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Mortgage in law of property

The Role of Mortgages in Property Law: A Comprehensive Overview

A mortgage is a legal instrument that serves as security for a loan used to finance the purchase of real property, such as a home or commercial building. It represents a contractual agreement between a borrower (mortgagor) and a lender (mortgagee). The borrower pledges the property as collateral, allowing the lender to seize and sell it in the event of default on loan repayment.

Introduction:

A right in another’s property was known in Roman law as a jus in re aliena. To this class of rights according to Holland belongs a right which is given for the subsidiary purpose of enabling the person to whom it is granted to make sure of receiving a certain value to which he is entitled, if not otherwise, then at all costs, by means of the right in question. This right which is known as mortgage merely entitles a person who is entitled to receive a definite value from another, to realise it by eventual sale of the thing which is given to him in mortgage.

Concept of Mortgage in Law of Transfer of Property:

In essence, a mortgage is a contract between two parties (i.e. a borrower/mortgagor and a lender/mortgagee) where a capital sum of money is lent in exchange for a proprietary interest in land. Unlike other proprietary interests in land, a right accrues to both the mortgagor and a mortgagee once a mortgage deed has been executed between the two parties. These interests are:

  • (a) the mortgagor's/borrower's right to have the land redeemed/returned once the capital money lent has been repaid, and
  • (b) the mortgagee's/lender's right to possess and acquire the property, if the capital money lent, is not repaid as stipulated in the mortgage deed.

The proprietary rights of both the mortgagor and mortgagee are independent proprietary interests and there is oftentimes no bar on the parties to transfer and/or sell their respective rights in the mortgage to subsequent parties. [2022 SCMR 1893]

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Mortgage in Transfer of Property Act

Relevant Legal Provisions regarding mortgage:

Section 58 of the Transfer of Property Act defines the transaction of mortgage of immovable property. Text of Section 58:
“(Mortgage”, “mortgagor”, “mortgagee”, ‘“Mortgage-money” and “mortgage-deed” are defined.) 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, and existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability, The transferor is called a mortgagor, the transferee is called a mortgagee, the principal money and interest of which payment is secured for the time being are called the mortgage-money and the instrument (if any) by which the transfer is effected is called a mortgage-deed.

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Meanings and Definitions of Mortgage:

According to Black’s Law Dictionary:
“A conveyance of title to property that is given as security for the payment of a debt or the performance of a duty and that will become void upon payment or performance according to the stipulated terms.
According to Corpus Juris Secundum:
Mortgage “includes transfer of property, more particularly or real property, as security for payment of money or performance of contracts or other obligations, whether made by conveyance or condition or with a defeasance or by deed of trust or by conveyance absolute in form or by deposit of title-deeds or other transaction constituting an equitable mortgage.”
As defined in the Halsbury’s Laws of England:
A mortgage is a disposition of property as security for a debt. It may be affected by a demise or sub-demise of land, by a transfer of a chattel or by an agreement to create a charge, for securing money or money’s worth, the security being redeemable on repayment or discharge of the debt or other obligation.
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Object of Mortgage:

According to Professor Holland, the objects aimed at by the law of mortgage are obviously, on the one hand, to give the creditor security on the value of which he can rely, which he can readily turn into money, and which he can follow even in the hands of third parties; on the other hand, to leave the enjoyment of thing in the meantime to its owner, and to give him every facility for disencumbering it when the debt for which it is security shall have been paid.”

Essential Ingredients of Mortgage:

A transfer of property by way of mortgage must contain the followings:
  • There must be a contract/transfer.
  • Transfer must be of an Interest.
  • Interest must pertain to immovable property.
  • The immovable property must be specific.
  • The consideration/purpose must be to secure: (a) money advanced or to be advanced(b) existing or future debt, (c) the performance of an engagement.
  • There must be two competent parties.
  • The following legal forms must be complied with: (a) execution by mortgagor, (b) attestation by two witnesses, (c) registration of instrument.

