Priority, marshalling, contribution and charges

1. Priority

The general rule is in section 48: where a person purports to create by transfer at different times rights in the same immovable property, and the rights cannot all exist or be exercised to their full extent together, each later right is subject to the rights previously created. Qui prior est tempore, potior est jure. Between mortgagees, the first in time is paid first.

Postponement of a prior mortgagee, s.78. Where, through the fraud, misrepresentation or gross neglect of a prior mortgagee, another person has been induced to advance money on the security of the mortgaged property, the prior mortgagee is postponed to the subsequent one. The classic case of gross neglect is a first mortgagee who hands the title deeds back to the mortgagor, who then uses them to raise a second loan from someone who checks the deeds and finds them clean.

Mortgage to secure an uncertain amount, s.79. If a mortgage made to secure future advances, the performance of an engagement or a running account expresses the maximum to be secured, a later mortgage of the same property is, if made with notice of the prior mortgage, postponed to the prior mortgage in respect of all advances or debits not exceeding that maximum, though made after the later mortgage. A banker's overdraft secured up to a stated limit is the usual example.

No tacking, s.93. A prior mortgagee cannot, by advancing further money to the mortgagor, gain priority for that later advance over an intervening mortgagee, except as s.79 allows. The English doctrine of tacking does not apply.

2. Marshalling, s.81

If the owner of two or more properties mortgages them to one person and then mortgages one or more of them to another person, the subsequent mortgagee is, in the absence of a contract to the contrary, entitled to have the prior mortgage debt satisfied out of the property or properties not mortgaged to him, so far as they will extend, but not so as to prejudice the rights of the prior mortgagee or of any other person who has for consideration acquired an interest in any of the properties.

Example. A mortgages properties X and Y to B for Rs 10 lakh. He then mortgages Y alone to C for Rs 5 lakh. B can recover from X or Y as he chooses; his security is not cut down. But C can insist that B's debt be paid out of X first, so far as X suffices, so that Y is left free for C. If X is worth Rs 10 lakh, B is paid wholly from X and C takes Y.

• The right belongs to the subsequent mortgagee, not to the prior one.
• It needs a common debtor: both mortgages must be by the same owner.
• It cannot prejudice the prior mortgagee, who keeps his choice of property.
• It cannot prejudice a third person who has acquired an interest for consideration, for example a purchaser of X.
• It yields to a contract to the contrary.

Section 56 applies the same idea to a purchaser: a buyer of one of several properties mortgaged together may, in the absence of contract, have the mortgage debt satisfied out of the property not sold to him, so far as it will extend.

3. Contribution, s.82

Where property subject to a mortgage belongs to two or more persons having distinct and separate rights in it, the different shares or parts are, in the absence of a contract to the contrary, liable to contribute rateably to the debt, each according to its value after deducting any other mortgage to which it was subject when the first mortgage was made. Where, of two properties of the same owner, one is mortgaged for one debt and then both are mortgaged for another, and the first debt is paid out of the first property, each property contributes rateably to the second debt after deducting the first debt from the value of the property out of which it was paid.

Marshalling and contribution compared. Marshalling is a right of a later mortgagee to throw the debt onto another property; contribution is a right of owners to share the debt in proportion. Section 82 itself says that nothing in it applies to a property liable under s.81 to the claim of the subsequent mortgagee: where marshalling applies, contribution gives way.

4. Subrogation, s.92

Any person entitled to redeem under s.91 (other than the mortgagor) and any co-mortgagor who redeems the mortgaged property has, in so far as he redeems, the same rights as the mortgagee whose mortgage he redeems against the mortgagor or any other mortgagee. He stands in the shoes of the mortgagee. A puisne mortgagee who pays off the first mortgage takes the first mortgagee's priority as well as his own.

Subrogation also arises by agreement: a person who advances money to a mortgagor with which the mortgage is redeemed is subrogated only if the mortgagor has by a registered instrument agreed that he shall be.

5. Charges, s.100

Where immovable property of one person is, by act of parties or operation of law, made security for the payment of money to another, and the transaction does not amount to a mortgage, the latter person is said to have a charge on the property, and all the provisions applicable to a simple mortgage apply, so far as may be, to the charge.

• By act of parties: a deed saying that a sum shall be paid out of a named field, without transferring any interest in it. Registration is needed if the value is one hundred rupees or more (s.17, Registration Act, 1908).
• By operation of law: the unpaid seller's charge on the property for the price, and the buyer's charge for the price paid in advance, under s.55(4)(b) and (6)(b); a charge for maintenance created by a decree.
• A charge cannot be enforced against property in the hands of a transferee for consideration without notice of it, save as otherwise expressly provided by any law.

6. Mortgage and charge distinguished

• Interest. A mortgage transfers an interest in the property; a charge transfers none and only creates a right to payment out of it.
• Creation. A mortgage arises only by act of parties; a charge arises by act of parties or by operation of law.
• Personal liability. A mortgage usually carries a personal covenant to pay; a charge as such does not, though the underlying debt may.
• Against transferees. A mortgage, being a transfer of an interest, binds a later transferee whether or not he had notice (registration operates as notice); a charge fails against a bona fide transferee for value without notice.
• Remedy. The mortgagee may have foreclosure or sale according to the kind of mortgage; the chargeholder has only a decree for sale, as a simple mortgagee does.
• Limitation. A suit to enforce payment of money charged on immovable property, like a mortgage suit, has twelve years (Article 62, Limitation Act, 1963).

How this is examined

Short notes of 5 or 6 marks: marshalling (s.81, with the X and Y example and the limits), and charges (s.100, two ways of creation, the bona fide transferee rule, and the comparison with a mortgage). Contribution, subrogation and postponement of a prior mortgagee turn up in the same form. A problem sometimes gives two properties and two mortgagees and asks who is paid from which: answer with s.81 and say whether s.82 is excluded.