This Article is authored by Rhea Banerjee, pursuing B.A.LL.B from Indore Institute of Law.
Mortgage is a term commonly used in transfer of property it involves temporary transfer of property against a loan which has to be re-transferred once the loan amount is paid off. Mortgage basically includes conveyance of property as security for the payment of debt or performance of the duty and the conveyance becomes void once the debt is paid off by the debtor.
Mortgage is also referred as debt instrument which is secured against the immovable property of the debtor wherein the debtor has to return the principal amount along with the stipulated interest over it, once the payment is paid off then the lender is obliged to return the property back to the borrower. Mortgage is popularly known as “Claims on property” or “Liens against Property”.
The term mortgage was derived from an old French word which meant “dead pledge”, mortgage was called a dead pledge as the pledge comes to an end when the stated obligation comes to an end or in case the debt is not repaid back then the property is taken for foreclosure or for sale by the lender. The key function of mortgage is to provide security to the lender against the money or loan borrowed.
In a mortgage, there are two essential parties i.e., mortgagor and mortgagee, mortgagor is the person who transfers his property or gives the possession of the property to the lender and mortgagee is the transferee who has rights over the mortgaged property till the debt is paid back. Let’s have a look into the rights and liabilities of mortgagor and mortgagee as mentioned under the Transfer of Property Act, 1882.
Rights And Liabilities Of Mortgagor –
Whenever a mortgage deed is constituted, there are number of rights and liabilities in favour of mortgagor as well as mortgagee, and either of them can invoke his right in case of any damage is caused to the mortgaged property by the other party or under the supervision of the other party. The rights and liabilities of the mortgagor are stated as follows-
1. Right to Redemption (Section 60)
One of most significant rights of mortgagor is the right to redemption or right to redeem his own property once the debt amount is paid off. This right puts an end to the mortgage as the property is returned back to the mortgagor after his dues are cleared. The right to redeem his property further provides three more rights to the mortgagor which are as follows-
1.1 Right to end mortgage deal
1.2 Right to re-transfer the property in his own name
1.3 In case the there was no transfer, just possession was delivered, then the mortgagor has the right to take back the possession of the property
In the landmark judgment of Noakes & Co. v. Rice (1902) AC 24, the defendant (Rice) was a dealer who had mortgaged his property along with the premise and its goodwill to the petitioner (Noakes) subject to the condition that if Rice paid back the debt to Noakes the property will be re-transferred on his name. But the document attached to the deal didn’t state about the amount which was due on Rice and thus Rice faced an issue in redeeming his property and the deed entered by him didn’t given him absolute right over his property. Thus, it was held by the House of Lords that anything which obstructs or comes in the way of right to redemption of mortgagor is bad and came with the phrase “once a mortgage always a mortgage” and clarified that mortgage is not reducible.
This clause was introduced to protect the interest of mortgagor, as right to redeem is one of the most essential rights of mortgagor and there should be no specific condition which clogs this right of mortgagor to redeem his own property. In the case of Gulab Chand Sharma v. Saraswati Devi, the same principle was emphasised by the Supreme Court that there can be no stipulation of mortgage deed over the redemption clause as it was void and cannot be enforced at any cost.
Another case of Stanley v. Wilde (1899) 2 Ch 474, it was decided that even under condition where the mortgagor fails to pay his debts or the loaned amount, wouldn’t take away the right to redemption of the mortgagor, and if there is any such provision clogging the right to redeem, then it will be considered void.
Although, there are some exception to right to redeem of the mortgagor, such as in case some illegal act of the parties or by the operation of law or if any decree is passed against the right to redeem of the mortgagor, then the right will get extinguished.
2. Obligation to transfer the property to third party instead of the mortgagor (section 60-A)
This right was added in the Transfer of Property Act much later through an amendment in 1929. Under this right the mortgagor can ask the mortgagee to transfer the mortgage debt as well as the mortgaged property to a third person as directed by the mortgagor. The main purpose behind this amendment was to help the mortgagor pay off his debt/loan by creating an encumbrance from a third party over the same security.
