Rules of Lien and Merger in Law

What is Lien in Property Law

Overview:

Within the realm of property law, the concept of lien holds significant importance as it establishes the rights and interests of individuals concerning tangible assets. Lien, as defined by the Transfer of Property Act, 1882 (TP Act), refers to the right of one party to retain possession of another party's property until a specific debt or obligation is fulfilled. This comprehensive article aims to delve into the intricacies of lien, exploring its legal framework, types, creation, and enforcement under the TP Act, 1882. By understanding lien in property law, individuals can gain clarity on the rights and obligations associated with the retention of property until the fulfillment of debts or obligations.

Definition of Lien:

A common law lien is the right of a person to retain possession of the goods of another until his claims are satisfied. it is the right of a person to have his claim satisfied out of the property belonging to another.

Kinds of Lien:

Lien is either legal or equitable and either particular or general.

It differs from a mortgage or a pledge. The point of difference is that a lien does not give any active right in regard to the property, the right given is merely a passive right to possess.

Legal Lien:

Legal lien is that which is recognized and enforced by the common law Courts, while an equitable lien is that which is recognized and enforced in a Court of equity only. A legal lien is lost when the possession of the property subject to it is given up. It is, however, good against the whole world.

Banker's lien:

Banker's lien was a right of retaining things delivered into his possession as a banker if and so long as the customer to whom they belonged or who had the power of disposing them when so delivered was indebted to the banker on the balance of the account between them, provided the circumstances in which the banker obtained possession did not imply that he had agreed that this right shall be excluded.

Where securities or other properties of the customer were in the hands of the bank, the bank could exercise the right of retaining those securities or documents until the whole amount due to it was paid by the customer

When a customer pays money into his bank's account, the amount ceases to be the property of the customer and becomes the property of the bank and the bank is thereafter under a contractual obligation to repay or give credit to the customer for the amount.

Equitable lien:

Equitable lien, for its existence and continuance, does not depend upon retention of possession of the property subject to it affecting everybody who obtains property with notice thereof. In other words “equitable lien confers a charge on property” and arises by “operation of equity from relationship of possession but will not avail against a purchaser for value of a legal estate without notice of it. It is enforceable by means of an order for sale.

A mortgage lien:

A mortgage lien is a type of lien that is placed on a property when the owner borrows money from a lender to purchase the property. The lender holds the lien as security for the repayment of the loan. If the borrower fails to make the required loan payments, the lender has the right to foreclose on the property and sell it to recover the outstanding debt.

Judgment lien:

A judgment lien is a type of lien that is placed on a property as the result of a court judgment. For example, if someone wins a lawsuit against a property owner and obtains a judgment against them, they may be able to place a lien on the property as a means of collecting the judgment amount.

Tax lien

A tax lien is a lien that is placed on a property by the government to secure the payment of taxes. If a property owner fails to pay their taxes, the government may place a lien on the property and eventually foreclose on it to recover the unpaid taxes.

Mechanic's lien

A mechanic's lien is a type of lien that is placed on a property by a contractor, subcontractor, or supplier who has provided goods or services to the property owner but has not been paid for them. The lien is placed as a means of securing payment for the goods or services provided.

In general, liens remain in place until the debt or obligation secured by the lien is satisfied. Once the debt has been paid in full, the lien is typically removed.

Examples of Principles of Lien:

Lien and Pledge: Difference

A common law lien confers merely a right to possess and retain the property as security, which can be said to be a mere passive right to possess. In a pledge, there is a delivery of possession of the property, and a power of sale is its necessary concomitant.

What is Merger

Meaning of Merger:

The verb 'to merge' has been defined as meaning to sink or disappear in something else, to be lost to view or absorbed into something else, to become absorbed or extinguished, to be combined or be swallowed up.  the word "merge" also carries the meaning of joining together, an addition, a combination of the qualities of one with another.

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Definition of Merger:

Merger is defined generally as the absorption of a thing of lesser importance by a greater, whereby the lesser ceases to exist, but the greater is not increased, an absorption or swallowing up so as to involve a loss of identity and individuality. It is extinguishment of right, estate, contract action etc. by absorption in another to be sunk in the greater title.

