Mortgage: Kinds of Mortgages

A mortgage is the transfer of an interest in specific immoveable property for the purpose of securing payment of money advanced (or to be advanced), or an existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability (S.58). The transferor is the mortgagor, the transferee is the mortgagee, the amount secured is the mortgage-money, and the instrument is the mortgage-deed.

Why: A mortgage is NOT a sale the mortgagor retains ownership and has an absolute right to get the property back upon repayment (right of redemption). The mortgagee gets only a LIMITED interest as security. The TPA recognises six types of mortgages, each transferring a different quantum of interest.

Legal Framework

Six Kinds of Mortgages

Detailed Analysis

Simple Mortgage (S.58(a))

Without delivering possession, the mortgagor PERSONALLY binds himself to pay the mortgage-money, and agrees that if he fails to pay, the mortgagee shall have a right to cause the property to be SOLD.

Mortgage by Conditional Sale (S.58(b))

The mortgagor ostensibly sells the property on condition that: (a) on default, the sale shall become absolute; OR (b) on repayment, the sale shall become void; OR (c) the buyer shall retransfer on repayment.

Why (dangerous form): This mortgage disguises itself as a "sale." Courts apply the Pandit Chunchun Jha test: if the REAL intention was to secure a debt (with reconveyance on repayment), it is a mortgage despite being labelled a "sale." The label does not determine the character.

Usufructuary Mortgage (S.58(c))

The mortgagor delivers possession to the mortgagee and authorises the mortgagee to retain possession and receive rents/profits in lieu of interest, or in payment of mortgage-money, or both.

English Mortgage (S.58(d))

The mortgagor binds himself to repay on a certain date AND transfers the property ABSOLUTELY to the mortgagee, subject to the proviso that the mortgagee will retransfer upon repayment.

Mortgage by Deposit of Title Deeds Equitable Mortgage (S.58(e))

In notified towns (Mumbai, Chennai, Kolkata, Delhi, and other notified centres), a person delivers title deeds to a creditor as security. No writing is required.

Illustrations

1. Simple mortgage: Ravi borrows Rs. 10 lakhs from HDFC Bank for home renovation. Ravi mortgages his house (registered mortgage deed). Ravi retains possession and lives in the house. If Ravi defaults, HDFC obtains a court decree for SALE of the house. HDFC can also sue Ravi personally for the Rs. 10 lakhs (personal liability). Foreclosure is NOT available.

2. Conditional sale vs. real sale (the Chunchun Jha test): Suresh needs Rs. 5 lakhs urgently. He executes a "sale deed" to Mahesh for Rs. 5 lakhs, with a simultaneous agreement: "If Suresh pays Rs. 5 lakhs + 12% interest within 3 years, Mahesh will reconvey." Is this a sale or a mortgage? Apply the test: the REAL intention was securing Rs. 5 lakhs (not buying property). The "reconveyance on repayment" condition converts this into a mortgage by conditional sale (S.58(b)), regardless of the "sale deed" label. Suresh retains the right to redeem.

3. Usufructuary mortgage (self-liquidating): Farmer Gopi borrows Rs. 3 lakhs from moneylender Hari. Gopi mortgages his 5-acre farmland and gives POSSESSION to Hari. Hari cultivates the land and earns Rs. 1 lakh per year from crops. Agreement: Hari will retain possession until the rents equal the Rs. 3 lakhs (approximately 3 years). After that, Gopi can redeem. Hari has NO right to sue Gopi personally; his only remedy is the income from the land.

4. English mortgage: Corporation borrows Rs. 50 lakhs from bank. Corporation transfers its commercial building ABSOLUTELY to the bank (title passes to bank). Agreement: bank will retransfer building when corporation repays by 31 December 2027. If corporation defaults, bank can: (a) sell the building, and (b) sue the corporation personally for any shortfall. The bank is the legal owner until repayment this is the strongest form of mortgage for the lender.

5. Equitable mortgage (deposit of title deeds): Kavitha in Mumbai deposits her property title deeds with ICICI Bank as security for a Rs. 20 lakh overdraft. No mortgage deed is executed. No registration. Just an oral agreement + deposit of original documents. Valid equitable mortgage under S.58(e) Mumbai is a notified town. If Kavitha defaults, ICICI can obtain court sale of the property.

Recall Check

1. Name the six types of mortgages under S.58 and state which one does NOT require a written instrument.
2. What is the Pandit Chunchun Jha test for distinguishing a conditional sale mortgage from a genuine sale?
3. In which type of mortgage does the mortgagee have NO personal remedy against the mortgagor?

