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Types of mortgage in property law

Overview:

The Transfer of Property Act recognizes six kinds of mortgages, English mortgage, mortgage by deposit of title deeds and anomalous mortgage. Instead of reproducing their definitions, we shall go through and discuss in brief their important features hereunder.

 All the mortgages, under S.58 of Transfer of Property Act, 1882, can be made of a 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

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Kinds of Mortgage and Their Features

Simple Mortgage:

A simple mortgage which is made without delivering possession of the mortgaged property has the following ingredients, 
  • 1) Possession and enjoyment of the property subject to mortgage remains with the mortgagor. 
  • 2) The mortgagor binds himself personally to pay the mortgage money. 
  • 3) In the event of his failing to pay, the mortgagee shall have a right to put the property to sale only through Court and recover his money. 
  • 4) Such a mortgage, irrespective of the amount of consideration, must be effected by a registered document. 

Kinds of Mortgage
In such a mortgage, the mortgagee has two ways open to him either to use his power of sale of the mortgaged property through sale and to recover his amount or to sue on the mortgage and obtain a money decree against the debtor.

A simple mortgage has to be distinguished from a charge. As pointed out by Shell, for most practical purposes a charge can be regarded as a species of mortgage for whereas a mortgage is a conveyance of property, a charge merely gives the chargee certain rights over the property as security for the loan. Where the amount is to be realised from the income of a definite and specified item of property and there is no right to put the property to sale, the transaction is only a charge and not a mortgage.

Mortgage by Conditional Sale

History and legal status of Mortgage by Conditional Sale:

In legal history mortgage underwent a process of evolution. A "mortgage by conditional sale" was a very early form of mortgage amongst Hindus. Amongst Muslims the mortgage by conditional sale was a device to evade the Islamic prohibition of interest. This was ordinarily called as bye-bil-wafa i.e. a sale with promise so that the mortgagee enjoys the rent and profit in lieu of interest and became absolute owner of the property if the debt was not paid. The earliest form of Islamic security was the rahn or pledge or mortgage with possession corresponding to the Roman Pignus, which was a transfer not of ownership, but of possession without liability to forfeiture. In case mortgage deed is created under most pressing demand for money as the mortgagor parted with the possession and income of the shop. In such cases a moment of weakness of needy person is exploited by the mortgagee. He enjoys the usufruct of the mortgaged property in his possession with increased market value attracting all the ingredients of interest forbidden in Islam. In such circumstances, Courts of law and equity are expected to construe various transactions concerning mortgage in such a liberal way that the right of rightful owner survives and the one who has enjoyed the possession of usufructuary of the mortgaged property for a considerable time and thus has recovered the amount manifold, should not be allowed to get away with the mortgaged property as well. 
[Maqbool Ahmad v. Government of Pakistan 1991 SCMR 2063] [P L D 2014 Lahore 26]

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In a mortgage by conditional sale, there is: 
  • 1) An ostensible sale of the mortgaged property. 
  • 2) There is also a condition that in case of failure to pay the money on a certain date the sale shall become absolute, but on such payment being made the sale shall become void and the mortgagee (the buyer) shall retransfer the property to the seller (the mortgagor). 
  • 3) Such a condition has to be embodied in the same document if the transaction is to be a mortgage.
  • 4) The remedy of the mortgagee in such a transaction is a suit for foreclosure
  • 5) If the consideration exceeds Rs. 100 the registration of the document is compulsory. 

Whether a transaction is a mortgage by conditional sale or a sale has to be decided with reference to the “intention of the parties”, which can be gathered from the document itself. In every case the question is “what, upon a fair construction, is the meaning of the instrument. No extrinsic evidence or evidence decors the document is allowed, as what the document expresses has to be accepted.”

Distinction between Absolute sale" and "mortgage by conditional sale"

The "absolute sale" and "mortgage with conditional sale" are two different types of transactions. In the first category, relationship of borrower and creditor do not exist between the parties and the title in the property is absolutely passed on to the vendee by virtue of the sale deed. The second category, however, manifests the arrangement for borrowing money much below the value of the property, which is tendered as security for payment of the loan and if it is not paid, the creditor' can fall back on the security. In this instance having been created relationship of the mortgagor and mortgagee, the ostensible owner of the property retains the interest in it.

Usufructuary Mortgage

The salient features of a usufructuary mortgage are: 
  • 1) Delivery of possession of the property to the mortgagee or a binding to that effect. 
  • 2) Till the amount obtained is repaid such possession is authorised to be retained.
  • 3) Rents and profits accruing from the property are to be appropriated in lieu of interest on the principal amount. On realisation of the amount the property is redeemed. 
  • 4) The mortgagor has no personal liability.
  • 5) The mortgagee has no power either of sale or of foreclosure.
  • 6) Registration, if the consideration exceeds Rs. 100, is compulsory. 

Moreover, binding to deliver possession of the mortgaged property must be plain and without any condition. The mortgaged property will remain with the creditor as long as the debt is not satisfied, but if the possession is for a definite number of years the transaction is not a usufructuary mortgage but an anomalous mortgage.

If possession of mortgage property was delivered to the mortgagee then mortgage-deed would be called "usufructuary mortgage". Mortgagee in usufructuary mortgage could not file a suit against mortgagor for recovery of money, If possession of mortgaged property was not delivered to the mortgagee then mortgage-deed would be called simple mortgage. [2020  CLCN  3]

English Mortgage

In an English mortgage: 
  • 1) The mortgagor binds himself personally to repay the mortgage money on a certain date. 
  • 2) There is transfer of the mortgaged property absolutely to the mortgagee.
  • 3) Possession is delivered. 
  • 4) The property so transferred is to be retransferred to the mortgagor when there is repayment. 
  • 5) The mortgagee’s remedy is only a sale. 
  • 6) Such a power of sale can be out of Court. 

It must be noted that like a simple mortgage, there is a personal undertaking to repay the amount. There is no personal undertaking in a mortgage by conditional sale, but in an English mortgage it is there. Similarly, there is a transfer of the mortgaged property absolutely in an English mortgage, but in a mortgage by conditional sale the transfer is an ostensible sale. 

Mortgage by Deposit of Title Deeds

The recognition of this type of mortgage is for the benefit of the mercantile community to enable them to raise quick money. Its essential characteristics are:
  • (1) There should be delivery of documents of title to the creditor with intent to-create a security thereon. The property can be situated anywhere.
  • (2)Registration is not necessary, except that a memorandum evidencing the deposit of title deeds is required to be drawn and the terms of the mortgage are incorporated therein. 
  • (3) No possession of property is delivered.
  • (4) The remedy available to the mortgagee is a suit for sale, 
  • (5) Provisions in respect of simple mortgage are applicable to this type of mortgage also.

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] [2015  SCMR  319 SUPREME-COURT]

Anomalous Mortgage

An anomalous mortgage is an admixture of any two or more types of mortgages mentioned above. However, it is not necessary that whenever a mortgage does not fall Within any one of the five categories mentioned in Section 58(b) to (f). It must necessarily be treated as an anomalous mortgage. This is so because the classification of Mortgages by the Act is not an exhaustive one but projects only a cross-section of the common types of mortgages prevalent in Pakistan. 

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