3. Right to inspect and produce the documents (section 60-B)
This section was also added from the Amendment Act 1929 and it was stated that even the mortgagor has the right to ask the mortgagee to present the documents of the mortgaged property which are in his possession for the purpose of inspection, given on notice of reasonable time. But the expenses that are incurred by the mortgagee to procure those documents for inspection are to be borne by the mortgagor and this right is available till the mortgagor has the right to redeem.
4. Right to recover the possession (section 62)
This section provides the right to usufructuary mortgagor that he can recover the possession of the mortgaged property along with the mortgage deed entered by him on the condition if he has paid the principal amount of loan or on the expiry of the prescribed time stated for the payment of mortgage amount.
In the case of K Variath v. PCK Haji, it was held by the Apex Court that the usufructuary mortgagor was not entitled to recover his possession of the mortgaged property just on the basis of an oral mortgage as there was no legit proof for registration of the transfer but it was open for the mortgagor to recover the possession on the merits of his title of property.
5. Right to Accession (Section 63)
The right to accession means the mortgagor is entitled to the additions which are made in the mortgaged property while it was in the custody of the mortgagee. Accession basically means additions to the property made when the property is in the possession of mortgagee. There are two types of accession-
- Artificial accession means when some extra efforts or additions are made by mortgagee to upgrade the value of the land
- Natural accession means the addition done without any external efforts done over the property
When the accession is made by the mortgagee to the mortgaged property and it is inseparable then the mortgagor will be entitled to such accession but he needs to pay the expenses spent by the mortgagee while acquiring the accession.
In cases where the possession lies with the mortgagor and separate enjoyment of the property is not possible, then it is the duty of the mortgagor to pay the necessary amount of the accession along with the principal amount and it is also the liability of mortgagor to protect the property from any sort of destruction, forfeiture or sale or if it is made with the assent of mortgagee, then to pay the loan amount along with the interest as decided in the deed.
6. Right to improvement (section 63-A)
According to this section in case the mortgaged property has been improved while it was in the possession of the mortgagee then the mortgagor shall be liable for such improvements while redeeming his possession and if there is no such contract contrary with regard to the improvements and the mortgagor is not liable to pay the for the improvements made by him unless-
- The improvements were made by the mortgagee to preserve the property from some threat or destruction or with the permission of the mortgagor
- The improvements were made by the mortgagee with the approval of a public authority
7. Right to Renewed Lease (Section 64)
In case the mortgagor has entitled a leasehold property as the mortgaged property and during the duration of the mortgage, the lease is renewed then on redemption of the property the mortgagor shall be eligible for the benefits of the renewed lease and this right is available to the mortgagor unless he enters into any contract which is contrary to this condition with the mortgagee.
8. Right to grant a Lease (section 65-A)
This right was too introduced in the Amendment act of 1929, and before this right came into existence the Act didn’t allow the mortgagor to grant a lease of the mortgaged property on his own but only if the mortgagee permitted to. Now, post the amendment the mortgagor was allowed to grant a lease of the mortgaged property if he has the possession of that property subject to the following conditions-
- The conditions of the lease should be as per the local laws and customs to avoid any further fraudulent transaction
- No rent or premium shall be paid prior by the mortgagee
- The contract cannot contain any provision with regard to renewal of lease
- Every such lease shall be enforced within a period of 6 months from the date of execution of the lease
- The term of the lease should not be more than 3 years in total where the mortgaged property is a building.
Along with the rights comes certain liabilities too, thus the liabilities conferred upon the mortgagor are-
1. Liability to avoid waste (section 66)
Under this section, the mortgagor has the liability to not commit any such act which might lead to waste of property or any such act which is detrimental to the value of the mortgaged property. Waste can be divided into 2 types-
- Active waste is the kind of waste when the act of the mortgagor would lead to reduction in the value of the mortgaged property and the mortgagor will be liable to the mortgagee
- Permissive waste is minor waste caused by the mortgagor while he has the possession of the mortgaged property, but he won’t be liable to the mortgagee for this waste
2. Liability to indemnify for defective title of property (section 65)
It is duty of mortgagor to indemnify the mortgagee, if the title of the property is found defective. A defective title can be understood as the situation where any third party is claiming over the mortgaged property or intervening with the mortgaged property. Thus, the mortgagor will be liable to pay the damages for the same to the mortgagee if any expenses are incurred by the mortgagee while preserving the title of the property.
