Concept of Mortgage | Property Law - CLAT PG PDF Download

Introduction

• A mortgage involves transferring an interest in specific immovable property to secure the payment of a loan or debt.
• The party transferring the property is called the mortgagor, while the party providing the loan is the mortgagee. The property used as security is known as the mortgage property.

Essentials for Mortgage (Section 58)

• Transfer of Interest: An accessory right is secured to ensure debt payment, without transferring ownership. The mortgagor retains ownership, and the mortgage creates a right in rem against all subsequent transferees.
• Specific Immovable Property: The property being mortgaged must be clearly specified and easily identifiable.
• Securing Payment or Performance: The transfer aims to secure the payment of a loan or the performance of a contract.

Types of Mortgage

• Simple Mortgage: A personal undertaking to pay is essential. The mortgagee has the right to sell the property to realize the mortgage debt. Possession remains with the mortgagor.
• Mortgage by Conditional Sale: The mortgagor ostensibly sells the property with a condition that the sale becomes absolute upon default. The condition must be included in the mortgage document.
• Usufructory Mortgage: Possession of the property is delivered to the mortgagee, who does not receive rents or profits in lieu of interest or principal. The mortgagee cannot foreclose or sue for sale.
• English Mortgage: The mortgagor binds himself to repay the mortgage money on a certain day. The mortgaged property is transferred absolutely to the mortgagee, subject to reconveyance upon payment.
• Mortgage by Deposit of Title Deeds: Also known as equitable mortgage, involves a debt, deposit of title deeds, and intention for deeds to secure the debt.
• Anomalous Mortgage: A mixture of various types of mortgages, such as simple mortgage and usufructuary mortgage.

Mode of Transfer in Mortgage

1. Registered Instrument
2. Delivery of Possession
3. Deposit of Title Deeds

Doctrine of Marshaling and Contribution

Example:

• Suppose B mortgages his properties P and Q to C. Later, B mortgages property P to D.
• When D enforces the mortgage on property P and purchases it, C then obtains a decree and proceeds against property P.
• In this scenario, D can claim marshaling. Properties P and Q should be considered together to protect the interests of both C and D.

Aldrich v Cooper Case

• In the case of Aldrich v Cooper, there were two creditors: C and S.
• Creditor C had a right against the property of debtor D, while creditor S had certain rights against the same debtor's property.
• If creditor C was allowed to proceed against the property, it would affect the rights of creditor S.
• The principle established in this case is that one creditor should not disadvantage another creditor.
• For example, if one creditor has security over two properties of the mortgagor and another creditor has security over only one of those properties, the two properties should be marshaled.
• This means arranging the properties in such a way as to place the burden as far as possible on the property not included in the second creditor's security.

Example:

• Consider properties X and Y belonging to P, both subject to an encumbrance by creditor A.
• Additionally, property Y is also subject to an encumbrance by creditor B.
• According to the doctrine of marshaling, the amounts owed to creditor A must be satisfied from property X in order to avoid affecting the amounts owed to creditor B.

Contribution

• Contribution is the opposite of marshaling and occurs when the mortgaged property is owned by two or more individuals with distinct and separate ownership rights.
• In such cases, if there is a mortgage debt, all owners are required to contribute proportionately.
• The contributions are calculated based on the value of the property at the time of the mortgage.

Example:

• Property X is mortgaged to creditor A for Rs. 200/- and sold to debtor C.
• Properties X and Y are mortgaged to creditor B for Rs. 400/- each and sold to debtor D.
• The value of both properties X and Y is Rs. 500/- each.
• Debtors C and D are required to contribute Rs. 150/- and Rs. 250/- respectively.

Illustration

• Properties X and Y have a mortgage amount of Rs. 400/- advanced by creditor B.
• Creditor B can recover this amount from debtors C and D.
• From debtor C: 500 - 200 = 300, half of this = 150 Rs.
• From debtor D: Value 500 Rs., half of this = Rs. 250/-

Subrogation (Section 91)

• Subrogation, which means 'Substitution,' allows a person to pay off a creditor and assume their position to exercise the creditor's rights.
• Anyone redeeming a mortgaged property has the same rights (such as redemption, foreclosure, or sale) against the mortgagor or any other mortgagee as the mortgagee would have. This right is known as subrogation.
• Full redemption is necessary to apply this doctrine.

Example: Consider the following scenario:

• A mortgages his property to B.
• A then takes a second mortgage from C.
• Subsequently, A makes a third mortgage to D.
• In this case, D has the right to redeem B, which means D takes over B's position and has the same rights as B.

There are certain individuals who may claim the right of subrogation:

• Any person with an interest in or charge on the mortgaged property.
• Any surety.
• Any creditor of the mortgagor.

Exceptions:

• Subrogation does not apply to a mortgagor.

Instances of legal subrogation include:

• A subsequent mortgagee redeeming a prior mortgagee.
• A co-mortgagor redeeming the mortgagee.
• A mortgagor's surety redeeming the mortgagee.
• A purchaser of the equity of redemption redeeming a mortgage.

These individuals have the right to claim subrogation in legal cases.

