Rights and Liabilities of Mortgagor and Mortgagee

The rights and liabilities of the mortgagor and mortgagee are of paramount importance in the realm of property transactions and financial lending.

The term “mortgage” can be understood as the transfer of an interest in the property, commonly known as collateral, from the borrower (mortgagor) to the lender (mortgagee) as security for a loan. This arrangement safeguards the lender if the borrower fails to repay the loan or becomes insolvent, as the lender gains rights over the mortgaged property.

The legal framework governing mortgages includes Section 58-104 of The Transfer of Property Act 1882 and The Indian Contract Act 1872.

Who is a Mortgagee?

The mortgagee, also known as the lender, can be an individual, a group of individuals, or an organization that extends a loan to the borrower. In return, the mortgagee receives the mortgage as security for the principal amount and the interest, collectively called mortgage money. The formal document that effectively transfers the mortgage to the mortgagee is the mortgage deed.

Who is a Mortgagor?

On the other hand, the mortgagor is the borrower who transfers the immovable property to the mortgagee. The mortgagor must repay the principal amount and the interest unless a contradictory contract is in place. If the mortgagor fails to fulfil these obligations, the mortgagee gains ownership of the mortgaged property and can recover the mortgage money through its sale.

For instance, let’s consider an example where A lends B an amount of rupees 50 lahks, and in return, B transfers his ancestral house (an immovable property) to A as security. In this scenario, A is the mortgagee, and B is the mortgagor.

Rights and Liabilities of Mortgagor and Mortgagee

The rights and liabilities of mortgagor and mortgagee are:

Rights and Liabilities of Mortgagor

Rights of Mortgagor

The Transfer of Property Act 1882 grants the mortgagor (the borrower) several rights to protect their interests. These rights include:

• Right to redemption
• Right to transfer mortgaged property to a third party instead of retransferring
• Right of inspection and production of documents
• Right to accession
• Right to improvements
• Right to a renewed lease
• Right to grant a lease

Right to Redemption (Section 60)

The right to redemption is a vital right granted to the mortgagor under Section 60 of the Act. This right allows the mortgagor to bring the mortgage to an end by reclaiming full ownership of the mortgaged property. The right to redemption encompasses three key rights for the mortgagor:

• Right to Terminate the Mortgage: The mortgagor has the right to end the mortgage arrangement by repaying the mortgage debt and any outstanding interest to the mortgagee.
• Right to Transfer Mortgaged Property: The mortgagor has the right to transfer the mortgaged property back into their name or to any other person’s name upon redemption. This enables the mortgagor to regain full legal ownership of the property.
• Right to Reclaim Possession: If the mortgagor delivered possession of the property to the mortgagee, the right to redemption entitles the mortgagor to take possession of the property upon redemption.

In the case of Noakes & Co. vs. Rice (1902) AC 24, the court clarified that any provision or condition restricting the mortgagor’s right to redeem the mortgaged property is considered a “clog” on the right of redemption and invalid. This principle was established to protect the interest of the mortgagor. The right to redemption persists even if the mortgagor fails to repay the loan amount. Provisions in the mortgage deed that obstruct or impede the right to redemption are deemed void, as seen in the case of Stanley v. Wilde (1899) 2 Ch 474.

Exceptions to the Right to Redemption

The right to redeem can be extinguished under three circumstances:

• By the Act of Parties: The right to redemption may be eliminated if both the mortgagor and the mortgagee mutually agree to do so.
• By Operation of Law: The right to redemption may be extinguished by the operation of certain legal provisions or circumstances.
• By Decree of the Court: In certain cases determined by the court, the right to redemption may be eliminated through a court decree.

Obligation to Transfer to a Third Party (Section 60A)

This right was introduced through the Amendment Act of 1929. Under this provision, the mortgagor is entitled to request the mortgagee to assign the mortgage debt and transfer the property to a third person as directed by the mortgagor. The purpose of this right is to enable the mortgagor to repay the mortgagee by obtaining a loan from a third party using the same property as security.

Right to Inspection and Production of Documents (Section 60B)

Section 60B grants the mortgagor the right to request the mortgagee to produce copies of documents related to the mortgaged property in the mortgagee’s possession. The mortgagor can exercise this right by giving reasonable notice to the mortgagee to allow for inspection of the documents.

However, the mortgagor will bear the expenses incurred for producing the documents, including the cost of copies or the mortgagee’s travel expenses. This right remains available to the mortgagor only if their right to redeem the mortgaged property exists.