3. Liability to compensate mortgagee (section 65(c))
In case, where the mortgaged property is in the possession of the mortgagee, who is paying all the taxes and public charges till the property is redeemed back to the mortgagor, then a liability will arise on the mortgagor to compensate the mortgagee for the expenses incurred by him. But in cases, where the property is in possession of the mortgagor, then he will be liable to pay all the taxes and public charges levied on the property and not the mortgagee.
4. Liability to direct rent of the lease to the mortgagee (section 65(d))
When the property is leased by the mortgagor, then it would be the duty of the mortgagor to direct the rents and profits of the lease to the mortgagee till the property is not redeemed back by the mortgagor. The mortgagor shall direct the lessee to send the rents directly to the mortgagee.
Rights and Liabilities of Mortgagee –
Once the property is mortgaged in the name of mortgagee, even the mortgagee attains some rights and liability towards the mortgaged property. In fact, the mortgagee possesses one right against the property and the other right against the mortgagor.
1. Right to foreclosure (section 67)
As per this section, once the time has lapsed to pay the mortgage money or at any time before the decree for the redemption of the mortgaged property has been passed after the payment of the loan amount, the mortgagee can redeem the property or get a decree from the court to sell the property. In the case of K. Vilasini v. Edwin Periera, AIR 2009 SC 104, it was noted that an order of foreclosure is passed only after determining the kind and nature of mortgage and the parties who are operating within the mortgage.
The right of foreclosure is usually invoked when the mortgagor fails to pay the debt amount in the given time period and his right to redeem the property has also expired due to default in his payment. Thus, the mortgagee can file a suit of decree to debar the mortgagor from his redemption rights.
2. Right to sue (section 68)
The mortgagee has the right to sue the mortgagor in the following cases to retrieve his mortgage money-
- Where the mortgagor is personally bound himself to pay the debt
- In case where the mortgaged property is completely or partially destroyed without any fault of them mortgagee
- In case where the mortgagee is destituted from the whole or part of the security by any faulty act of the mortgagor
- In specific mortgage, where the mortgagee is entitled to possession of the security but the mortgagor fails to do so
The Court can put a stay on all the suit and proceedings as per the suit filed by the mortgagee until the mortgagee exhausts all its remedies or abandons the security property and if decided in favour of mortgagor, re-transfers the property.
3. Right to sell (section 69)
As per this section, the mortgagee has the right to sell the mortgaged property without getting a decree or order from the Court. When the mortgagor fails to pay the mortgage money in the stated time period, mortgagee is entitled to sell the property to recover the mortgage money without the intervention of court.
But there are only certain conditions under which the mortgagee has this right to sell the property without the permission of Court. They are-
- Where the mortgage is an English Mortgage and the mortgagor and mortgagee are not Hindus, Muhammadan, Buddhist or a member of any race, sect, tribe or as stated by the official gazette of the State government.
- Where this power of mortgagee is explicitly stated by the mortgagee in the mortgage deed and the mortgagee is itself government and the property is located in specified towns i.e. Calcutta, Madras or Bombay originally
This right to sale without intervention of Court is independent of the right to have receiver of the property appointed under section 69A and right to sale can be exercised after the appointment also. This was mentioned in the case of Saraswati Bai v. Vardarajalu N Dicker, 1955 Mad. 1310, that the power of sale of the mortgagee will not affect the ordinary right of realization of suit.
4. Right to accession (section 70)
Accession are the additions made to the mortgaged property as stated above, and this section mentions that after the date of execution of the mortgage deed if any additions are made to the property, then even the mortgagee shall have rights over those accessions for the purpose of its security of his mortgage money.
This is section is quite the opposite of section 63 where the mortgagor has the right over any accession made by mortgagee, but under this section the mortgagee can claim over the acquired accession as part of the security only enforce his authority on them.
5. Right to renewal of lease of the mortgaged property (section 71)
As per this section, when the mortgaged property is under lease and the mortgagor has renewed the lease of the property, then even the mortgagee shall be entitled to the benefits of the renewed lease and consider it as part of security only unless anything contrary has been stated in the contract.
