A mortgage is a common term and is usually understood by most to mean a transaction where a mortgagee on the failure of the repayment of the loan by the mortgagor can sell the immovable property mortgaged to him, in order to secure the amount loaned. Under the property laws in India, a mortgage is a legal instrument used by a mortgagor to form a financial arrangement about immoveable property in a manner that is more feasible.
A mortgage is best understood, through Section 58 of the Transfer of Property Act (hereinafter referred to as TPA), 1882. It defines a mortgage as a transfer of property in a specific immovable property for the purpose of securing the payment of money that was advanced or to be advanced as a loan, an existing or future debt, or the performance of an engagement, which may give rise to a pecuniary liability. The one who transfers the property is referred to as the mortgager and the to whom the property is transferred is referred to as the mortgagee. The legal instrument is called the mortgage deed which contains the essentials of the mortgage agreement, listed as below:
1. Parties to the mortgage agreement.
2. Transfer of interest.
3. The specific immovable property involved.
4. Purpose to secure the repayment of the loan, if the mortgagor fails to abide by the payment schedule under the Transfer of Property Act 1882, there are several types of mortgages, such as
- Simple Mortgage,
- Mortgage by Conditional sale,
- Usufructuary Mortgage,
- English Mortgage,
- Mortgage by deposit of title deeds or equitable mortgage and
- Anomalous mortgage.
Mortgage by Conditional Sale
In a mortgage by conditional sale, there is an “ostensible” sale of the specific immovable property by the mortgagor which on the lapse of payment of the mortgage money on a certain agreed-upon date, becomes absolute, or on the payment of the full mortgage amount becomes a void sale, and on the payment of the amount, the buyer shall transfer the property back to the seller. The essential element of such a sale are as follows:
- Mortgagor ostensibly sells the mortgaged property.
- This sale is bound by a condition.
- On the lapse of payment by a decided date, the sake shall become absolute.
- If the payment is made, the sale is void.
- If payment is made, the property is returned to the seller by the buyer.
The mortgagor in this sale holds no personal pecuniary liability, the liability lies solely on the property.
The earliest form of mortgage practiced by Hindus was a mortgage by conditional sale. The usufructuary and simple mortgages were later developments. In Mohammedan law, mortgages by conditional sale started as a manner to evade the Islamic prohibition of Interest. It was a sale with a promise, where the mortgage enjoyed the rents and profits instead of the interest amount and in case of non-payment of the money became the absolute owner of the property. The development was gradual under Hindu Law, the custom existed to serve the purposes of the people in securing their financial agreements.
Instead of interest, the transfer usually was of possession and was more in the form of a pledge. In England too the transfer was of possession, instead of a title. It took the form of a dead pledge, where the creditor took the profits from the property to satisfy the debt, and then later became what we know today as a usufructuary mortgage. Gradually it became a conditional conveyance where on the repayment of the debt the property reverted to the mortgagor. Once the mortgage under the common law became the mortgage by conditional sale, it was further modified by three principles of equity:
1. The essence of a mortgage transaction is that it is a borrowing transaction.
2. The borrower is on the short end, and therefore any condition that penalizes him is void.
3. That condition of forfeiture in default of payment on the due date is a penalty.
These principles of equity have also been applied in India. Mortgages have always been a part of the Hindu and Mohammedan law, and these customs merged with the practice of English Property Law are largely what has been codified into the existing mortgage law under the Transfer of Property Act, 1882.
Distinct Nature of Sale and Mortgage by Conditional Sale
The word sale in this type of mortgage under Section 58 of the TP Act, can be a cause for confusion. However, the law and the courts in their interpretation have laid out a clear distinction between the two. The mortgage has the components of a sale, except it has a condition attached to it which makes it a mortgage. Furthermore, debt is an essential component of the transaction. The term ostensible means seeming or apparent but not the same thing. Although there are elements of the same that seem similar to a sale, a mortgage is not a sale. The existence of debt makes a mortgage a relationship between a creditor and a debtor, which is distinct from that of a relationship between a seller and a buyer.