Right to Accession (Section 63)

The term “accession” refers to any additions made to the property. Section 63 of the Act grants the mortgagor the right to claim any accession that has occurred to their property while it was in the custody of the mortgagee. There are two types of accession:

• Artificial Accession occurs when the mortgagor’s efforts have led to improvements or enhancements to the property, thereby increasing its value.
• Natural Accession refers to any additions to the property that happen naturally without any man-made efforts.

In cases where an accession is made to the property due to the efforts of the mortgagee or at their expense, and it becomes inseparable from the property, the mortgagor can be entitled to claim such accession. However, in such cases, the mortgagor must compensate the mortgagee for the expenses incurred in acquiring that accession.

If the accession is separate from the property and can be delivered independently, the mortgagee must hand it over to the mortgagor. In the case of an acquisition necessary to preserve the property from destruction, forfeiture, or sale, or if the acquisition was made with the mortgagor’s assent, the mortgagor is liable to pay the proper cost of the accession. This cost is treated as an addition to the principal amount and is subject to the same interest rate as payable on the principal or at the rate of nine percent per annum if no specific rate is fixed.

These provisions aim to ensure fair treatment of the mortgagor’s rights with regard to any improvements or additions made to the mortgaged property during the mortgage period.

Right to Improvements (Section 63A)

Under Section 63A of the Act, if the mortgaged property experiences improvements while it is in possession of the mortgagee, then upon redemption, and in the absence of any contract stating otherwise, the mortgagor is entitled to benefit from those improvements. The mortgagor is not obligated to compensate the mortgagee for these improvements unless:

• The mortgagee made improvements to protect the property or with the prior permission of the mortgagor.
• The mortgagee made the improvements with the permission of a public authority.

The purpose of this provision is to ensure that the mortgagor can benefit from any enhancements or developments that occurred during the mortgage period without bearing an additional financial burden.

Right to Renewed Lease (Section 64)

If the mortgaged property is a leasehold property, and during the mortgage period, the lease gets renewed, then upon redemption, the mortgagor is entitled to enjoy the lease benefit.

This right is available to the mortgagor unless they have entered into a contract with the mortgagee stating otherwise. This means that the mortgagor can continue to enjoy the leasehold property under the new lease terms after redeeming the mortgage.

Right to Grant a Lease (Section 65A)

The right allows the mortgagor to lease out the mortgaged property while they legally possess it. However, there are certain conditions that must be met:

• The conditions in the lease should be in accordance with local laws and customs to prevent fraudulent transactions.
• No rent or premium should be paid in advance or promised to the mortgagee.
• The lease contract should not contain any provision for the renewal of the lease.
• The lease must come into effect within six months from its execution.
• If the mortgaged property is a building, the term of the lease should not exceed three years in total.

Before this amendment, the Transfer of Property Act only allowed a mortgagor to lease out the mortgaged property with the mortgagee’s permission. This amendment empowers the mortgagor to lease the property independently, subject to the specified conditions.

Liabilities of a Mortgagor

In addition to the rights granted to a mortgagor, the Transfer of Property Act also imposes certain duties on them. The following are the duties of a mortgagor:

• Duty to avoid waste
• Duty to indemnify for defective title
• Duty to compensate mortgagee
• Duty to direct rent of a lease to mortgagee

Duty to Avoid Waste (Section 66)

The mortgagor has a duty not to engage in any activity that would waste the property or diminish its value. Waste can be categorized as permissive waste and active waste. Minor or permissive waste committed by a mortgagor in possession of the property does not render them liable to the mortgagee.

However, if the mortgagor commits major or active waste that significantly damages the property or reduces its value, they will be held liable to the mortgagee.

Duty to Indemnify for Defective Title

The mortgagor is responsible for compensating the mortgagee if any defect in the title of the mortgaged property arises, such as a third party making claims or interfering with the property.

In such cases, the mortgagor must reimburse the mortgagee for any expenses incurred in defending and protecting the title of the property.

Duty to Compensate Mortgagee

When the mortgaged property is in the possession of the mortgagee, and the mortgagee pays taxes and other public charges on the property, the mortgagor has a duty to compensate the mortgagee for these expenses. Conversely, if the mortgaged property is still in the possession of the mortgagor, it is their duty to bear all the public charges and taxes levied on the property.

Duty to Direct Rent of a Lease to Mortgagee

In cases where the mortgagor leases out the mortgaged property, it becomes their duty to instruct the lessee to pay the rent and other dues directly to the mortgagee.

These duties are aimed at ensuring that the mortgaged property is preserved and its value is maintained during the mortgage period, and the interests of both the mortgagor and the mortgagee are protected.

