Mortgage: Definitions, Types, and Legal Framework

Mortgage

As per section 58, A mortgage is the conveyance of an interest in immovable property as security for a loan, existing or prospective debt, or the performance of an obligation that may result in a monetary liability.

Other concepts:

Mortgagor

The mortgagor is the individual who transfers the interest in immovable property.

Mortgegee

The mortgagee is the recipient of the transferred interest.

Mortgage Money

The principal amount and any interest currently secured are referred to as mortgage money.

Mortgage Deed

The legal instrument effecting the transfer is known as a mortgage deed.

A mortgage involves transferring an interest in immovable property to secure a loan. The mortgagor retains ownership of the property while granting a partial interest to the mortgagee as collateral for the loan.

Essential

1. Transfer of interest to the mortgagee.

2. Interest must pertain to a specific immovable property.

3. There must be a Consideration to support the mortgage transaction.

TYPES OF MORTGAGES

As per Section 58 of the Transfer of Property Act, 1882 there are six types of mortgages:

1.Simple Mortgage

Defined in Section 58(b) of the Transfer of Property Act, a simple mortgage does not involve transfer of immovable property to the mortgagee. Instead the mortgagor undertakes to repay the mortgage money. The mortgagee has the right to sell the property in case of default and use the proceeds to recover the debt.

2. Mortgage by Conditional Sale

As per Section 58(c) a mortgage by conditional sale allows the mortgagee to sell the property if the mortgagor fails to pay the mortgage money by a specified date. On repayment the sale becomes void and the ownership reverts back to the mortgagor.

3. Usufructuary Mortgage

As per Section 58(d) in a usufructuary mortgage the mortgagor transfers the possession of the property to the mortgagee. The mortgagee can retain the possession till the debt is discharged and can collect the rents or profits from the property to adjust the interest.

4. English Mortgage

As per Section 58(e) an English mortgage is where the mortgagor transfers the ownership of the property to the mortgagee with the condition that it will be re-transferred back to the mortgagor on repayment of the mortgage money on a specified date.

5. Mortgage by Deposit of Title Deeds

As per Section 58(f) this type of mortgage occurs when the mortgagor deposits the title deeds of immovable property with the creditor as security in the specified towns notified by the state governments.

6. Anomalous Mortgage

Any other mortgage not covered above is an anomalous mortgage as per Section 58(g) of the Transfer of Property Act, 1882.

RIGHT AND LIABILITIES OF MORTGAGOR

Mortgagor’s Rights

-Right to Redeem:

As per Section 60 of Transfer of Property Act, 1882, the mortgagor has a right to redeem the mortgage. Once the debt becomes due on the specified date, the mortgagor can reclaim the mortgaged property by paying the mortgagee the amount due. The right to redeem is a statutory and legal right which cannot be extinguished by any agreement.

-Right to Directly Transfer to a Third Party:

As Section 60A of Transfer of Property Act, 1882 the mortgagor can instruct the mortgagee to assign the mortgage debt and transfer the property to a third party instead of the mortgagor. This provision is to enable the mortgagor to discharge the debt by getting a loan from another person against the same property.

-Right to Inspection and Production of Documents:

As per Section 60B of TPA the mortgagor can inspect at any time the title documents of the mortgaged property in the possession of the mortgagee. Cost of inspection shall be borne by the mortgagor.

-Right to Accession

According to Section 63 of the Transfer of Property Act, 1882, if you've got a mortgage going on and you add stuff to the property while you still own it, you have the right to keep those additions after you've paid off the mortgage. It doesn't matter if the additions happen naturally or if you acquire them in some way.

-Right to Improvements

As per Section 63A of the Transfer of Property Act, 1882, if you make any improvements to the property while the mortgagee is in possession of it, you still have the right to keep those improvements when you finally pay off the mortgage. But there's a catch. If the mortgagee made any improvements to protect the property from getting destroyed, you'll have to reimburse them for the costs.

