mortgage. In a simple mortgage, the mortgagor promises to personally repay the loan without giving possession of the property to the mortgagee. 

The mortgagor also agrees that if they fail to repay, the mortgagee has the right to sell the property and use the proceeds to pay off the loan.

The key elements of a simple mortgage are:

1. The mortgagor agrees to personally repay the loan.

2. The property is not given to the mortgagee.

3. The mortgagor transfers the right to sell the property if they fail to repay it as security for the loan.

A critical aspect of a simple mortgage is the mortgagor’s personal obligation to repay the loan. This obligation can be explicit or implied from the terms of the transaction when the loan is accepted. However, in certain cases, like a usufructuary mortgage, the terms of the mortgage transaction may change this obligation.

In a simple mortgage, the mortgagor retains possession of the property. The mortgagee’s security is solely based on the property itself, not on any income or profits it generates. If a simple mortgagee seeks to enforce their security, they cannot obtain a possession decree according to Section 68. Instead, it would convert the simple mortgagee into a mortgagee with possession.

The mortgagee has the right to sell the property if the mortgagor fails to repay the loan. However, this power of sale requires court intervention. This means that the mortgagee must obtain a court decree to execute the sale. Once the property is sold through the court, the mortgagee receives the advanced money with interest, and the remaining proceeds go to the mortgagor.

To create a simple mortgage, a registered document is necessary. Even if the loan amount is less than 100 rupees, Section 59 states that a registered instrument is required for a simple mortgage.

In case the mortgagor fails to repay the loan on time, the mortgagee has two remedies available:

1. The mortgagee can sue the mortgagor personally to recover the money owed. This results in a simple money decree.

2. The mortgagee can also seek a court order to sell the mortgaged property and recover the money. This leads to a decree for the sale of the property.

However, the mortgagee can combine both actions in a single lawsuit. They can sue the mortgagor personally and request a court decree for the sale of the property. It’s important to file the lawsuit within 12 years from the due date of the loan or mortgage money.

In the case of Mathai Mathai v Joseph Mary, a specific property was used as collateral security for stridhan, with the mortgagor being responsible for paying interest towards the loan repayment. However, the mortgage deed did not include any provision regarding the delivery of possession. As a result, the court determined that this particular deed should be classified as a simple mortgage.

In another case, Kishan Lai v Ganga Ram, the court reaffirmed the interpretation of Section 58(b) of the Transfer of Property Act 1882. The court clarified that the phrase “right to cause the property to be sold” implies that the mortgagee cannot arbitrarily exercise the power of sale. Instead, it requires the intervention of the court for the sale process to take place.

Mortgage by Conditional Sale [Section 58(c)]

Section 58(c) explains the concept of a mortgage by conditional sale. In this type of mortgage, the mortgagor appears to sell the property to the mortgagee, but there is a condition attached to the sale. If the mortgage money is not repaid by a certain date, the sale becomes absolute, or if the payment is made, the sale becomes void, or the buyer transfers the property back to the seller. This condition must be stated in the same document that affects the sale.

Muslims developed the mortgage by conditional sale as a way to comply with their religious prohibition on charging interest on loans. This type of mortgage allowed them to receive the principal amount and interest while keeping their conscience clear.

The basic elements of a mortgage by conditional sale are:

• The mortgagor ostensibly sells the property to the mortgagee.
• There is a condition attached to the sale, specifying the consequences based on repayment or default.
• The condition must be included in the same document.

It’s important to note that a transaction will not be considered a mortgage if the condition is not mentioned in the document affecting the sale.

The inclusion of the proviso under clause (c) of Section 58 brought about a significant change. It stated that a transaction would be deemed a mortgage by conditional sale only if the condition is embodied in the document that affects or purports to affect the sale. This amendment emphasized that the provision of repurchase must be included in the original sale deed itself rather than having separate documents for the sale and conditions of reconveyance.

The parties’ intention is crucial in determining the nature of the transaction. If the written words of the deed contradict one’s claim, evidence needs to be produced before the court to establish the intention of the parties.

In a mortgage by conditional sale, the mortgagor has no personal liability to repay the debt, and the mortgagee cannot include the mortgagor’s other properties in this transaction. This type of mortgage is an exception to the general rule of “No Debt, No Mortgage.”

Upon breach of the condition, the sale deed itself is executed, and the transaction becomes an absolute sale without further accountability between the parties. The mortgagee does not possess the property but has qualified ownership that may become absolute in case of default.