6. Right of mortgagee to spend money (section 72)
This section applied on the mortgagee when the property is in possession of the mortgagee and the mortgagee has the right to spend on the mortgaged property if he finds it is necessary and unless there is contract contrary to that. The following conditions are mentioned where the mortgagee can spend money-
- In case of destruction, forfeiture of property, the mortgagee may spend money to protect it
- To support the title of the mortgaged property
- For defending his own title over the mortgaged property against the title of the mortgagor
- The mortgagee can also spend money to renew the lease of the mortgaged property
- He can also insure the property if it is of insurable nature
The liabilities of the mortgagee are as follows-
1. Mortgagee must bring one suit for several mortgages (section 67A)
Section 67A of the Act states that if a mortgagee has two or more mortgages of same or different properties from the same mortgagor, then with respect to each mortgagee he has the right to get a decree of the court under section 67 and in case the mortgagee wishes to sue the mortgagor on anyone of the mortgages, then he shall have to sue all the mortgages where the mortgage money is due on part of the mortgagee.
2. Duty of mortgagee when the property is in his possession (Section 76)
When the mortgaged property is in the possession of the mortgagee and during the continuation of the mortgage, the mortgagee is bound by the following liabilities-
- To manage the property well in manner of ordinary prudence
- Duty to collect rents and profits of the property to his best endeavour
- To pay the government dues duly while the property is in his possession
- To make the necessary repairs of the property unless it is contrary to the contract
- To not commit any act which may damage or deteriorate the value of the property permanently
- Duty to apply for insurance money for reinstating the property or in case he receives reduction in mortgage money from the mortgaged property
- To keep proper accounts of all the sums received and spent by him over the mortgaged property
- Duty to apply for rents and profits for discharging the interests of principal amount and make certain deductions
Implication of Mortgage in Real Estate Regulatory Authority –
- The concept of mortgage is implicated in the arena of Real Estate also, as either it is used for raising funds to buy the real-estate property or the pre-existing property owners use their property to raise further funds by mortgaging that property. As per the legal process, the lender has the right to take possession over the premises and sell it to pay off his debt amount, if buyer fails to pay the amount.
- Under section 11 (4)(g) of the RERA Act, 2016 it has been clearly mentioned that it is the duty of the promoter to pay all the outgoings and expenses till the physical possession is transferred to the allottee and these expenses also include local taxes, mortgage loan and the interest amount on the mortgages and other liabilities.
- The proviso of section 11(4)(g) of the Act states that if the promoter fails to pay the outgoings which are collected from the allottees inclusive of the mortgage loan and interest after the transfer of the property then the promoter will have to continue to pay the expenses even after the transfer and for any further cost of legal proceeding which is taken by the authority.
- The general concern of the lenders is basically derived from the restriction that is imposed by Section 15 of the RERA Act, 2016 as it puts the lender (mortgagee) in a condition which is not pretty clear on the legislation side, and thus the question arises whether enforcement of the mortgage/ security would be equivalent to his majority rights and liabilities with regard to the project.
There are many ways to get the consent of allottees or to inform the allottees regarding the mortgage attached to the project by the promoter. Some of the ways are-
- To get a one-time consent from the allottees regarding the mortgage while the execution of the sale agreement. However, the promoter shouldn’t try the concept of blanket consent with the allottee like getting their consent while handing over the possession or at time of entering into agreement, instead it is the duty of the promoter to get an informed consent from the allottee by giving a full disclosure to them.
- In some State RERA Rules, the relief for such mortgage deeds has been provided, such as the Rule 8 of the Maharashtra Rules gives some comfort to the lenders who are registered on the website of the Authority. The authority has taken certain measure to secure the interest of other parties who are interested in the project through mortgage or investments are to be disclosed by the promoter on the official website of the Authority. Once the lender is registered on the website and his charges are visible on the site, then the Authority shall protect the interest of the lender. But it should be ensured by the lender that he is registered on the site by the promoter as it cannot be done by himself.