-Right to Renewed Lease

As per Section 64 of the Transfer of Property Act, 1882, you're entitled to enjoy the benefits of that renewed lease once you've redeemed the mortgage.

-The Right to Grant a Lease

As per section 65A of the Transfer of Property Act, 1882, the mortgagor has the authority to lease out property that is lawfully in the possession of the mortgagee. Such a lease shall be legally binding on the mortgagee, provided it meets the following conditions:

1. The lease must conform to local laws, customs, or usages.

2. No rent or premium shall be payable in advance.

3. The lease must not include a provision for renewal.

4. The lease shall commence within six months from the date it is executed.

5. In the case of lease agreements for buildings, the term of the lease shall not exceed three years.

Liabilities of Mortgagor

Sections 65 and 66 of the Transfer of Property Act, 1882 outline the responsibilities of the mortgagor.

-Covenant for Title

Under Section 65(a) of the Transfer of Property Act, 1882, there is an implied covenant that the mortgagor warrants the title transferred to the mortgagee belongs solely to the mortgagor and is transferable. Any breach of this covenant renders the mortgagor liable for damages.

-Covenant for Defense of Title

According to Section 65(b) of the Transfer of Property Act, 1882, the mortgagor is impliedly obligated to defend the title against any challenge or assist the mortgagee in defending the title. The mortgagor bears all expenses incurred in defending the title.

-Covenant for Payment of Public Charges

As per Section 65(c) of the Transfer of Property Act, 1882, upon execution of the mortgage, the mortgagor undertakes to pay all relevant public charges. Failure to meet these charges may result in the property being sold by public authorities to recover the charges.

-Covenant for Payment of Rent

Under Section 65(d) of the Transfer of Property Act, 1882, if the mortgaged property is leasehold, the mortgagor is obliged to pay the rent associated with the property.

-Covenant for Discharge of Prior Mortgage

Section 65(e) of the Transfer of Property Act, 1882 imposes an implied duty on the mortgagor to discharge any prior mortgages. It is presumed that subsequent mortgagees have a covenant with the mortgagor to pay off the mortgage when due. Failure to do so allows the subsequent mortgagee to sue for the amount due.

-Mortgagor's Liability for Waste

Section 66 of the Transfer of Property Act, 1882 stipulates that the mortgagor has an implied duty not to engage in any activity that harms or destroys the mortgaged property. The mortgagee must also refrain from actions that diminish the property's value.

Activities constituting waste by the mortgagor include:

1. Removing valuable fixtures from the mortgaged property.

2. Demolishing the mortgaged structure and selling the materials.

3. Cutting down timber from the mortgaged land.

4. Mining under the mortgaged building, endangering its stability.

5. Commencing new mining operations on the mortgaged property.

RIGHTS AND LIABILITIES OF MORTGAGEE

Rights of Mortgagee in Possession

-Right to Foreclosure or Sale

If the person who borrowed money (the mortgagor) fails to pay back their mortgage by the agreed-upon date and hasn't redeemed the property, the mortgagee (the lender) has the right to foreclose or sell the property. This right can be subject to any special terms agreed upon by both parties.

-Right to Sue

It is stated under section 77 of the act also known as Receipts in lieu in interest. Under certain circumstances, the mortgagee can sue the mortgagor for the money owed. This can happen in a few situations:

- When the mortgagor has promised to pay back the money.

- If the property is damaged or destroyed without the mortgagee's fault.

- If the mortgagor wrongfully takes away the property, causing a loss of security.

- When the mortgagor fails to hand over possession of the property.

-Right to Sell

The power of sale when valid is stated under section 69 of the Act. It states if the mortgagor defaults on their payments, the mortgagee has the right to sell the property. In certain cases, this can be done without going to court, but there are some conditions.

Before selling, the mortgagee has to follow a couple of steps:

- They need to serve a written notice to the mortgagor, giving them at least three months' time to sort things out.