Explanation of Essential Ingredients of Mortgage:

(1) There must be a Contract/Transfer In every mortgage:

There must be a contract, express or implied; the original and intentional hypothecation of the mortgaged property to secure the repayment of the mortgage money is of the very essence of a mortgage; 

(2) Transfer must be of an interest:

In England, a mortgage debt is a chose in action but the mortgagee is treated as having an interest in the mortgaged property and priorities are governed by the rules applicable to interests in land and not by the rules which apply to interests in personality. Under the present Act, a mortgage-debt is not an actionable claim. It is the transfer of an interest in immovable property. This distinguishes it from a sale which is a transfer of ownership of immovable property. The interest referred to in this section thus has reference to interest less than ownership which continues with the mortgagor. The interests transferred in the several classes of mortgages are, however, not identical. 

(3) Interest must pertain to immovable property 

The phrase “immovable property” is defined in Section 3 of the Act. A mortgage under the Act is confined to a transfer of immovable property. A building attached to the earth, or a house embedded in the earth is immovable property. When land is transferred by way of mortgage, the building erected upon it passes by necessary implication to the mortgage. AIR 1959 Ker. 294

Illustration: 

Equity of redemption, or the right to redeem, is immovable property, and when an owner has made a mortgage, whether simple or usufructuary, he can make another mortgage of his interest in the mortgaged property. [ILR 37 Pat. 1577]

(4) The immovable property must be specific 

To create a mortgage, it is necessary to specify the immovable property which is made security for the payment of the debt, or the performance of the engagement. The description must be sufficient to identify the property. The word “specific” indicates that . the description of the immovable property should:
  • (1) be free from ambiguity and uncertainty, and 
  • (2) be specific as distinguished from general. 

A mortgage may be created, even though there is no specification of the property, provided the property is easily ascertainable from the instrument. There is no reason why a general description of the property should be held insufficient, if it is not uncertain. A property can be specific, provided it is identifiable, even though it may not be in existence on the date of the transfer. 

Illustrative Case law: 

In Land Mortgage, Bank of India v. Abdul Kasim, the mortgagor gave, in the earlier part of the deed, specific properties and later on added “all other mauzas, mahals, etc., comprised in the Sanad”, It was held, that the description was sufficient to include the properties comprised in the Sanad as mortgaged properties, though they had not been Specifically mentioned in the Schedule. [ILR 26 C 395]

(5) The Consideration/purpose of mortgage:

To determine whether a transaction is a mortgage or not, it has to be found whether the property comprising it is made security for the payment of a debt or for the performance of an engagement. If it appears from the deed that the parties intended to create a security on the immovable property, a mortgage is created. If the property is not made security for the payment of any money, there is no mortgage. However, Section 58 Specifies the following to be the considerations of mortgage:

(a) Money advanced or to be advanced:

The expression “money advanced or to be advanced” covers:
  • (i) existing debts without a present advance, for which security is given by the execution of a mortgage;
  • (ii) present advances; 
  • (iii) mortgage made to secure future advances. 

Where only a part of the mortgage-money is advanced, the mortgage is good security for the amount actually advanced. A mortgage, ordinarily, does not cease to be enforceable merely for failure of part of the consideration. The mere non-payment of a portion of the consideration does not render a mortgage inoperative or invalid. [AIR 1917 Pat. 51]

(b) Existing or future debt:

A mortgage may be made for the purpose of securing an existing or future debt. Therefore, the security may be intended to cover the general balance that might become due from the mortgagor to the mortgagee upon all the accounts between them. In such a case, the whole of the balance that might become due on account is secured by the mortgage. Where a mortgage is executed to secure a past or existing debt, it is valid in law, and so is a mortgage made to secure a future debt. Thus, a security bond given to an officer of the Court to secure an amount that may be decreed is a mortgage to secure a future debt, The future debt, referred to in the section, may be a contingent liability, e.g., a mortgage executed by way of security for the payment of the respondent’s costs in an appeal, or to further secure a mortgage against the loss of the existing security.

(c) The performance of an engagement:

The word “engagement” means a contract as defined in Section 2 of the Contract Act. So, where a mortgage is made to secure delivery by the mortgagor of certain goods, and the parties assess the amount of the pecuniary liability which might arise in anticipation of a breach, the mortgage is valid, being for the purpose of securing the performance of an engagement.

Illustration:

Where A sells property to B and executes a document of indemnity agreeing that if B was deprived of the property or suffered loss, A would pay the whole amount of the mortgage, the document contains an engagement which may give rise to a personal liability. [5 All. L Jour. 723 (DB)]

(6) There must be two competent parties: 

In order to constitute a mortgage, there must be two parties called mortgagor and mortgagee. 
(a) Mortgagor:

Everyone entitled to immovable property can mortgage his property unless he is under some statutory or personal disability, So, a joint owner or co-owner can mortgage his share, but not a minor or a person suffering from any other disability. ILR 30 C 539. 

