Mortgage: definition and kinds

1. Definition: section 58(a)

A mortgage is the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability. The transferor is the mortgagor, the transferee the mortgagee; the principal money and interest secured are the mortgage-money, and the instrument is the mortgage-deed.

• Transfer of an interest, not of ownership. The mortgagor keeps the ownership, subject to the mortgagee's interest. What remains with him is called the equity of redemption.
• Specific immovable property. A promise to pay out of “all my property” is not a mortgage.
• Purpose of security. The transfer exists to secure a debt. Once the debt is paid, the interest must go back. This is what separates a mortgage from a sale.

Formalities (section 59). Where the principal money secured is one hundred rupees or more, a mortgage (other than a mortgage by deposit of title deeds) can be made only by a registered instrument signed by the mortgagor and attested by at least two witnesses. Below one hundred rupees, it may be made by such an instrument or, except for a simple mortgage, by delivery of the property.

2. The six kinds

• Simple mortgage, s.58(b). No possession passes. The mortgagor binds himself personally to pay, and agrees, expressly or impliedly, that on default the mortgagee may have the property sold and the proceeds applied to the debt. Remedy: suit for sale (s.67), and a personal decree on the covenant.
• Mortgage by conditional sale, s.58(c). The mortgagor ostensibly sells the property on condition that on default of payment on a certain date the sale becomes absolute, or that on payment the sale becomes void, or that on payment the buyer shall retransfer. Remedy: foreclosure, not sale. No personal covenant.
• Usufructuary mortgage, s.58(d). The mortgagor delivers possession (or binds himself to deliver it) and authorises the mortgagee to retain it until payment and to take the rents and profits in lieu of interest, or towards the principal, or partly each. There is no personal liability and no fixed date of repayment. The mortgagee can sue neither for foreclosure nor for sale (s.67 proviso); his security is possession itself.
• English mortgage, s.58(e). The mortgagor binds himself to repay on a certain date and transfers the property absolutely to the mortgagee, subject to a proviso that he will retransfer on payment. Remedy: sale, and in limited cases sale out of court under s.69.
• Mortgage by deposit of title deeds, s.58(f). In the towns of Kolkata, Chennai and Mumbai, and in any other town notified by the State Government in the Official Gazette, a person delivers to a creditor or his agent documents of title to immovable property with intent to create a security. No deed is needed, so no registration is needed; the intent is the essence. If the parties reduce the bargain into a document that itself creates the mortgage, that document needs registration, but a mere memorandum recording a deposit already made does not. This is the “equitable mortgage” banks use every day. Remedy: sale.
• Anomalous mortgage, s.58(g). Any mortgage that is not one of the above, such as a combination of simple and usufructuary. The rights depend on the terms of the deed.

3. Mortgage by conditional sale or sale with a right of repurchase?

The proviso to s.58(c) says that no transaction shall be deemed a mortgage by conditional sale unless the condition is embodied in the document which effects or purports to effect the sale. A reconveyance clause in a separate deed therefore cannot convert a sale into a mortgage, though it may give a contractual right of repurchase.

Even where the condition is in the same deed, the question remains whether the parties meant a loan secured on land or a real sale with an option to buy back. In Umabai v. Nilkanth Dhondiba Chavan, 2005 INSC 203, (2005) 6 SCC 243, the Supreme Court treated it as a question of the intention of the parties gathered from the document read as a whole, with surrounding circumstances admissible. Pointers the courts use:

• whether a debtor–creditor relationship existed before or survives the deed;
• whether the price is adequate; a price far below value suggests a loan;
• who keeps possession and pays the revenue;
• whether interest is payable, and whether the reconveyance price equals the “sale” price.

The difference matters. A mortgagor has a right to redeem that lasts until it is extinguished by act of the parties or decree, and limitation runs for thirty years. A seller with a right of repurchase has only a personal contractual right, which must be exercised strictly within the time fixed, failing which it is lost.

4. “Once a mortgage, always a mortgage” and clogs on redemption

Section 60 gives the mortgagor, at any time after the principal money has become due, the right on payment or tender of the mortgage-money to have the deed and documents returned, possession restored, and the property retransferred. The proviso is short: the right is lost only by act of the parties or decree of a court. From this flows the equitable maxim traced to the Court of Chancery (Lord Eldon in Seton v. Slade, 1802): a mortgage cannot be turned into something else by a stipulation in it. A term that prevents or unduly fetters redemption is a clog on the equity of redemption and is void.

English examples: Noakes & Co. v. Rice (1902), where a tie obliging a publican to buy the mortgagee's beer even after redemption was struck down; contrast Kreglinger v. New Patagonia Meat and Cold Storage Co. (1914), where a collateral advantage that did not fetter redemption itself was upheld.

• Seth Ganga Dhar v. Shankar Lal, 1958 INSC 45, AIR 1958 SC 770. A stipulation that the mortgagor could redeem only within a fixed window after a long term, failing which he would lose the right for ever, was held a clog and void. The Court said a long term is not in itself a clog; what is forbidden is a term that destroys or penalises the right to redeem.
• Pomal Kanji Govindji v. Vrajlal Karsandas Purohit, 1988 INSC 344, (1989) 1 SCC 458. On a long-term usufructuary mortgage the Court held that whether a term is a clog is decided on the facts at the date of the mortgage: the length of the term, the other conditions, and the relative position of the parties. A term that makes redemption illusory, or is oppressive and unconscionable, is a clog; a long term freely agreed between parties on equal terms need not be.

Two related rules: the mortgagee cannot buy the equity of redemption in the mortgage deed itself, but a later, independent agreement by which the mortgagor sells his equity to the mortgagee is valid; and the right to redeem is barred by limitation thirty years after it accrues (Article 61, Limitation Act, 1963).

5. Problem

A borrows Rs 5 lakh from B and executes a registered deed “selling” his house to B for Rs 5 lakh (market value Rs 25 lakh), with a clause that if A repays Rs 5 lakh with interest within three years B will reconvey, otherwise the sale becomes absolute. A stays in the house and pays B interest. In year four A tenders the money. B says the sale is absolute.

Issue. Whether the deed is a sale with a right of repurchase or a mortgage by conditional sale.

Law. Section 58(c) and its proviso; intention gathered from the deed and circumstances (Umabai); section 60 and the clog doctrine.

Application. The condition is in the same deed, so the proviso is satisfied. The money was a loan, interest is being paid, the price is one-fifth of value, and A kept possession. All point to security, not sale.

Conclusion. It is a mortgage by conditional sale. The clause making the sale absolute on default does not end A's right; that right ends only by act of the parties or decree, so B must sue for foreclosure. Until a decree, A may redeem on paying the mortgage-money.

How this is examined

The 10-mark essay is “Define mortgage. Explain the different kinds of mortgages under the Transfer of Property Act”: definition, the three elements, s.59 formalities, then each kind with its remedy. The second essay is “Once a mortgage always a mortgage”: s.60, the proviso, the clog doctrine, Ganga Dhar and Pomal Kanji, and a line on conditional sale versus repurchase. Short notes: usufructuary mortgage; mortgage by deposit of title deeds; anomalous mortgage.