- The mortgage money must have been unpaid for at least three months, with arrears totalling at least INR 500.

-Right to Appoint a Receiver

If a sale is happening, the mortgagee can also appoint a receiver. This receiver is someone who will take charge of the property and handle things according to the terms set out in the mortgage agreement. If the originally designated receiver can't or won't do the job, the mortgagee can appoint a replacement with the mortgagor's consent. If the mortgagor doesn't agree, the mortgagee can seek court approval for the appointment.

The receiver has some powers, including:

- Dealing with rents, taxes, land revenues, and other charges related to the property.

- Claiming payments with interest.

- Taking a commission.

- Paying for property insurance.

-Right to Accession to Mortgaged Property

If there's a provision in the mortgage agreement that grants the mortgagee rights to any additions made to the property after the mortgage date, the mortgagee is entitled to those additions.

-Right of Mortgagee to Spend Money

The mortgagee also has the right to spend money in certain situations, such as:

- Protecting the property from destruction, forfeiture, or sale.

- Protecting the mortgagor's title to the property.

- Managing renewable leasehold properties.

- Insuring the property.

-Right to Proceeds of Revenue Sale or Compensation on Acquisition

Section 73(1) of TPA state if the government sells your mortgaged house because of unpaid bills, the lender can get back the mortgage money from what the house sells for.

Section 73(2) of TPA explains if the government takes your house under the Land Purchase Act or a different law and gives you money for it, the lender can take the mortgage money out of the payment you get.

Liabilities of Mortgagee

Transfer of Property Act of 1882's Section 76 states what a property loan holder must do when taking care of someone else's property.

-Duty to Manage the Property

The mortgagee is required to exercise reasonable care in managing the mortgagor's property. However, the mortgagee possesses absolute authority in managing the property, except for the restriction that leases cannot extend beyond the term of the mortgagee's interest in the property.

-Duty to Collect Rents and Profits

A mortgagee in possession has the authority to collect rents and profits derived from the property. Notably, in a usufructuary mortgage, the mortgagee retains the rents and profits instead of using them to offset interest payments.

-Duty to Pay Rent, Revenue, and Public Charges

If stipulated in the mortgage agreement, the mortgagee is responsible for paying rents, revenue, taxes, and other charges related to the property. The mortgagee must not enjoy the benefits of the property without fulfilling these financial obligations. If income from the property is insufficient to cover these expenses, the mortgagee may use personal funds and subsequently debit the amount against the mortgage account.

-Duty to Make Necessary Repairs

When agreed upon in the mortgage contract, the mortgagee is obligated to undertake necessary repairs on the property. These repairs are financed from surplus rents and profits.

-Duty not to Commit Destructive Acts

During possession, the mortgagee must refrain from any acts that may damage or diminish the value of the property. Acts of God exempt the mortgagee from liability for property damage.

-Duty towards Proper Use of Insurance Money

If the mortgaged property is insured against fire, the mortgagee must apply for and utilize insurance proceeds for the property's restoration. Insurance coverage should typically be for two-thirds of the property's value.

-Duty to Keep Accounts

The mortgagee is legally obligated to maintain accurate records of all income received and expenses incurred in relation to the mortgaged property. An exception applies when income offsets interest, thereby relieving the mortgagee from providing a full account if no surplus funds are available.

Duty to Apply Rents and Profits

This clause specifies how rents and profits accruing during the mortgage period are to be applied by the mortgagee in possession.

These duties ensure that the mortgagee responsibly manages the mortgaged property and fulfils their contractual and statutory obligations towards the mortgagor.

ROLE OF A MORTGAGEE’S SALE DEED IN TRANSFERRING OWNERSHIP AFTER FORECLOSURE

Under the Transfer of Property Act, a sale deed by a mortgagee is considered to play a very pivotal role in transferring property ownership after the process of foreclosure. When the mortgagor defaults in the mortgage and the mortgagee decides to sell the property and recover the loan, the sale deed by the mortgagee acts as a legal document transferring ownership from him to the buyer. It conclusively transfers all rights and title to the property to the buyer.