The remedy available to the mortgagee is foreclosure, which can only be obtained through a court decree. The mortgagee can file a decree for foreclosure when the mortgagor fails to repay the amount on time, and the sale becomes absolute.

In the case of Tamboli Ramanlal Moti Lal v Gharchi Chimanlal Keshavlal, the court emphasized that for a mortgage to be classified as a mortgage by conditional sale, the existence of the debt must be inferred from the conditions explicitly mentioned in the mortgage deed. The conditions should clearly indicate an absolute ostensible sale in the event of default in payment, as well as the return of the property upon payment prior to or on the prescribed date. If the mortgage deed does not reflect a debtor-creditor relationship or lacks these essential conditions, it cannot be considered a mortgage by conditional sale.

In another case, Rama v Samiyappa, the court reiterated that a crucial aspect of a mortgage by conditional sale is that in the event of default in payment, the mortgaged property becomes the absolute property of the mortgagee. Importantly, the mortgagor does not bear any personal liability for the debt repayment. This distinction highlights the unique nature of a mortgage by conditional sale, where the transfer of ownership is contingent upon the occurrence of specific conditions, relieving the mortgagor from personal liability.

Usufructuary Mortgage [Section 58(d)]

Section 58(d) explains the concept of a usufructuary mortgagehttps://lawbhoomi.com/usufructuary-mortgage/. In a usufructuary mortgage, the mortgagor either delivers possession of the property to the mortgagee or binds themselves to deliver possession. 

The mortgagee is authorized to retain possession until the mortgage money is paid and to receive the rent and profits from the property. The mortgagee can use these rents and profits in place of interest or payment of the mortgage money, either fully or partially.

The basic elements of a usufructuary mortgage are:

• The mortgagor delivers possession of the property to the mortgagee or binds themselves to do so.
• The mortgagee is authorized to retain possession and receive the rent and profits from the property.
• The mortgagee can use the rent and profits as a substitute for interest or payment of the mortgage money, either fully or partially.

Delivery of Possession

The mortgagor provides possession of the property to the mortgagee as security for the mortgage money. The mortgagee retains ownership of the property until the debt is paid. The actual delivery of possession may not occur at the time of executing the mortgage deed but can be agreed upon through an express or implied undertaking by the mortgagor.

Rent and Profits

The mortgagee is entitled to receive the rents and profits generated by the mortgaged property until the mortgage money is repaid. The manner in which the rents and profits are appropriated depends on the terms of the mortgage deed. The mortgagee can use the rents and profits in lieu of interest, principal, or both. The specific terms dictate when the mortgagor can regain possession.

No Personal Liability of the Mortgagor

In a usufructuary mortgage, the mortgagor is not personally responsible for repaying the mortgage money. The mortgagee must utilize the rents and profits from the property to satisfy the mortgage money. The duration of the mortgage is not limited since it is difficult to predict when the debt will be fully repaid.

Mortgagee’s Remedies

If the mortgagor fails to deliver possession of the property, the mortgagee can sue for possession or to recover the advanced money. However, if the mortgagee has already been given possession, their only remedy is to retain the property until the debts are satisfied. The usufructuary mortgagee does not have the right of foreclosure or sale. The mortgagee has the advantage of repaying themselves using the rents and profits.

Rights of Usufructuary Mortgagor

Under Section 62, a usufructuary mortgagor has the right to recover possession of the property from the mortgagee in certain cases. These cases include when the mortgagee was authorized to pay themselves the mortgage money from the rents and profits, and the mortgage money is paid, or when the terms for payment of the mortgage money have expired. The mortgagor pays the money to the mortgagee or deposits it in court.

In the case of Prabhakaran v M Azhagiri Pillai, the mortgagor transferred the interest in his property to the mortgagee, granting the mortgagee the authority to retain possession and enjoy the rents and profits until the debt is fully realized. The court ruled that in a usufructuary mortgage, the mortgagor bears no personal liability beyond this arrangement.

Similarly, in Hikmatulla v Imam Ali, the court established that the mortgagee is entitled to retain possession of the mortgaged property until the full repayment of the debt. Unlike other types of mortgages, the time period for repayment is not fixed in a usufructuary mortgage. If a specific time period is mentioned, the arrangement ceases to be a usufructuary mortgage.

Furthermore, in the case of Chathu v Kunjan, the court confirmed that the mortgagor in a usufructuary mortgage does not have any personal liability to repay the mortgage amount. As a result, the mortgagor cannot be personally sued for the repayment of the debt.