Another defining feature of a mortgage is that the right in the property is an accessory to the right to recover the debt. A similar transaction with the absence of a debt-creating transaction is not a mortgage but a sale.
Mortgage and a Sale with a Condition to Repurchase
It has been made clear by the legal and judicial authorities that a sale with the condition of the repurchase is not a mortgage by conditional sale since there is no relationship between a debtor and a creditor, nor is there a conveyance for the purpose of security. The distinction for the first time was made in the Alderson v. White case, and it was accepted in Bhagwan Sahai v. Bhagwan Din. The presumption is in favour of a mortgage when prima facie the condition of the repurchase is present in the document, however, both such agreements in different documents signify a sale instead. The one alleging the agreement to be a mortgage has the onus to prove so in such a case. The major test established is the examination of the intention of the parties and that it should be an ostensible and not a real sale.
In case, X executed a deed in 1960 in favour of Y which was in the documents termed as a conditional sale of ten thousand rupees whereof the payment was made by X within a period of five years then, Y would give the property back and if the period expired before full payment is made by X then X relinquishes all rights over the property. The Supreme Court examined the matter and conclude that the relations between X and Y were that of a debtor and a creditor and the deed was, in fact, a mortgage with a conditional sale.
Rules for Documentation
The transaction of the lending of mortgage money and the condition of the ostensible sale must be present in the same document, however, this does not automatically make the transaction a mortgage. This was added in the proviso to Section 58 (c) through amendment in 1924. It is useful for matters relating to adjudication and examination of such documents as to whether it is a mortgage or a sale with a condition.
In Sunil v. Aghori, there were two separate documents for the sale and the condition for retransfer. There was no mention of a mortgage in the sale deed. As a rule, the court ruled it as a sale and not a mortgage. When the court is looking to analyze the intention of the parties and apply the one true test, it looks in the language of the deed. For example, where there was no certain mention of a sale becoming absolute on not abiding by the sale, but there was a specific condition for the repayment of the amount, the transaction was held to be a mortgage.
Mortgage by conditional sale is a type of transaction which is one of the earliest forms of mortgage practiced. It began as a custom under different legal systems and over time converged into a streamlined practical law under Section 58 (c) of the Transfer of Property Act. It is a practice of loan lending, usually for real estate or property purchasing where the interest of the mortgagee, who is essentially the creditor in the relationship, is created. It is stipulated in the deed as an agreement between all parties that on the failure of payback of the mortgaged amount with a stipulated time the, sale of the specific immovable property, which is only ostensible in nature will become absolute. It is a matter that has its share of confusion and also rules and interpretation by the court to remove those confusions. It is evident that it is a flexible practice born out of human nature to own and possess property through various means and methods and will continue to bend around the black letter of the law to suit the need of people.
Gobardhan v. Gokul Das, (1880) ILR 2 All 633
Mulla on the Transfer of Property Act, 1882. Bombay, N.M. Tripathi, 1966
Rajkumari Kaushalya Devi v. Bawa Pritam Singh (1960) 3 SCR 570
Alderson v. White (1858) De G and J 97
 (1890) 12 All 387
Hasam Nurani Malak v. Mohan Singh, AIR 1974 Bom 136
Held by several Older Courts, see Ahmed Hussai v. Azar Ali, AIR 1944 Oudh; Ganesh v, Gnanasi Khamani AIR 1925 Mad 37
Vidhyadhar v. Mankikrao, AIR 1999 SC 1441
Patel Ravjibhai Bhulabhai v. Rahemanbhai M. Shaikh AIR 2016 SC 2146
 Sunil v. Aghor, AIR 1989 Gau. 39
Jirambhai v. Bipinchandra AIR 2013 Guj 272
This Article has been Written by Ishani Kumar Singh, LL.M Student at National Law Institute University, Bhopal.
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