- In certain cases, the mortgage can be ensued only on the built-up areas of the as it is the traditional and old form of recovering the debt from the respective project. But it is very difficult to realise the absolute value of the built-up area until it is completely constructed, and the rights of the lender would remain unchanged even if a new developer is appointed by the Authority under section 8 of the RERA Act.
- In other cases, where the developer is in breach of the terms of RERA, it is possible he might be in breach of lending documents too, that it would have entered with the banks or any financial institution. Normally in case of default the banks like to enforce their mortgage over the development rights of the project. But as per section 8 of the RERA Act, the right of first refusal lies with allottees of the project on how to complete the construction whereas the bank or financial institutions want to enforce their right over the development right and sell it to a third party to recover their debt charges.
Thus, if we consider section 2(d) of the RERA Act, it defines “allottee” which means a person to whom the plot, apartment or building is allotted or sold or otherwise transferred by the promoter. The interpretation of “otherwise transferred” shall include mortgage transaction as mortgage is one of the forms of transfer of property under the Transfer of Property Act, 1882 like sale, lease, etc. Hence, even the banks/financial institutions will come in the category of allottees and they shall have the same rights as of allottee.
Implication of Mortgage in Contract Act, 1872 –
One of the common implications of mortgage in Contract Act as well as Transfer of Property Act is via “assignment” in form and content. Assignment basically means transfer of contractual rights or liability by one of the contracting parties to some other third party who is not party to the contract or transfer deed. Thus, whenever lenders want to secure their rights and liabilities, they often choose this option in order to save themselves from any further adversities. Lender usually secures his transaction either by mortgage of immovable property or by hypothecation of movable property of the borrower.
Lately, in certain cases where there are huge transactions made, the lenders have added the concept of assignment of the contractual rights along with the mortgaging and hypothecation of the properties, depending upon the nature of the transaction.
Usually, the lenders are always under the risk of credit default on the part of the borrowers and thus, in order to maintain the securities over the borrower, the lender often asks for assignment of the borrowers rights in his company or project as one thing which should be kept in mind is that the tangible assets of the borrower can be mortgaged whereas the intangible ones cannot be and hence the assignment of the rights comes into the picture, as their physical mortgaging or hypothecation is a bit debatable.
The borrowers dealing in finance project cases often assign their rights of the company to the lender by executing a registered mortgage of the rights which is arising out of their project. As we discussed above in RERA Act, many promoters often assign their developmental rights to the lender as way of mortgage, which often meads to many complex procedures but is widely practised. Sometimes, the lender doesn’t want to execute another deed of assignment, and hence just add a clause of the assignment to the deed of registered mortgage, the lender executes over the immovable properties of the borrower.
Thus, the original concept of mortgage came into existence through the Indian Contract Act in form of pledge, where a security is kept for the money borrowed but in case of mortgage the security has to be immovable property and the lender has the right to foreclosure in case of default of payment whereas in pledge the property is movable and lender doesn’t have the right to foreclosure. Apart from that the further content of mortgage is discussed in the Transfer of Property Act, 1882.
Implication of Mortgage in Consumer Laws –
Mostly in consumer cases, the issue of mortgage is often seen with the banking institutions, as the most common service provided by the bank is “loan” and a loan is granted only after verifying the assets of the respective company or person or by way of keeping some property as security in form of mortgage. Let’s have a better view of cases of mortgage in the consumer law.
- In case of M/s Shankar Tube Wells v. the Branch Manager, SBI 1997 (2) CPR 3(NC), the complainant had filed the suit for deficiency of service on the part of the bank, as the bank had failed to return the title deeds of the borrower deposited with the bank for creating an equitable mortgage. The bank had further claimed lien over the title deed under section 171 of the Contract Act, 1872 stating that the complainant was guarantor for another loan transaction which was to be recovered from the bank. The State Commission had held the issue raised was in regard to the borrowings of the complainant and thus the complainant was not considered as a consumer within the meaning of the Consumer Protection Act, 1986.