The sale deed of the mortgagee must be performed strictly in compliance with the statutory requirements prescribed under the Transfer of Property Act. In this context, it includes compliance with such procedural requirements as issue of public notice, auction requirements, wherever applicable, and contents and provisions of any special conditions of the mortgage deed or the statute. By executing the sale deed, the mortgagee ensures that the buyer gets clear and marketable title to the property, free from all encumbrances or claims arising due to the mortgage or foreclosure proceedings, fully protecting the purchaser's valid rights and interest in the property.

Registration and execution of the sale deed formally bring closure to the foreclosure process by the mortgagee. It symbolizes the lawful transfer of ownership of the property to a fresh proprietor, thereby bringing to an end the mortgage transaction entered into between the original mortgagor and mortgagee.

The sale deed is, in effect, the very pivot instrument, which aids in transferring the ownership of property subsequent to foreclosure, as undertaken under the regime of the Transfer of Property Act. Its execution serves to ensure compliance with the legal requirements and safeguards the legitimate interests of all parties concerned due in accordance with the prevalent principles of law.

SITUATION WHERE A MORTGAGEE MIGHT APPOINT A RECEIVER

The situation where a Mortgagee might appoint a receiver can be understand with the help of the example:

Ashish, an owner of a commercial premise comprising multiple shop units, who obtains finance by way of mortgage with a certain bank. Under the terms of this mortgage agreement, Ashish was due to pay on a monthly cycle an amount composed of principal and interest.

As a result of businesses for Ashish's tenants remaining difficult, he is unable to collect enough rents and as such has financial problems, defaulting on his mortgage payments. In accordance with the terms of the mortgage agreement, upon such default the bank, being the mortgagee, may appoint a receiver to protect its interest.

Feeling the financial strain that Ashish is under and also to protect the value of the property, the bank decides to exercise its right to appoint a receiver. In most cases, banks will appoint a qualified receiver who is well conversant with property management or financial administration to take over the commercial property.

The receiver's role upon appointment, inter alia, involves collecting rental income from the retail units, ensuring the property is properly maintained, and handling the day-to-day activities relating to the same. The receiver acts as the bank's agent in protecting the subject property and ensuring that its value is maximized pending the complete discharge of the liability or sale of the property for recovery of the loan amount.

What aids the lender in financial protection from such acts of the borrower in terms of his failure to repay what is due to the lender is an appointment of a receiver under the provisions of Transfer of Property Act. The mortgagee will continue to maintain control over the mortgaged property and limit financial losses arising from the borrower's failure to discharge the obligation of the mortgage.

DIFFERENCE BETWEEN “MORTGAGE MONEY” AND “PRINCIPAL AMOUNT”

"Mortgage money" refers to the principal sum a borrower received from a lender to buy property or immovable assets, usually with the said property securing it—that is, the lender may foreclose the property in case of delinquent payments as recourse to offset the outstanding debt.

On the other hand, under TOPA, "principal amount" signifies the principal amount of money borrowed, which is secured by mortgage or hypothecation. It is the basic amount that one borrows and is mentioned in the deed of mortgage. This principal amount thus serves as the core for calculating interest and represents the total debt liability of the borrower with the lender.

REDEMPTION

In the Transfer of Property Act, "redemption" means the right of the mortgagor, or borrower, to recover possession and absolute ownership of the property from the mortgagee, or lender, upon full payment of the debt due. This tenet of law provides that on the fully discharge of all the financial obligations under the mortgage, legal possession and proprietary rights in the property are recovered by the mortgagor.

For instance, consider the example of Aditi, who obtains a house loan. Her mortgage agreement requires her to repay the principal amount plus interest accrued on the same within a stipulated period. As time goes by, Aditi repays her indebtedness to the lender through regular installments, she is able to gradually reduce her debt balance.