Key Cases

Pandit Chunchun Jha v. Ebadat Ali (1954) Pandit-Chunchun-Jha-v-Ebadat-Ali-1954 Issue: How to distinguish a mortgage by conditional sale (S.58(b)) from a sale with condition of repurchase. Rule: The test is the REAL INTENTION of the parties: if the relation of debtor-creditor exists, it is a mortgage regardless of the label. If the transaction is a genuine sale with an independent option to repurchase, it is a sale. Held: Where money passes at the time of execution and reconveyance is conditional on repayment, the presumption is mortgage. The court examines: (a) existence of debt, (b) consideration as price vs. loan, (c) possession, (d) relationship of parties, (e) subsequent conduct.

Prabhu Lal v. DLF Universal (2008) Prabhu-Lal-v-DLF-Universal-2008 Issue: Whether creation of an equitable mortgage by deposit of title deeds requires any writing or can be purely oral. Rule: S.58(f) (correctly S.58(e)) requires only: (a) deposit of title deeds, (b) in a notified town, (c) with intent to create security. No writing, registration, or stamp duty is required. Held: An equitable mortgage is created by the mere act of depositing title deeds with the lender as security. Oral communication of intent suffices. This is the only mortgage form exempt from registration requirements.

Distinctions

Flashcards

Q: How does S.58 define a mortgage? A: Transfer of an interest in specific immoveable property for the purpose of securing payment of money or performance of an obligation giving rise to pecuniary liability.

Q: Name all six kinds of mortgages under S.58. A: Simple, Conditional Sale, Usufructuary, English, Deposit of Title Deeds (Equitable), and Anomalous.

Q: Which mortgage does NOT require a written instrument? A: Mortgage by deposit of title deeds (equitable mortgage, S.58(e)) created by deposit in a notified town + oral intent.

Q: What is the Chunchun Jha test? A: To distinguish mortgage by conditional sale from genuine sale: examine the REAL INTENTION. If a debtor-creditor relationship exists and reconveyance depends on repayment, it is a mortgage regardless of the document's label.

Q: In which mortgage does the mortgagee have NO personal remedy? A: Usufructuary mortgage (S.58(c)) mortgagee's only remedy is possession and rents. No right to sue personally or to sell through court.

Q: What is the strongest form of mortgage for the lender? A: English mortgage (S.58(d)) ownership passes absolutely to mortgagee + personal liability exists + right of sale.

Q: What is required for an equitable mortgage? A: (1) Deposit of original title deeds, (2) In a town notified by State Government, (3) With intent to create security. No writing or registration needed.

From Mortgage Definition and Essentials

Q: Define mortgage under S.58, TPA. A: Transfer of an interest in specific immovable property for securing payment of money advanced/to be advanced, or an existing/future debt, or performance of an engagement giving rise to pecuniary liability.

Q: What is transferred in a mortgage: ownership or interest? A: Only an interest in the property; ownership remains with the mortgagor.

Q: What are the four key terms defined in S.58? A: Mortgagor (borrower), Mortgagee (lender), Mortgage-money (principal + interest secured), Mortgage-deed (instrument of transfer).

Q: Can a mortgage exist without a debt? A: No. A mortgage without an underlying debt is a nullity.

Q: What does S.59 require for creating a mortgage? A: A registered instrument (for all mortgages except equitable mortgage by deposit of title deeds, which requires no writing).

Q: What is the mortgagor's most important right? A: Right of redemption (S.60): the right to get back the property upon repayment of the mortgage debt.

From Kinds of Mortgage

Q: Name the six kinds of mortgage under S.58. A: Simple, Mortgage by conditional sale, Usufructuary, English, Mortgage by deposit of title deeds (equitable), Anomalous.

Q: In which mortgage does the mortgagee get foreclosure as a remedy? A: Mortgage by conditional sale (S.58(c)).

Q: What is the unique feature of usufructuary mortgage? A: It is self-liquidating: mortgagee takes possession and applies rents/profits towards the debt until the debt is wiped out.

Q: What formalities are needed for creating an equitable mortgage (S.58(f))? A: Only delivery of title deeds with intent to create security; no writing or registration required.

Q: What is the test to distinguish mortgage by conditional sale from genuine sale? A:

• (1) Whether price is below market value
• (2) Whether dominant intent is security
• (3) Whether possession remains with the ostensible seller.

Q: In an English mortgage, what must the mortgagee do on repayment? A: Re-transfer the property to the mortgagor (because absolute ownership had been transferred to mortgagee).