Rights and Liabilities of Mortgagee

Rights of Mortgagee

Right to Foreclosure or Sale

Section 67 of the Transfer of Property Act addresses the right to foreclosure or sale. It grants the mortgagee the authority to obtain a decree for foreclosure from the court after the mortgage money becomes due.

Right to Sue for Mortgage Money

Section 68 of the Transfer of Property Act outlines the circumstances in which the mortgagee has the right to sue for the mortgage money. These situations include when:

a. The mortgagor agrees to repay the money.

b. The mortgaged property is wholly or partially destroyed, except due to the wrongful act or default of the mortgagee.

c. The mortgagee’s security is wholly or partially deprived.

d. The mortgagee was entitled to possession of the mortgaged property, and the mortgagor failed to deliver it.

Power to Sale when Valid

Section 69 of the Transfer of Property Act specifies cases where a sale is valid. These include:

a. English mortgage between non-Hindus, non-Muslims, non-Mohammedans, and members of any race or sect notified by the State Government in the Official Gazette.

b. Government being the mortgagee, with an express provision for sale without the intervention of the court.

c. Mortgaged property situated in Calcutta, Madras, Bombay, or any other gazetted town or area.

Right of Accession

The mortgagee has the right of accession to any increased value or improvements made to the mortgaged property.

Right to Renewal of Lease

If the mortgaged property is under a lease, the mortgagee is entitled to seek lease renewal for security purposes.

Right to Reimbursement of Expenses

The mortgagee has the right to reimbursement, along with interest, for the expenses incurred for purposes such as preserving the mortgaged property.

Right to Mesne Mortgage

In cases where a property is mortgaged for successive debts to successive mortgagees, a mesne mortgagee has the same rights against subsequent mortgagees as they have against the mortgagor.

Liabilities of Mortgagee (Section 76)

Duty to Sue on Behalf of Other Mortgagees

The mortgagee is obligated to sue on behalf of all the mortgagees for whom the mortgage money has become due unless there is an express contract stating otherwise. This duty applies throughout the duration of the mortgage.

Duty to Manage the Property

The mortgagee has a duty to manage the mortgaged property with the same level of prudence and care that a person of ordinary prudence would use if the property belonged to them.

Duty to Collect Rents

The mortgagee is required to make their best efforts to collect the rents and profits from the mortgaged property.

Duty to Pay Government Revenue and Charges

In the absence of any contrary agreement, the mortgagee has a duty to pay government revenue and other public charges, as well as all rents, from the income derived from the property.

Duty to Make Necessary Repairs

Unless there is a contract stating otherwise, the mortgagee must make necessary repairs to the property within the limits of the property’s income.

Duty to Avoid Destructive Acts

The mortgagee must refrain from engaging in any acts that could lead to the destruction or permanent injury of the property.

Handling Loss or Damage due to Fire

Suppose the property is insured against loss or damage by fire. In that case, the mortgagee must either reinstate the insured property using the money obtained from the insurance policy or use it to discharge the mortgage debt, as directed by the mortgagor.

Duty to Maintain Clear Accounts

The mortgagee must keep clear, accurate accounts of all sums received and spent in relation to the mortgaged property and provide these accounts to the mortgagor upon request. The receipts from the property, or a fair occupation rent if the mortgagee personally occupies the property, shall be applied first against the interest on the mortgage money and then against the principal.

The mortgagee must also account for the receipts from the mortgaged property, and such accounting shall be taken in lieu of interest on the principal money given to the mortgagor.

Final Thoughts

The Transfer of Property Act provides a comprehensive legal framework for mortgage transactions, establishing the rights and liabilities of mortgagor and mortgagee. A mortgage is a valuable financial instrument that allows individuals or organizations to secure loans by offering their property as collateral.

For the mortgagor, the Act grants various rights, including the right to redemption, which allows them to reclaim full ownership of the property upon repayment of the loan and interest. Additionally, the mortgagor has the right to transfer the mortgaged property to a third party, inspect and access documents related to the mortgage, and enjoy any improvements or additions made to the property during the mortgage period.

On the other hand, mortgagees also have rights, such as the right to foreclose or sell the property to recover their dues if the mortgage money becomes due. They can sue for the mortgage money in specific circumstances, have the right to accession, and may obtain renewed leases for security purposes. Furthermore, mortgagees are entitled to reimbursement for expenses incurred in managing and preserving the mortgaged property.

Alongside these rights, both parties also have important duties to fulfil. Mortgagors must avoid waste, indemnify mortgagees for defective titles, and compensate them for expenses, among other responsibilities. Mortgagees, in turn, are bound to manage the property prudently, collect rents, and make necessary repairs when applicable.