English Mortgage [Section 58(e)]

Clause (e) of Section 58 describes an English mortgage. In an English mortgage, the mortgagor agrees to repay the mortgage money on a specific date and transfers the property to the mortgagee. However, there is a provision that the mortgagee will re-transfer the property to the mortgagor upon full payment of the mortgage money as agreed.

The basic elements of an English mortgage are:

• The mortgagor commits to repaying the mortgage money on a certain date.
• There is an absolute transfer of the property to the mortgagee.
• The transfer is subject to the condition that the mortgagee will re-transfer the property to the mortgagor upon full payment of the mortgage money on the agreed date.

In an English mortgage, the mortgagor transfers full ownership of the property to the mortgagee as security. The mortgagee will return or re-transfer the property to the mortgagor once the agreed-upon mortgage money is fully repaid.

Personal Liability

In an English mortgage, the mortgagor is personally liable to repay the mortgage debt by the agreed-upon date. The agreement to repay is a crucial aspect of this type of mortgage.

Remedy Available

If the mortgagor defaults on payment, the mortgagee can sell the mortgaged property to recover the debt.

No Absolute Interest

While the property is transferred absolutely to the mortgagee, it is subject to the provision of re-transfer if the mortgagor repays the mortgage money. Therefore, the mortgagee has an interest in the property but with the right of redemption.

In an English mortgage, when the mortgagor transfers the property to the mortgagee, two circumstances may arise:

Mortgagor repays the amount: If the mortgagor repays the agreed-upon amount to the mortgagee on the specified date, the property that was transferred absolutely will be reconveyed to the mortgagor.

Mortgagor defaults on payment: If the mortgagor fails to repay the amount on the specified date, the mortgagee has the right to sell the property and recover the debt. However, the mortgagor is personally liable for repaying the debt.

Rights of the Mortgagee

In an English mortgage, the mortgagee has the right to possession, even if the right of entry is not explicitly stated. The mortgagee can retain possession until the full amount is repaid. If the mortgagee is in possession and receiving profits from the property, those profits will be used to reduce the mortgagee’s dues.

For example, if B, the mortgagor, sells the property to A through a sale deed, and B defaults on payment, A only needs to register the sale deed as they have been given absolute rights over the property.

Mortgage by deposit of title deeds (Equitable Mortgage) [Section 58(f)]

Section 58(f) describes a mortgage by the deposit of title deeds. In this type of mortgage, a person in specific towns, such as Calcutta, Madras, and Bombay, or in any other town specified by the State Government, delivers documents of title to immovable property to a creditor or their agent with the intention of creating a security on the property.

In English Law, this type of mortgage is referred to as an “equitable mortgage” as it involves the deposit of title deeds without additional formalities or a written document. 

This type of mortgage provides flexibility to the business community when there is an urgent need to raise funds before the opportunity to prepare a mortgage deed arises. This mortgage does not require a written document and is not affected by registration laws since it is an oral transaction.

The basic elements of a mortgage by the deposit of title deeds are:

• Existence of a debt.
• Deposit or delivery of the title deeds.
• The intention that the deeds will serve as security for the debt.

Territorial Restrictions

It’s important to note that this type of mortgage can only be made in specific areas designated by the State Government and not everywhere in India. The restriction applies to the location where the deeds are delivered, not the situation of the property being mortgaged. Depositing the deeds beyond the specified area will not create a mortgage or a valid security.

Existence of Debt

The debt can be an existing one or a future obligation. The transfer of an interest in any property to secure the payment of money, either advanced or to be advanced, or to fulfil an existing or future debt, or to perform any obligation resulting in a pecuniary obligation is considered a mortgage. Clause (f) provides one way of creating a mortgage, which is the equitable mortgage by the deposit of title deeds.

Deposit of Title-Deeds

Physical delivery of the documents is not necessary; constructive delivery is sufficient. A valid equitable mortgage does not require all the title documents to be deposited, but the deposited deeds should be genuine, relevant to the property, and serve as material evidence of title. Suppose a title deed is not included in the deposited documents and there are other documents that establish the person’s title to the property, but they are not deposited. In that case, an equitable mortgage is not created.

Intention to Create Security

The essence of the transaction lies in the intention that the title deeds will serve as security for the borrowed money (debt). Simply handing over the title deeds from one person to another does not create a mortgage. The delivery of the deeds must fulfil the agreement that they will serve as security for the debt.

The intention to create security is factual, determined on a case-by-case basis through presumptions and evidence, whether oral, documentary, or circumstantial. It is a question of fact, not a question of law.

