The Mortgagee in Possession

Section 72: what a mortgagee may spend

A mortgagee may spend such money as is necessary:

(b) for the preservation of the property from destruction, forfeiture or sale; (c) for supporting the mortgagor's title; (d) for making his own title good against the mortgagor; (e) where the property is a renewable leasehold, for renewal of the lease.

He may, absent contrary contract, add such money to the principal, at the rate of interest payable on the principal, or, where none is fixed, nine per cent per annum.

The proviso. Expenditure under clause (b) or (c) is not deemed necessary unless the mortgagor has been called upon and has failed to take proper and timely steps to preserve the property or support the title. The mortgagor must be given the chance to act first; the mortgagee cannot spend freely and send the bill.

Insurance. Where the property is by its nature insurable, the mortgagee may, absent contrary contract, insure against fire, and the premiums are added to the principal on the same interest terms. But the amount insured must not exceed the amount specified in the mortgage-deed, or, if none is specified, two-thirds of the amount that would be required to reinstate the property on total destruction. And he may not insure at all where insurance is already kept up by or on behalf of the mortgagor to the amount he is authorised to insure for.

Section 73: proceeds of a revenue sale, and acquisition compensation

Sub-section (1). Where the property is sold for failure to pay arrears of revenue, other public charges or rent, and the failure did not arise from the mortgagee's default, the mortgagee may claim the mortgage-money, wholly or in part, out of any surplus of the sale proceeds remaining after the arrears, charges and deductions directed by law.

Sub-section (2). Where the property is acquired under the Land Acquisition Act 1894 or any other compulsory acquisition enactment, the mortgagee may claim the mortgage-money, wholly or in part, out of the compensation due to the mortgagor.

Sub-section (3). Such claims prevail against all other claims except those of prior encumbrances, and may be enforced notwithstanding that the principal money has not become due.

The principle is substitution: when the land is converted into money by an event outside the mortgagee's control, the security follows the money. Sub-section (3) is what makes it useful, since an acquisition rarely waits for the mortgage to fall due.

Sections 74 and 75, on the rights of a subsequent and a mesne mortgagee, were repealed by the amending Act of 1929, and are noted here as repealed rather than explained. Their subject matter is now covered by subrogation under section 92.

Section 76: the liabilities

When the mortgagee takes possession during the continuance of the mortgage:

(a) he must manage the property as a person of ordinary prudence would manage it if it were his own;

(b) he must use his best endeavours to collect the rents and profits;

(c) absent contrary contract, he must pay out of the income the Government revenue, all other public charges and rent accruing due during his possession, and any arrears of rent in default of which the property may be summarily sold;

(d) absent contrary contract, he must make such necessary repairs as he can pay for out of the rents and profits after deducting the payments in clause (c) and the interest on the principal;

(e) he must not commit any act which is destructive or permanently injurious to the property;

(f) where he has insured against fire, he must, on loss, apply the money he actually receives, so far as necessary, in reinstating the property, or, if the mortgagor so directs, in reduction or discharge of the mortgage-money;

(g) he must keep clear, full and accurate accounts of all sums received and spent as mortgagee, and at any time during the mortgage give the mortgagor, at his request and cost, true copies of them and of the vouchers supporting them;

(h) his receipts, or a fair occupation-rent where he occupies personally, must, after deducting the expenses properly incurred for management and collection and the expenses in clauses (c) and (d) with interest, be debited against him in reduction of interest due, and, so far as they exceed the interest, in reduction or discharge of the principal; any surplus is paid to the mortgagor;

(i) when the mortgagor tenders or deposits the amount due, the mortgagee must account for his receipts from the date of the tender, or from the earliest time he could have taken the money out of Court, and may not deduct expenses incurred after that date.

Loss occasioned by default. If he fails to perform any of these duties, he may, when accounts are taken under a decree, be debited with the loss occasioned by the failure.

Clause (h) is the engine of the whole section, and clause (b) is what makes it bite: a mortgagee who does not bother to collect rent is not thereby better off, because clause (h) charges him with a fair occupation-rent where he occupies himself, and the accounting under a decree can debit him with what his neglect cost.

Section 77: receipts in lieu of interest

Clauses (b), (d), (g) and (h) of section 76 do not apply where there is a contract that the receipts from the property shall, so long as the mortgagee is in possession, be taken in lieu of interest on the principal, or in lieu of interest and defined portions of the principal.

This is the usufructuary arrangement, and the exemption follows from it. If the parties have agreed that the income is simply set against interest, there is nothing to collect for the mortgagor, nothing to account for, and no surplus to hand over. The duties that survive are the important ones: prudent management under (a), payment of public charges under (c), no destructive acts under (e), and the proper application of insurance money under (f).

A worked example

Lalita mortgages her orchard at Ratnagiri to Manoj, who takes possession under a mortgage carrying interest at 8 per cent.

The river adds land to one boundary. Under section 70 it becomes part of the security. On redemption it goes to Lalita under section 63.

The revenue authorities threaten to sell the orchard for arrears. Manoj may spend money to preserve it from sale under section 72(b), but only after calling upon Lalita to act and her failing to do so. What he spends is added to the principal at 8 per cent.