Q: Does a usufructuary mortgagor have personal liability? A: No. The debt is satisfied only from the rents and profits of the property.

Exam Scenario

A executes a document titled "Sale Deed" in favour of B for Rs. 8 lakhs. A simultaneous unregistered letter from B states: "If A pays Rs. 8 lakhs plus 15% interest within 2 years, I shall reconvey the property to A." A retains possession throughout. After 2 years, A tenders the amount. B refuses to reconvey, claiming it was an absolute sale. Advise A.

Approach: (1) Apply Pandit Chunchun Jha v. Ebadat Ali (1954): examine the REAL intention. (2) Indicators of mortgage: (a) A retains possession (seller normally gives possession), (b) reconveyance on repayment clause exists, (c) the sum (Rs. 8 lakhs) appears to be a loan at 15% interest, (d) the "sale" was simultaneous with the reconveyance agreement. (3) Conclusion: this is a mortgage by conditional sale (S.58(b)), not a genuine sale. The document's title ("Sale Deed") is irrelevant substance prevails over form. (4) Under S.60, A has an ABSOLUTE right of redemption. This right cannot be extinguished by contract ("once a mortgage, always a mortgage"). (5) A can file a suit for redemption. Court will decree: B must reconvey on A paying Rs. 8 lakhs + 15% interest for 2 years. B's refusal is untenable. (6) The unregistered letter is admissible as evidence of the true nature of the transaction (not as an instrument of transfer requiring registration, but as collateral evidence showing intent).

From Mortgage Definition and Essentials

Problem: Prakash needs Rs.15 lakhs urgently. He approaches Vijay. Prakash verbally agrees to mortgage his agricultural land (worth Rs.40 lakhs) to Vijay. Prakash hands over the original title deeds to Vijay at a place that is NOT the office of a Sub-Registrar or in towns specified in S.58(f). No registered instrument is executed. Vijay advances Rs.15 lakhs. Six months later, Prakash offers to repay and demands return of the title deeds. Vijay claims a valid mortgage exists. Advise both parties on:

• (a) whether a valid mortgage was created

• (b) what type of mortgage, if any

• (c) Prakash's remedy.

From Kinds of Mortgage

Problem: Lakshmi borrows Rs.8 lakhs from Naresh. She executes a document titled "Sale Deed" transferring her house to Naresh for Rs.8 lakhs, with a clause: "If Lakshmi pays Rs.8 lakhs + 10% interest within 2 years, Naresh shall reconvey the house." The market value of the house is Rs.25 lakhs. Possession remains with Lakshmi. Lakshmi offers repayment after 18 months but Naresh refuses, claiming the house is his by sale. Identify the true nature of the transaction and advise Lakshmi.

Illustrations (from consolidated notes)

From Mortgage Definition and Essentials

1. Simple mortgage: A borrows Rs.10 lakhs from B. A executes a registered mortgage deed stating: "I transfer my interest in House No. 5 to B as security for the loan. I retain possession. If I fail to repay, B can sell the house through court." This is a simple mortgage (S.58(b)).

2. What is NOT a mortgage (licence to enjoy): A borrows Rs.5 lakhs from B and says "You can stay in my house until I repay." If no interest in the property is formally transferred, this may be a licence, not a mortgage. A mortgage requires transfer of interest by instrument.

3. Specific property requirement: A borrows Rs.20 lakhs from Bank and offers "all my properties" as security without identifying them. This fails the "specific immovable property" requirement. Each property must be described precisely (survey number, address, area).

4. No debt = no mortgage: A executes a mortgage deed in favor of B but B never actually advances any money. The mortgage is ineffective because there is no debt to secure. A can get the deed cancelled.

From Kinds of Mortgage

5. Simple vs. English (personal liability): Both have personal liability. In simple mortgage, possession stays with mortgagor and mortgagee can only seek judicial sale. In English mortgage, possession AND ownership pass to mortgagee (though mortgagee must re-transfer on repayment).

6. Usufructuary in practice: Farmer A mortgages his 5-acre field to B for Rs.2 lakhs. B takes possession and cultivates the land, earning Rs.40,000/year. B adjusts this against the debt. After 5 years, the debt is wiped out from the produce. B must return the land. This is self-liquidating.

7. Conditional sale vs. genuine sale: A needs Rs.10 lakhs. A executes a document "selling" his house to B for Rs.10 lakhs with a condition: "If A repays Rs.10 lakhs within 1 year, B shall reconvey." If the intent is security (not a genuine sale), it is a mortgage by conditional sale. The test: was the transaction's dominant purpose to secure a loan?