(b) Mortgagee:

A mortgagee is a person in whose favour an interest in the mortgaged property is transferred. By virtue of Section 59-A, the word “mortgagee” includes a person deriving title under him. 
Any person capable of holding property may be a mortgagee, even though he be a minor or a person of unsound mind, or disability does not disqualify a person from being a transferee. ILR 40 M 308.

(7) The legal formalities must be complied with:

It lays down when the mortgage should be by assurance. It provides for two cases, namely (a) when the principal money secured is one hundred rupees or upwards; and (b) where the principal money secured is less than one hundred rupees. In the former case, the formalities prescribed for a mortgage, other than a mortgage by deposit of title-deeds, are, that the deed must be

  • (1) signed by the mortgagor,
  • (2) attested by at least two witnesses, and
  • (3) registered.
In the other case, where the principal money secured is less than one hundred rupees, a mortgage may be affected either.
  • (a) by a registered instrument, signed and attested, as in the case of a mortgage, where the principal money secured is one hundred rupees or upwards; or 
  • (b) except in the case of a simple mortgage, by delivery of the property, 
Except in the case of a mortgage by deposit of title-deeds, there are only two ways for transfer of property by way of a mortgage, namely
  • (a) by a registered instrument signed by the mortgagor and attested by at least two witnesses; and 
  • (b) by delivery of possession.
But the latter mode of transfer is limited only to cases where the principal money secured  is less than one hundred rupees and the transaction is not one of a simple mortgage, for, in such a mortgage, the mortgagor does not part with possession. The section provides that a simple mortgage must always be registered.

Mortgage by deposit of title documents Meanings:

Under S. 58(f) of Transfer of Property Act, 1882, delivery of title documents pertaining to any immovable property to creditor or his agent with intention to create security thereon is called 'mortgage by deposit of title deeds/equitable mortgage [2016  CLD  920]

Recovery of possession of mortgaged immovable property:

Person entitled to seek remedy under S. 8 of Specific Relief Act, 1877. Such person would include an owner, lessor, lessee, mortgagee or mortgagee of immovable property, trustee or beneficiary of a trust. [2019 SCMR 84 SUPREME-COURT]

The Doctrine of consolidation of Mortgages: 

The doctrine of consolidation had its origin in the maxim “he who seeks equity must do equity”. Where distinct estates have been Separately mortgaged by the same mortgagor to the same mortgagee, the mortgagee is in a better position as if the whole of the lands had been mortgaged to him for the total amounts advanced by him. He can, therefore, consolidate those mortgages against the mortgagor and refuse to allow him to redeem one without redeeming the other. In other words, when a party is entitled to the mortgages he can insist upon the mortgagor to redeem all at a time or none. Redemption here is allowed only upon equitable terms that is, when the mortgagor’s right to redeem at law was lost and he seeks to enforce his equitable right to redeem, the mortgagee can subject the mortgagor to an equitable condition of redeeming all the mortgages, because otherwise a mortgagee would be exposed to the risk of deficiency of the other security. He is thus left to his luck, which is not fair. The doctrine applies to real or personal property mortgaged and also to legal or equitable properties. This doctrine was abolished in England.

The Transfer of Property Act, Section 61, in Pakistan, also enacts to this effect. Section 61 enacts against consolidation but provides that if there is a contract to the contrary consolidation will be permitted. But a mortgagee cannot compel a mortgagor to redeem all the mortgages as is provided in Section 67-A of the Transfer of Property Act. It must be noted that the old section referred to separate mortgages of different properties but the amended section now covers the situation where the same property is mortgaged under successive mortgages. As explained in Jankinath v. Pramathnath, such a situation may arise not due to consolidation but because of making a second mortgage of the same property to the same mortgagee.

Conclusion:

A mortgage is an interest in land created ordinarily by a written instrument providing security for the performance of a duty or the payment of a debt. The mortgage operates as a conveyance of the legal title to the mortgagee, but such title is subject to defeasance on payment of the debt or performance of the duty by the mortgagor. The law of mortgage, however, has its foundation in the desire of the creditor to secure himself against the loss of his money owing: to the death, failure, or vagary of his debtor.

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