He insures the orchard against fire. Permitted, unless Lalita already insures it for the relevant amount. The sum insured may not exceed what the deed specifies, or, if silent, two-thirds of the reinstatement cost.

Fire damages the packing shed and Manoj receives the insurance money. Under section 76(f) he must apply it in reinstating the property, or, if Lalita so directs, in reduction or discharge of the mortgage-money. The choice is hers.

He collects Rs. 6 lakh of fruit revenue in a year. Under clause (h) he deducts the proper management and collection expenses and the payments under (c) and (d) with interest, credits the balance first against interest due, and any excess against the principal. Any surplus beyond the whole debt is paid to Lalita.

He lives in the farmhouse himself and collects nothing for it. Clause (h) charges him with a fair occupation-rent all the same.

He lets the trees go untended and the yield halves. Clause (a) required prudent management and clause (b) his best endeavours to collect. When accounts are taken under a decree, he may be debited with the loss his failure caused.

Lalita tenders the whole amount due on 1 March. From that date Manoj must account for his receipts and may not deduct any expenses incurred afterwards.

Change the arrangement. Suppose the deed had provided that Manoj takes the orchard's income in lieu of interest. Section 77 then switches off clauses (b), (d), (g) and (h): he need not account for the receipts at all. He must still manage prudently, pay the public charges, avoid destructive acts and apply insurance money properly.

What it does NOT mean

Section 70 does not give the mortgagee the accession. It attaches it to the security; sections 63 and 63A return it on redemption.

A mortgagee may not spend at will. Under section 72(b) and (c) the mortgagor must first be called upon and have failed to act.

He may not over-insure. The cap is the deed's figure, or two-thirds of the reinstatement cost, and he may not insure where the mortgagor already does.

Insurance money is not automatically applied to the debt. It goes to reinstatement, unless the mortgagor directs otherwise.

Occupying rent-free is not free. A fair occupation-rent is debited against him.

Section 77 does not exempt him from everything. Only clauses (b), (d), (g) and (h) fall away.

Sections 74 and 75 are repealed and should be described as repealed, not explained.

Distinctions

Quick revision

• s.70 and s.71: accessions and a renewed lease enure to the security, not to the mortgagee's ownership.
• s.72: he may spend to preserve the property, support the mortgagor's title, perfect his own title and renew a leasehold, adding it to the principal at the contract rate or 9%. For (b) and (c) the mortgagor must first be called upon and have failed. Insurance is capped at the deed's figure or two-thirds of reinstatement cost, and is barred where the mortgagor already insures.
• s.73: on a revenue sale he claims out of the surplus; on compulsory acquisition out of the compensation; such claims prevail over all but prior encumbrances and may be enforced though the money is not yet due.
• ss.74 and 75 are repealed.
• s.76, nine duties: prudent management; best endeavours to collect; pay revenue, charges and rent; necessary repairs out of income; no destructive act; apply insurance money to reinstatement or as the mortgagor directs; clear, full and accurate accounts with copies at the mortgagor's request and cost; credit receipts, or a fair occupation-rent, against interest then principal with the surplus to the mortgagor; account from the date of tender and deduct no later expenses.
• Failure means being debited with the loss when accounts are taken.
• s.77: a contract that receipts are taken in lieu of interest switches off clauses (b), (d), (g) and (h) only.

Test yourself

1. A mortgagor builds a house on mortgaged land. Who is entitled to it? For the purposes of the security, the mortgagee, under section 70 and its illustration (b). It becomes part of what answers the debt, and on redemption it goes to the mortgagor under section 63.

2. Before spending money to preserve the property, what must a mortgagee do? Call upon the mortgagor to take proper and timely steps and find that he has failed to do so. The proviso to section 72 says such expenditure is not deemed necessary otherwise.

3. How much may a mortgagee insure the property for? Not more than the amount specified in the mortgage-deed, or, if none is specified, two-thirds of the amount that would be required to reinstate the property on total destruction. He may not insure at all where the mortgagor already keeps up insurance to that amount.

4. The property is acquired compulsorily. What can the mortgagee do? Claim payment of the mortgage-money, wholly or in part, out of the compensation due to the mortgagor under section 73(2). That claim prevails against all claims except prior encumbrances, and may be enforced even though the principal money has not become due.

5. A mortgagee in possession occupies the property himself and pays nothing. How is that treated? Under section 76(h) a fair occupation-rent in respect of the property is debited against him, in reduction of the interest and then of the principal, exactly as if he had received rent.

6. What happens if the mortgagee fails in his duties under section 76? When accounts are taken in pursuance of a decree under Chapter IV, he may be debited with the loss occasioned by his failure.

7. Which duties fall away where receipts are taken in lieu of interest? Clauses (b), (d), (g) and (h) of section 76, that is best endeavours to collect, necessary repairs out of income, keeping and producing accounts, and crediting receipts. The rest continue to apply.

8. Insurance money is received after a fire. Who decides how it is used? It must be applied in reinstating the property, unless the mortgagor directs that it be applied in reduction or discharge of the mortgage-money. The direction is the mortgagor's to give.