In the case of United Bank Of India v Messra Lekharam Sonam and Co, the court established that the submission of the title deed relating to the property is the essential requirement for it to be considered as security. No further requirements or formalities are necessary to create a valid mortgage. This ruling emphasizes the importance of the title deed as the primary element in establishing the security for a mortgage.

It is worth noting that each case’s specific facts and circumstances can influence the court’s decision. However, this case clarifies that the submission of the title deed alone is sufficient to create a valid mortgage without any other additional requirements or formalities.

Anomalous Mortgage [Section 58(g)]

Clause (g) of Section 58 defines an anomalous mortgage as a mortgage that does not fall into the categories of a simple mortgage, a mortgage by conditional sale, a usufructuary mortgage, an English mortgage, or a mortgage by deposit of title deeds.

The purpose of including clause (g) was to recognize and protect various customary mortgages that exist in different regions of the country. An anomalous mortgage is essentially a combination of two or more types of mortgages.

The rights and liabilities of the parties involved in an anomalous mortgage are determined by their contractual agreement as stated in the mortgage deed. Additionally, local usage and customs may also influence the rights and liabilities to the extent that the contract does not cover them.

An anomalous mortgage is created through an agreement between the mortgagor and the mortgagee based on their terms and conditions. It is termed “anomalous” because it does not fit into the established categories such as simple, usufructuary, mortgage by conditional sale, and so on.

For example, an anomalous mortgage could involve a combination of a usufructuary mortgage and a mortgage by conditional sale. In this case, the mortgagee is given possession of the property for a specific period with a condition that if the debt is not repaid, the mortgage will be treated as a mortgage by conditional sale. This creates a situation where the mortgage is both usufructuary and by conditional sale, making it an anomalous mortgage.

The remedy available in an anomalous mortgage depends on the terms of the mortgage agreement. If the agreement allows for it, the mortgagee has the right of both “foreclosure” and “sale.” If the debt is not repaid, the mortgagee can become the property owner through foreclosure or sale, as specified in the agreement.

In the case of Hathika v Puthiya Purayil Padmanathan, the mortgagor borrowed a specific amount from the mortgagee and also handed over the property as security. According to the terms of the agreement, the mortgage amount was supposed to be repaid within a period of 6 months. In the event of non-payment, the mortgagee had the right to sell the property and recover the amount. Although the document described it as a usufructuary mortgage, the court classified it as anomalous. The court reasoned that the mortgage exhibited characteristics of both a simple mortgage and a usufructuary mortgage.

Mortgagor’s Right of Redemption 

The mortgagor can exercise the right of redemption in a mortgage through the mortgage deed. It can only be exhausted if an agreement between the parties, a court decree, or a statutory provision restricts the mortgagor from redeeming the mortgage. The mortgagor’s right to redeem arises when payment is made to the mortgagee, and it can only be limited by the actions of the parties involved.

There are two additional terms related to mortgages that are important to understand:

Sub Mortgage

When a mortgaged property is mortgaged again, it is called a sub mortgage. This occurs when the mortgagee mortgages their interest in the property to another party. For example, if Mr X mortgages his house to Mr Z for ₹15,000 and Mr Z further mortgages his mortgagee rights (such as the right to sue the mortgagor in case of default or possession of rents) to Ms B for ₹5,000, it creates a sub mortgage.

Puisne Mortgage (also known as Pari Pasu Mortgage)

When a mortgagor mortgages the same property to another person to secure an additional loan, it is referred to as a puisne mortgage. For instance, if a property valued at ₹1,00,00,000 (1 crore) is given as security to Bank of Baroda for a loan of ₹10,00,000 (10 lakh), and the same property is used as security for another loan of ₹5,00,000 (5 lakh) from Syndicate Bank, the loan from Bank of Baroda is considered the first mortgage, while the loan from Syndicate Bank is the second or puisne mortgage. 

Syndicate Bank becomes the puisne mortgagee and can recover its debt once Bank of Baroda’s claim is satisfied.

A puisne mortgage is allowed only with the permission of the first mortgagee and after the valuation of the mortgaged property.

Conclusion 

Understanding the various aspects of mortgages is essential for both borrowers and lenders. The different types of mortgages are simple mortgages, mortgages by conditional sale, usufructuary mortgages, English mortgages, mortgages by deposit of title deeds, and anomalous mortgages. They offer different rights and obligations to the parties involved. The right of redemption is a key aspect of mortgages, allowing the mortgagor to reclaim the property upon repayment of the mortgage money.