As explained by Blackstone, according to the common law rule in England:

 “whenever a greater estate and a lesser estate coincide and meet in one and the same person, without any intermediate estate, the less is immediately annihilated, or in the law Phrase, is said to be merged, that is sunk or drowned in the greater.

As decided in Forbes v, Moffat,

When a charge and ownership of an estate are united in the same person, the charge is automatically extinguished. Of course, this depends upon the intention of the person in whom the interests are united and the same may be express or implied. Equity will find out this intention and consider what is most beneficial for him. When a mortgage and the equity of redemption both come into the same hand such a question arises.

The common law rule, as laid down by Blackstone and explained in Jorbes case, was that the merger was automatic irrespective of the intention of the person, but equity ruled that it depended on the person’s intention and where merger was against that person’s interest, equity presumed against the same. Now, after. the Judicature Act, 1873, both at law and in equity, merger depends on intention, The Transfer of Property Act before its amendment in 1929 accepted the rule laid down in Toulmene v. Steere under which “extinguishment” (of a lesser and bigger one) was the exception. But the Privy Council declined to follow this rule of automatic merger.

The amended Section 101 of the Transfer of Property Act, therefore, lays down that the Court presumes that the person who discharges an encumbrance, kept it alive if it would be for his benefit, i.e, where a property is mortgaged once and there is a subsequent mortgage, the prior mortgagee if he purchases the equity of redemption will not bring about a merger because it would be in his own benefit to keep it alive. If he keeps it alive then the subsequent mortgagee will be able to redeem the prior mortgage, otherwise not.

The Doctrine of Merger in Mortgages:

A mortgage merger is a type of financial transaction in which two mortgage loans are combined into one. This can be done for a variety of reasons, such as to secure a lower interest rate, to extend the repayment term of the mortgage, or to consolidate multiple mortgages into a single loan.

In a mortgage merger, the terms of the two loans being combined are typically reevaluated and a new mortgage agreement is drawn up to reflect the combined loan. The borrower will then make payments on the merged mortgage according to the terms of the new agreement.

Mortgage mergers can be a useful tool for borrowers who are looking to refinance their existing mortgages or who have multiple mortgages that they would like to consolidate. However, it is important for borrowers to carefully consider the terms of the merged mortgage and to understand the potential risks and benefits before entering into such a transaction.

Examples of Merger in Morgage:

Here are a few examples of how a mortgage merger might be used:

1. A homeowner has a 30-year mortgage with an interest rate of 5% and a 15-year mortgage with an interest rate of 4%. By merging the two loans, the borrower can secure a lower overall interest rate and potentially save money on interest payments over the life of the loan.
2. A borrower has a mortgage with a short repayment term and a high monthly payment. By merging this mortgage with a loan that has a longer repayment term, the borrower can lower their monthly payment and make their mortgage more affordable.
3. A borrower has two separate mortgages on a single property, one for the original purchase and another for a home improvement project. By merging these two loans into a single mortgage, the borrower can simplify their finances and make it easier to manage their monthly payments.

This occurs

• (i) by the merger of a lower in higher security, and
• (ii) by the merger of a lesser estate in a greater estate.

The section only deals with the second head of the merger.

A merger of estates takes place when two estates held in the same legal rights become united in the same person. Where the capacity in which a person in possession of the mortgagee's right is something quite different from the capacity in which he is in possession of the equity of redemption, the mere fact that the two capacities are united in the same physical person cannot result in a merger.

It is, thus, clear that under the principles of section 101 of the Transfer of Property Act, as amended, up to date, it has been provided that the merger cannot be presumed to have taken place automatically of the two rights, but it can be held to have taken place only by proving that the person in whom both the rights vest had intended to treat both the rights as one, and not otherwise.

It is therefore the rule that there will be no merger and the application of the doctrine of intention is no longer required. Section 92 of the Transfer of Property Act lays down that the mortgagee’s interest is not merged by reason of the fact that the mortgagee’s interest and the mortgagor’s equity of redemption have been united in the same person.