Mortgage Defined, and the Six Kinds of Mortgage
Chapter Thirty-One
Syllabus topic 2.1, "Specific Transfers under the Transfer of Property Act, 1882: Mortgage and Charge [Sections 58 - 104]"
Pages 159 to 163 of 378
In one line
A mortgage is the transfer of an interest in a particular piece of immovable property to secure a loan, and the Act recognises six ways of doing it.
In exam wording: section 58(a) provides that a mortgage is the transfer of an interest in specific immoveable 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.
Why the definition is worded so carefully
Every phrase in section 58(a) is doing work, and the examiner tests them one at a time.
"Transfer of an interest." Something real passes to the lender. That is what makes a mortgage more than a promise to repay: the lender has rights in the property, not merely against the borrower. It is also what distinguishes a mortgage from a charge under section 100, where no interest is transferred.
"An interest", not the whole. The mortgagor keeps the rest. What he keeps is the equity of redemption, his right to get the property back on paying, and it is his most valuable remaining asset. That idea governs the whole of the next chapter, [The Right of Redemption, and Clogs on It].
"Specific immovable property." The property must be identified. A general promise that "my assets" answer the debt is not a mortgage.
"For the purpose of securing." The transfer is security, not payment. The lender is not buying the property; he is holding an interest in it until he is repaid.
What may be secured is drawn widely: money already advanced, money to be advanced in future, an existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability. So a mortgage may secure a guarantee or an obligation that has not yet crystallised into a debt.
The vocabulary, defined in the same clause: the transferor is the mortgagor, the transferee the mortgagee, the principal money and interest secured for the time being are the mortgage-money, and the instrument, if any, by which the transfer is effected is the mortgage-deed. The words "if any" matter: one kind of mortgage needs no instrument at all.
The six kinds
(b) Simple mortgage
No possession. The mortgagor binds himself personally to pay the mortgage-money, and agrees expressly or impliedly that on default the mortgagee shall have a right to cause the mortgaged property to be sold and the proceeds applied, so far as necessary, in payment of the mortgage-money.
Two features define it: a personal covenant to pay, and a right to have the property sold, which must be through the court. The mortgagee gets no possession and cannot foreclose.
Mortgage Defined, and the Six Kinds of Mortgage
(c) Mortgage by conditional sale
The mortgagor ostensibly sells the property, on one of three conditions:
- that on default of payment on a certain date the sale shall become absolute; or
- that on such payment being made the sale shall become void; or
- that on such payment being made the buyer shall transfer the property back to the seller.
The proviso, and it is the whole of the modern law: no such transaction is deemed a mortgage unless the condition is embodied in the document which effects or purports to effect the sale.
That proviso was added to stop a recurring injustice. Lenders would take an outright sale deed and a separate secret agreement to reconvey; when the borrower paid, the lender produced the sale deed and denied the rest. Requiring the condition to sit in the same document means the character of the transaction is visible on its face. Two documents means a sale, not a mortgage, and that single sentence answers most problem questions on this clause.
(d) Usufructuary mortgage
The mortgagor delivers possession, or expressly or impliedly binds himself to deliver possession, and authorises the mortgagee to retain possession until payment, and to receive the rents and profits, or any part of them, and to appropriate them in lieu of interest, or in payment of the mortgage-money, or partly each.
Usufruct means the produce or profit of a thing. Two things follow and both are examined: there is no personal liability on the mortgagor, and there is no time fixed for repayment, so the mortgagee's remedy is simply to stay in possession and take the income. He cannot sue for the money and cannot foreclose or sell.
(e) English mortgage
Three elements together: the mortgagor binds himself to repay on a certain date; he transfers the property absolutely to the mortgagee; subject to a proviso for re-transfer on payment as agreed.
It is the strongest form for the lender, combining a personal covenant with an absolute transfer, and is the form banks and companies commonly use.
(f) Mortgage by deposit of title-deeds
A person, in one of the named towns, delivers to a creditor or his agent documents of title to immovable property, with intent to create a security on it.
The named towns are Calcutta, Madras and Bombay, and any other town the State Government concerned specifies by notification in the Official Gazette.
This is the equitable mortgage of commercial practice. It is remarkable for what it does not need: no writing, no registration, no attestation. Delivery of the deeds plus the intention is the whole of it, which is why section 59 excepts it from the registered-instrument requirement. Its three essentials are a debt, a deposit of title deeds, and an intention that they be security.
Mortgage Defined, and the Six Kinds of Mortgage
(g) Anomalous mortgage
A mortgage which is not any of the five above. The Act defines it purely by exclusion. Anomalous mortgages are usually local or customary forms, or combinations, such as a usufructuary mortgage that also carries a personal covenant to pay. Their rights and liabilities are governed by the contract between the parties, and by section 98.
A worked example
Ashwini needs Rs. 20 lakh and owns a shop at Karad. Consider five arrangements with a lender, Bhaskar.
One. She signs a deed promising to repay in three years and agreeing that if she does not, Bhaskar may have the shop sold to recover the money. She keeps the shop and runs her business from it. Simple mortgage: a personal covenant plus a right to cause a sale, no possession.
