Charges

The two exceptions in section 100

One, the trustee's charge. Nothing in the section applies to the charge of a trustee on the trust property for expenses properly incurred in the execution of his trust. That charge is governed by trust law, and a trustee who has spent his own money running the trust is in a different position from a lender.

Two, and this is the examinable one: the bona fide purchaser. Save as otherwise expressly provided by any law in force, no charge shall be enforced against any property in the hands of a person to whom it has been transferred for consideration and without notice of the charge.

This is the same protection that runs through sections 39, 40 and 41, and for the same reason. A charge is often invisible: it may arise by operation of law, and it need not be registered in every case. A purchaser who pays value and could not have known cannot fairly be made to bear it. A donee is not protected, because he gave nothing, and neither is a purchaser with notice, actual, constructive or imputed under section 3.

Section 101: no merger where there is a subsequent encumbrance

Any mortgagee or chargeholder, or a transferee from him, may purchase or otherwise acquire the rights of the mortgagor or owner without thereby causing the mortgage or charge to merge, as between himself and any subsequent mortgagee or chargeholder; and no such subsequent mortgagee or chargeholder is entitled to foreclose or sell without redeeming the prior mortgage or charge, or otherwise than subject to it.

Merger is the doctrine by which a lesser interest is absorbed when it meets the greater in the same hands. Ordinarily, if the first mortgagee buys the property outright, his mortgage would be swallowed by his ownership.

That would produce an accidental windfall for whoever ranks second. The second mortgagee would find the first mortgage gone and himself promoted to first, purely because the first mortgagee happened to buy the property. Section 101 refuses that: the prior security stays alive as against later encumbrancers, and a later encumbrancer must still redeem it, or take subject to it, before he can foreclose or sell.

Sections 102 to 104

Section 102 governs service or tender on an agent where the person concerned is outside the district, and the Court's power to direct the manner of service where nobody can be found. It is set out in [Suits for Foreclosure, Sale and Redemption], which owns it.

Section 103 provides for notice to or by a person incompetent to contract, so that a minor or a person of unsound mind on either side does not stall the machinery of the Chapter.

Section 104 is the rule-making power: the High Court may, from time to time, make rules consistent with the Act to carry out its provisions in respect of the Chapter.

A worked example

Waman sells a shop at Latur to Xavier for Rs. 50 lakh, of which Rs. 12 lakh is left unpaid. Ownership passes on the registered deed.

What does Waman have? A charge on the shop under section 55(4)(b), arising by operation of law, for the unpaid Rs. 12 lakh with interest from the date possession was delivered. He has no interest in the shop.

Xavier sells the shop to Yash for full value, and Yash knows nothing of the unpaid price. Section 100's second exception protects him: no charge may be enforced against property in the hands of a transferee for consideration and without notice. Waman's remedy is now personal, against Xavier.

Change that: Xavier gifts the shop to his sister. She gave no consideration, so the exception does not protect her and the charge binds the shop in her hands, whether or not she knew.

Change it again: Yash bought for value but the deed recited the unpaid balance. He has actual notice and takes subject to the charge.

How would Waman enforce it? By a suit for sale, the simple-mortgage provisions applying so far as may be. He cannot foreclose, because he holds no interest to make absolute.

Now section 101. Suppose the shop had been mortgaged first to a bank and then to Zubin, and the bank later buys the shop from Xavier. Ordinarily the bank's mortgage would merge in its ownership and Zubin would be promoted. Section 101 prevents that: the bank's mortgage survives as against Zubin, and Zubin cannot foreclose or sell without redeeming it or taking subject to it.

What it does NOT mean

A charge is not a mortgage. No interest in the property is transferred.

A chargeholder cannot foreclose. His remedy is sale, the simple-mortgage rules applying so far as may be.

A charge is not always created by agreement. It may arise by operation of law, as under section 55.

A charge does not bind everyone. It cannot be enforced against a transferee for consideration and without notice, though it binds a donee and a purchaser with notice.

A trustee's charge for trust expenses is outside section 100.

Section 101 does not prevent merger generally. It prevents it as against a subsequent mortgagee or chargeholder.

A mere personal promise to pay out of property is not a charge. The property must be made security.

Distinctions

Quick revision

• Charge: immovable property made security for payment of money, by act of parties or operation of law, where the transaction does not amount to a mortgage.
• No interest in the property is transferred; that is the whole difference from a mortgage.
• The simple mortgage provisions apply so far as may be, so the remedy is sale, never foreclosure.
• Two exceptions in s.100: a trustee's charge for trust expenses; and no charge is enforceable against a transferee for consideration without notice.
• A donee and a purchaser with notice are both bound.
• s.101: a prior mortgagee or chargeholder who buys the property does not cause a merger as against a subsequent encumbrancer, who must redeem or take subject to the prior security before foreclosing or selling.
• s.102 notice and tender through an agent or as the Court directs; s.103 notice to or by a person incompetent to contract; s.104 the High Court's rule-making power.

Test yourself

1. Define a charge and state how it differs from a mortgage. A charge arises 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 difference is that a mortgage transfers an interest in the property while a charge transfers none, giving only a right to have the property applied in payment.

2. Which provisions of the Act govern a charge? Those which apply to a simple mortgage, so far as may be, under section 100.

3. Can a chargeholder foreclose? No. He holds no interest in the property, so there is nothing to make absolute. His remedy is a suit for sale.

4. Against whom can a charge not be enforced? Against a person to whom the property has been transferred for consideration and without notice of the charge, save as otherwise expressly provided by any law in force.

5. Give two examples of a charge arising by operation of law. The seller's charge for unpaid purchase money under section 55(4)(b), and the buyer's charge for purchase money paid in advance under section 55(6)(b).

6. What does section 101 prevent, and why? It prevents a mortgage or charge from merging in the ownership when the mortgagee or chargeholder buys the property, as against a subsequent mortgagee or chargeholder. Without it, a later encumbrancer would be promoted by an accident, so the section requires him to redeem the prior security or take subject to it.

7. Is a trustee's charge on trust property within section 100? No. The section expressly does not apply to the charge of a trustee on the trust property for expenses properly incurred in the execution of his trust.