Tacking

Tacking in Mortgages

• Tacking refers to the process of shifting one's position in the context of mortgages.
• The rule regarding the prohibition of tacking is outlined in Section 93 of the Transfer of Property Act.
• According to this rule, a mortgagee who pays off a prior mortgage, whether or not they are aware of any intermediate mortgage, does not gain any priority concerning their original security.

Example of Tacking

• Consider a scenario where three mortgages are made by B:
• First mortgage to X
• Second mortgage to Y
• Third mortgage to Z
• In this case, Z has the option to pay off X and assume X's position.
• By doing so, Z gains priority over Y concerning mortgage X only, but not regarding their own mortgage Z.
• This process of shifting is known as tacking; however, such a shifting is prohibited by the Transfer of Property Act.

Redeem Up, Foreclose Down
This principle states that while a subsequent mortgagee has the right to redeem a prior mortgagee, they also have the ability to foreclose on subsequent mortgagees. This concept is commonly referred to as "redeem up and foreclose down."

Example:

• Consider a scenario where A mortgages his property to B, C, and D.
• In this case, D has the option to redeem either B or C by paying off their respective mortgage debts.
• However, B has the right to foreclose on A's mortgage, as well as on C and D's mortgages since they are subsequent to him.
• This rule is designed to protect the interests of the mortgagees, who are essentially the creditors in this arrangement.

Rights and Liabilities of Mortgagee and Mortgagor

Once a Mortgage, Always a Mortgage

The concept of "Once a Mortgage, Always a Mortgage" emphasizes the mortgagor's right to redeem the mortgage, known as equity of redemption. This right is outlined in Section 60 of the Transfer of Property Act (T.P. Act). It states that after the principal amount becomes due, the mortgagor has the right to reclaim the property from the mortgagee by paying the mortgage money.

Any condition that restricts this right to redeem is referred to as a "clog on the equity of redemption." The mortgagor's right to redeem cannot be limited by a contract.

Case Study: Sher Khan v. Swami Dayal
In the case of Sher Khan v. Swami Dayal, several instances were identified that would constitute a clog on the right of redemption.
Instances Amounting to Clog on the Right of Redemption:

• Condition of Sale in Default: Any contract that deprives the mortgagor of his right to redeem, such as specifying a date for redemption, will be set aside by the court.
• Long Term for Redemption: If the mortgage contract imposes an excessively long term for redemption, the court may invalidate it as a clog and allow the mortgagor to redeem the mortgage.
• Stipulation Barring Mortgagor's Right of Redemption: If there is a stipulation that restricts the mortgagor's right of redemption after a certain period, it will be considered a clog on the right of redemption.
• Condition Postponing Redemption in Case of Default: A condition in the mortgage deed that postpones the right to redeem beyond a specific period will be deemed a clog on redemption.
• Restraint on Alienation: A stipulation preventing the mortgagor from alienating the mortgaged property is a clog on the mortgage.
• Redemption Restricted to the Mortgagor: A clause that limits the right to redeem to the mortgagor during his lifetime and does not extend to his legal heirs constitutes a clog on redemption.
• Penalty in Case of Default: Any stipulation imposing an increased rate of interest from the date of mortgage in case of default is a clog on the mortgagor's right of redemption.

Collateral Benefit to the Mortgagee

• Collateral benefits to the mortgagee can be either valid or invalid, depending on the specific circumstances and terms of the agreement.
• Several case laws illustrate the principles surrounding collateral benefits to the mortgagee, including:
• The Biggs Case: This case involved a collateral advantage conferred upon the mortgagee.
• The Noakes Case: Similar to the Biggs Case, this case dealt with collateral benefits to the mortgagee.
• The Bradleys Case: Another instance where collateral benefits were considered in relation to the mortgagee.

Rights of the Mortgagee in Possession

The following are the rights of the mortgagee in possession:

• Right to Spend Necessary Amounts: The mortgagee has the right to spend necessary amounts for preserving the mortgaged property from destruction, forfeiture, or sale, for supporting the mortgagor's title, and for making the mortgagee's title good against the mortgagor (defending suits against the mortgagor).
• Claiming Proceeds from Sales or Acquisitions: If the mortgaged property is sold under revenue sales or acquired by the government, the mortgagee is entitled to claim the surplus proceeds from such sales or acquisitions.
• Adding Insurance Premium to Mortgage Debt: The mortgagee has the right to add the amount paid for insurance premiums to the mortgage debt.

Liabilities of the Mortgagee

The following are the liabilities of the mortgagee:

• Prudent Management: The mortgagee is required to prudently manage the property.
• Collection of Rents and Profits: The mortgagee must make efforts to collect rents and profits from the property.
• Payment of Government Revenues and Public Charges: The mortgagee is responsible for paying all government revenues, public charges, and rents due, unless otherwise agreed upon.
• Repairs from Rent Collection: Necessary repairs to the property should be funded from the collection of rents and profits.
• Preservation of Property: The mortgagee should not engage in any actions that would destroy or damage the property.
• Maintenance of Accurate Accounts: The mortgagee is required to maintain clear, full, and accurate accounts.
• Accounting for Tendered or Deposited Money: If the mortgagor tenders or deposits any money, the mortgagee should account for it accordingly.
• Liability for Loss: The mortgagee becomes liable for any loss incurred by the mortgagor due to violations of these provisions.