Two. She executes a sale deed of the shop to Bhaskar, and the same document provides that if she pays Rs. 20 lakh within three years the sale becomes void. Mortgage by conditional sale. Had the condition been in a separate agreement executed the same day, the proviso to clause (c) would defeat it and it would be an outright sale.
Three. She hands the shop over to Bhaskar and authorises him to collect the rent of Rs. 30,000 a month and keep it in lieu of interest until the principal is repaid, with no date fixed and no promise to pay personally. Usufructuary mortgage.
Four. She promises to repay on a fixed date, transfers the shop absolutely to Bhaskar, and the deed provides that he will re-transfer it on payment. English mortgage.
Five. In Mumbai she hands Bhaskar the original title deeds of the shop, saying they are to be held as security for the loan. Nothing is written. Mortgage by deposit of title-deeds, valid without writing or registration because it is made in one of the named towns.
And if she had given Bhaskar possession and also promised to pay personally on a fixed date? That fits none of the five definitions exactly, so it is an anomalous mortgage under clause (g).
What it does NOT mean
A mortgage is not a sale. The transfer is for the purpose of securing, and the mortgagor retains the equity of redemption.
Not all of the interest passes. Only "an interest", even in an English mortgage where the transfer is expressed to be absolute, because it is subject to the proviso for re-transfer.
Mortgage Defined, and the Six Kinds of Mortgage
A mortgage by conditional sale needs one document. The condition must be embodied in the document which effects or purports to effect the sale.
A usufructuary mortgagee cannot sue for the money or foreclose. There is no personal covenant and no date; his security is the possession and the profits.
A simple mortgagee cannot sell privately. His right is to cause the property to be sold, which means through the court.
A mortgage by deposit of title-deeds is not available everywhere. It works only in Calcutta, Madras, Bombay and towns notified by the State Government.
"Anomalous" is not a defect. It simply means the mortgage does not fit the five named forms.
Distinctions
| Kind | Possession | Personal liability | Mortgagee's remedy |
|---|---|---|---|
| Simple, 58(b) | With the mortgagor | Yes | Sale, through the court |
| Conditional sale, 58(c) | Usually with the mortgagor | No | Foreclosure |
| Usufructuary, 58(d) | With the mortgagee | No | Retain possession and take rents and profits |
| English, 58(e) | With the mortgagee, transfer absolute | Yes | Sale |
| Deposit of title-deeds, 58(f) | With the mortgagor | Depends on the terms | Sale |
| Anomalous, 58(g) | As agreed | As agreed | As agreed, and s.98 |
| Mortgage by conditional sale | Sale with an agreement to repurchase | |
|---|---|---|
| Where the condition is | In the same document as the sale | In a separate document |
| Relationship created | Debtor and creditor | Seller and buyer |
| Right to redeem | Yes | No |
| Authority | Proviso to s.58(c) |
Quick revision
- Mortgage: transfer of an interest in specific immovable property to secure a loan, an existing or future debt, or an engagement giving rise to a pecuniary liability.
- Vocabulary: mortgagor, mortgagee, mortgage-money, mortgage-deed.
- The mortgagor keeps the equity of redemption.
- Simple (b): no possession, personal covenant, right to cause a sale.
- Conditional sale (c): ostensible sale on one of three conditions; the condition must be in the same document.
- Usufructuary (d): possession to the mortgagee, rents and profits in lieu of interest or in payment; no personal liability, no fixed date.
- English (e): personal covenant to repay on a certain date, absolute transfer, proviso for re-transfer.
- Deposit of title-deeds (f): in Calcutta, Madras, Bombay or a notified town; no writing or registration needed; needs a debt, a deposit, and an intention to secure.
- Anomalous (g): none of the above.
Test yourself
1. Define a mortgage and identify the four elements of the definition. 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 elements are a transfer of an interest, specific immovable property, a purpose of security, and an obligation of the kind described.
Mortgage Defined, and the Six Kinds of Mortgage
2. What single requirement decides whether a transaction is a mortgage by conditional sale or an outright sale? That the condition is embodied in the document which effects or purports to effect the sale. If it appears in a separate document the proviso to section 58(c) prevents the transaction being deemed a mortgage.
3. Which kind of mortgage carries no personal liability and no date for repayment? A usufructuary mortgage under section 58(d). The mortgagee takes possession and appropriates the rents and profits, and has no right to sue for the money or to foreclose.
4. Where can a mortgage by deposit of title-deeds be made, and what does it require? In Calcutta, Madras and Bombay, and in any other town the State Government concerned notifies. It requires a debt, delivery of documents of title to a creditor or his agent, and the intent to create a security. No writing, registration or attestation is needed.
5. What are the three elements of an English mortgage? The mortgagor binds himself to repay on a certain date; he transfers the property absolutely to the mortgagee; and the transfer is subject to a proviso that the mortgagee will re-transfer on payment as agreed.
6. What makes a mortgage anomalous? That it is not a simple mortgage, a mortgage by conditional sale, a usufructuary mortgage, an English mortgage or a mortgage by deposit of title-deeds within section 58.
7. Why is a mortgage not a transfer of the whole ownership? Because only "an interest" is transferred, and it is transferred for the purpose of security. The mortgagor retains the equity of redemption, his right to recover the property on payment.
The rest of this subject
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