Several years later, Aditi succeeds in repaying the entire principal amount plus interest. Under the Transfer of Property Act, Aditi can exercise her right to redeeming the property against the mortgagee. She serves a formal notice on the mortgagee regarding her intention to redeem the mortgage. On receiving the final settlement, the mortgagee releases the mortgage and transfers the legal title and possession of the house back to Aditi. The process by which Aditi takes full ownership of the property back, upon discharging her financial obligations, is what is known as redemption under the Transfer of Property Act.

At the very basic level, redemption allows mortgagors, like Aditi in this case, to regain full ownership of their property upon the discharge of all financial obligations that had been originally outlined in the mortgage contract.

DEFICIENCY JUDGEMENT

Under the Transfer of Property Act, a "deficiency judgment" is a remedy available to the mortgagee (lender) in the event that the foreclosure sale of a mortgaged property is insufficient to pay off the amount due to the mortgagor. What follows is a brief explanation of its concept and applicability:

Definition:

In case the mortgagor is unable to pay his/ her dues in a mortgage, and the property subsequently gets foreclosed by the mortgagee, it will then be sold publicly to recover either the complete or a portion of the lent amount. In the continuous event of the sale proceeds not being more than enough to repay the entire debt amount on behalf of the mortgagor, under such circumstances, the mortgagee is at liberty to file a deficiency judgment. It is a judicial remedy that allows the mortgagee to recover the deficiency, which is the difference between what is still owed and what the auction generates, from the mortgagor.

When it Can Be Applied:

A deficiency judgment can be pursued in the following situations:

- In the case of deficiency if the proceeds from the foreclosure sale are inadequate to pay the entire mortgage debt.

- The provisions in the mortgage contract or the local laws enable the mortgagee to file a deficiency judgment against the mortgagor.

- On petition by the mortgagee, the court decides if there is a deficiency after ascertaining the amount received from the auction and the outstanding debt.

In most states, the availability and enforcement of deficiency judgments are governed by specific provisions in the Transfer of Property Act or other relevant Acts that safeguard the rights of mortgagors by laying down certain procedural requirements for verifying that any deficiency claimed by the mortgagee on proper reasoning and in a legally accepted manner.

EQUITABLE MORTGAGE

Meaning:

An "equitable mortgage" refers to a situation where a mortgage comes into existence without compliance with the formalities prescribed for a legal mortgage by the TPA. Though the concept of an equitable mortgage is not recognized by the TPA, it may come into existence in certain situations where the intention to create a mortgage can be established, and despite the nonexistence of any instrument or paper in the shape of a deed or agreement, a decree or an order may rightly be passed against the mortgagor in favour of the mortgagee.

An equitable mortgage comes into existence once a property owner mortgages his property in favour of the lender to secure a loan and does not go ahead to execute a formal mortgage deed as provided under the TPA. This would ordinarily be based on an agreement or understanding between parties, which could be shown through documents like the deposit of title deeds, memorandum relating to the deposit, or any other writing adequate to demonstrate an intention to create a mortgage.

Enforceability:

Though falling short of the statutory requirements for a registered mortgage under the TPA, an equitable mortgage may be enforced by the courts proceeding by equity. The equitable mortgage will be endorsed by a court on the imports of fairness and intendment, based on the intentions that the parties concerned have expressed in the transaction.

Remedies:

Upon the occurrence of any event of default, all those remedies available to a lender or mortgagee in the case of a legal mortgage are available to the lender hereunder, including foreclosure or selling the property subject to the mortgage to recover the outstanding amounts.

Equitable mortgages have application in cases where the borrower and lender enter into informal arrangements for the use of property as security, such as by depositing title deeds or any other documentary evidence of intention. This is precisely resorted to in cases where urgent financial arrangements are to be made and it may not be possible, or the registration of a mortgage deed may be unduly delayed.