Foreclosure is the legal process wherein a lender attempts to recover the amount of loan. Section 67-68 of Transfer of Property Act deals with it.
Meaning of Foreclosure of Mortgage
Foreclosure refers to the legal process wherein a banker/financier/lender attempts to recover the amount of loan from a borrower who has discontinued making payments to the lender thereby constraining the sale of assets being used as the collateral security for the loan.
In a nutshell, mortgage lender, mortgagee or other lien holder obtains a termination of mortgage and the borrower’s right of redemption by the court’s order. Thus, through the process of foreclosure, the lender seeks to foreclose and terminate the mortgagor’s right to redemption.
In other words, foreclosure refers to both, a property and a process. In order for the right of foreclosure to exist, it is mandatory to have missed payments on the property loan consequent to which the mortgaged property must go back to the bank (lender) and thus, becomes the real estate property. However, the process of foreclosure is different in judicial and non-judicial states. Under judicial foreclosure a lawsuit is filed in court however, local laws distinguish the type of foreclosure so used.
Right to foreclosure
Whenever a loan is granted by the bank against the security of some immovable property, such as in case of a home loan, then the borrower creates a mortgage on the immovable property, i.e. on the property so mortgaged (here, the home). The concept of the right of foreclosure as well as the right to redemption comes into question in case of the mortgage. The right to foreclosure merely means a right available to the mortgagee for the purpose of recovering his outstanding loan amount. The relevant provisions to this subject of discussions are Section 67 and Section 68 of the Transfer of Property Act, 1882.
Under section 67, Transfer of Property Act, 1882, the right of foreclosure is the right of the mortgagee (the bank). This right is available to the mortgagee (lender) when the mortgage money is due and not paid by mortgager (borrower). Thus, the accessibility to the right of foreclosure is readily obtainable to the mortgagee on the instance when the mortgager haven’t paid the principle and interest amount of loan on due date. In comparison to the right of foreclosure, the right of redemption is available to the mortgager when the amount of loan has been paid back. i.e. the mortgager by paying back the mortgage money possess the right to take back the mortgaged property.
In case of foreclosure of the property, the mortgagee can obtain a court decree which debars the mortgager of his right of redemption. So, once this decree is obtained by the mortgagee through the court, a bar will be placed on the mortgager for using his right of redemption.
Section 67 of the Transfer of Property Act, 1882, explains the conditions where the mortgagee can either sell the property, do its foreclosure or neither sell it nor do its foreclosure. There are six types of mortgage namely:
1) Simple Mortgage
2) Mortgage by conditional sale
3) Usufructuary Mortgage
4) English Mortgage
5) Mortgage by deposit of title deeds
6) Anomalous Mortgage
In case of a simple mortgage, either the sale of the mortgaged property is possible or one can individually file suit against the mortgagor whereas the right of foreclosure is available only on the mortgage by conditional sale. Under the usufructuary mortgage neither the right to sale nor the right to foreclosure is available. English mortgage enumerates the right to the sale. Lastly, the right to sell or foreclosure in case of anomalous mortgage depends upon the terms of the mortgage. Basically, anomalous mortgage is defined as the type of mortgage which is not simple mortgage, english mortgage, mortgage by conditional sale, mortgage by deposit of title deeds and usufructuary mortgage. So, once the type of mortgage is decided, ultimately the right to sell or foreclosure will also be determined.
Once the right of foreclosure is used by the mortgagee, this consequently extinguishes the right of redemption of the mortgager. And once the right of redemptions is used, the right of foreclosure will be extinguished. The limitation period is 30 years from the date the right becomes available. Also, the right of redemption protects the rights of the mortgagor and he (borrower) can recover loans by foreclosure or sale of the immovable property.
Following mentioned are some conditions to exercise the right of foreclosure:
1) The money must be due for payment i.e. it must not be paid till the due date.
2) There should be no existing condition in the mortgage deed mentioning the waiving of the right to foreclosure.
3) The mortgager should not in any circumstances possess a decree of redemption of the mortgaged property.
In instances where the mortgagee possess two or more mortgages executed by the same mortgagor, then the mortgagee certainly possess the right to acquire a decree of foreclosure. But, if he sues to take decree on any one of the mortgages so available, then he would be bound to sue on all the mortgages in respect of which the mortgage money has become due.
Author Details: Yashika kapoor (student, Fairfield Institute Of Management And
Technology, GGSIPU, New Delhi)