- In case of Secretary Mayuram Co-operative Urban Bank Ltd. & Anr v. John Nicholson 1998 (1) CPR 95(SCDRC-Tamil Nadu), the complainant was refused for a second loan by the bank as he failed to execute a fresh mortgage for the second loan. It was averred by the complainant that he had repaid the first loan and the mortgage executed for the first one was continuing in nature, so there was no need for a fresh mortgage to be executed. When the matter was heard by the District Forum, the matter was given in the favour of the complainant. But the State Commission reversed the order of District Forum and held that there was no such specific law for continuing mortgage, and if the complainant is asking for a fresh loan then a fresh mortgage must be executed. Thus, the bank not granting loan to the complainant for the given reasons holds merit.
- In case of Xavier Estates v. Senior Manager, Indian Bank 1999 (2) CPR 160 (SCDRC-Tamil Nadu), it was held that non-release of the documents which were deposited by the borrower as a security after the repayment of the loan cannot be counted as consumer dispute, but has to be filed as a civil suit. Further it was also noted that mortgagor being another person, only he has the right to ask for return of his title deeds and not the complainant.
Thus, these were a few cases which have been dealt in the Consumer Forums and State Commissions for deficiency of services by the bank in their mortgage deeds and many of them, were directed to file a civil suit under the Civil Procedure Code, rather than under the Consumer Protection Act.
With this, we come to an end to the long-drawn article of mortgage where we learnt the rights and liabilities of mortgagor as well as mortgagee and how both of them are equally responsible to take reasonable care of the mortgaged property until the mortgage is discharged off. Further, we also discussed the different interpretations of mortgage in other statutes apart from the Transfer of Property Act such as Real Estate Regulatory Authority Act, Indian Contract Act and Consumer Protection Act which gave a multi-directional approach of the application of mortgage and the problems faced by the lenders to avail their securities and how can they be protected within the other statutes.
FAQ (FREQUENTLY ASKED QUESTIONS)
1. What are the rights and liabilities of mortgagor?
The rights and liabilities of mortgagor are stated below-
1. Right to redeem the mortgaged property
2. Right to transfer mortgaged property to a third party instead of re-transferring the property to himself
3. Right of inspection and production of documents
4. Right to additions made by the mortgagee
5. Right to improvements of the mortgaged property
6. Right to a renewed lease as well as can grant a lease
1. Duty to avoid waste of the property
2. Duty to compensate for defective title
3. Duty to compensate mortgagee for any loss caused to the mortgaged property while it is in his possession
4. Duty to direct rent of a lease to mortgagee directly via the lessee
2. What are the types of mortgage?
There are various kinds of mortgage but the Transfer of Property Act recognizes six types of mortgages which are defined from Section 58(b) to Section 58(g) of the Act. They are-
- Simple mortgage
- Mortgage by conditional sale
- Usufructuary mortgage
- English mortgage (also known as equitable mortgage)
- Mortgage by deposit of title deeds
- Anomalous mortgage
3. What do you mean by transfer of mortgage?
Mortgage is a transaction where the borrower or lender has the right to assign or transfer the existing mortgage usually a loan (mortgage money) for purchasing of property (mortgage property) from the current holder to another person or entity.
4. What is the difference between mortgagor and mortgagee?
Mortgagor is the borrower who keeps his property as a security as against the loan or debt amount whereas the mortgagee is the lender who lends the loan amount to the borrower for purchasing a property or any other purposes.
5. Whether unrecorded mortgage is enforceable?
Usually, the law has stated that an unrecorded mortgage can also be enforceable between the two parties-mortgagor and mortgagee, but only a bonafide purchaser will have the right to acquire the mortgaged property freely and clear the mortgage.
6. What is marshalling and contribution?
These two are common concepts one comes across while dealing with a mortgage, Marshalling is defined under section 81 of the Transfer of Property Act, 1882 and it means to secure the interests of subsequent mortgagees by satisfying the debt amount out of the property which is not mortgaged to them.
Contribution is defined under section 82 of the said Act and it states when two or more person have distinct rights over separate parts of the same property which is mortgaged, then all those persons will be proportionately liable for the repayment of the debt as much part of the property is owned by them.
7. What happens when mortgage is assigned?
Assignment of mortgage occurs when the mortgage is assigned by the lender to a third party and once the loan is transferred to the new lender, he shall be considered as the new mortgagee and assume the same rights and liabilities of the old mortgagee as mentioned in the mortgage deed.