EQUITABLE RIGHTS-2

RELIEF AGAINST PENALTY

DISTINCTION BETWEEN PENALTY AND LIQUIDATED DAMAGES, THE ENGLISH AND THE INDIAN LAW IN THIS RESPECT

 THE GROUND OF RELIEF AGAINST PENALTIES

PENALTY AND LIQUIDATED DAMAGES

	PENALTY	LIQUIDATED DAMAGES
1.	Where the parties name a penal sum as due and payable a breach of contract, the sum so named for securing the performance of the contract is called penalty. The whole of it is not always recoverable, the amount being the maximum of damages.	Liquidated damages on the other hand, are a fixed or ascertained measure of damages which the parties fix to avoid the difficulty in settling the pecuniary obligations arising as a result of a breach of the contract.
2	The essence of a penalty is the naming of a sum to be payable by the party guilty of the breach to the other party without assessment of the loss, imposed as a security for the due performance of the contract. It is intended to operate simply in terro rem.	On the other hand, the essence of liquidated damages is a genuine, pre-estimate by the parties of the loss expected to flow from the breach.

There is distinction between PENALTY AND LIQUIDATED DAMAGES in English law. Snell formulates the following rules to distinguish penalty from liquidated damages:-

(1) If payment of a smaller sum is secured by a larger, the larger sum is always a penalty.

(2) When there is a covenant to do several things and one sum is stated to be paid for the breach of any or all, that sum is in general to be considered a penalty.

(3) Where the sum payable is proportioned to the breach or where it is payable on one particular breach and there is no me of ascertaining the precise damage, the sum is not penalty but liquidated damages.

(4) Mere use of either term is not conclusive.

(5) Where there is only one event on which sum is to be paid and there is no means of measuring damage, the sum so named is liquidated damages.

(6) When the expressions are ambiguous and doubtful, equity inclines towards construing the sum as a penalty.

ENGLISH AND INDIAN LAW ON PENALTY AND LIQUIDATED DAMAGES

Unlike English law section 74 OF THE INDIAN CONTRACT ACT abolishes the distinction between penalty and liquidated damages by providing that the party complaining of the breach is entitled to receive from the other party only reasonable compensation not exceeding the amount named in the contract to be paid on a breach. The object of section 74 is to get rid of all questions with regard to the agreed sum being a ‘penalty’ or only ‘liquidated’ damages by providing that all such sums shall be treated as penalties.

RELIEF AGAINST PENALTIES

It was observed in the leading English case of Sloman v. Walter (1 Bro. C. C., 418) that where PENALTY CLAUSE is inserted in an instrument merely to secure the performance of some act or the enjoyment of some benefit, the performance of the Act or the enjoyment of the benefit is the substantial intent of the instrument, and THE PENALTY is only accessory.

Since equity looks to the intent rather than to the form, it always attempts to let at the substance of things. It relieves debtors against penalties and allows only reasonable compensation not exceeding the amount so named as penalty. Further, the penalty clause being thus ignored the prornisor is not excused from performing the act even if he is prepared to pay the penalty. Equity also provides relief against forfeiture for non-payment of rent or breach of an express condition on the ground that the condition of forfeiture is simply a security for the rent or carrying into effect the other terms of the lease by the lessee.

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MORTGAGES, LIENS AND CHARGE

DEFINITION AND ESSENTIALS OF A MORTGAGE

DISTINCTION BETWEEN SALE OF IMMOVABLE PROPERTY AND LIEN

MORTGAGES

Section 58 (a) of THE TRANSFER OF PROPERTY ACT defines the term ‘mortgage’ as under:

“A mortgage is the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced i.e., the mortgagee, gets only some rights depending upon the form 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.”  or nature of the mortgagee. In other words, in a mortgage there is only a partial transfer of rights.

Illustration

A borrows Rs. 5,000 from B and, in consideration thereof, transfers, to B the right to sell his house in case of default in payment on the due date. It is a mortgage.

The above definition will bring out the following essentials of a mortgage:

1. There is transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced by way of loan or for the purpose of securing the performance of a contract.

2. The immovable property must be distinctly specified.

3. The consideration ‘of a mortgage may be either

(i) money advanced or to be advanced, by way of loan, or

(ii) the performance of a contract.

4. The mortgagor (i.e.” the person who transfers the interest in the immovable property), must be competent to transfer. A minor cannot be a mortgagor, but a minor can be a mortgagee.

A mortgage may be legal or equitable. Where the transaction involves conveyance of legal estate, it is termed a legal mortgage. Where there is conveyance of equitable estate, it is termed an equitable mortgage. An equitable mortgagee has the same rights as a legal mortgagee, subject to such differences as might result from his not being in possession of legal estate.

The Transfer of Property Act divides mortgages into six groups, viz., simple mortgage, mortgage by conditional sale, usufructuary mortgage, English mortgage, equitable mortgage (mortgage by deposit of title deeds) and anomalous mortgage.

MORTGAGE AND SALE DISTINGUISHED

Sale is a transfer of ownership in exchange for a price of part paid and part promised (Section 54 of the Transfer of Property Act). In a sale there is an absolute transfer of all rights in the property sold so that nothing is left in the transferor.

Mortgage implies only a transfer of an interest in immovable property which means that the transferor, i.e., the mortgagee still retains some interest in it, and the transferee, i.e. a lien is the right to hold the property of another as security for the performance of an obligation.

MORTGAGE AND LIEN

The following are the differences between a mortgage and a lien:

	Mortgage	Lien
1	It is a form of security created by act of parties, i.e., by means of a contract between the parties.	It arises only by operation of law independent of any contract between the parties.
2	It is an independent or principal right and is not a mere security for another right.	It is a security for a debt which, in effect, means a right to retain the chattel until payment.
3	It can remain outstanding even after the extinction of the debt. In such an event the mortgagor has a right of reassignment or surrender of his mortgage, called the equity of redemption.	It ceases on the extinction of the debt. There is no such right as equity of redemption, for there is nothing to redeem. It is simply “the shadow cast by the debt upon the property of the debtor.”
4	There is transfer of interest in specific immovable property from the debtor to the creditor.	There is no transfer of interest in the property.
5	It is created either by transfer or by encumbrance.	It is created by way of encumbrance only.
6	Where mortgage is created by transfer of the debtor’s right to the creditor, the debtor is the beneficial or equitable owner on payment of the debt the mortgagee becomes a mere trustee.	The debtor has the full legal and equitable ownership, the creditor having only rights and powers like sale, possession, etc., which may safeguard his interest.
7	The mortgagee’s right is vested conditionally by way of security and subject to redemption by the mortgagor.	A lien is vested in the creditor absolutely, and has no existence apart from the debt.

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CHARGE

DISTINCTION BETWEEN CHARGE AND MORTGAGE

A. Charge.-When a lien arises by express contract, it is often termed a charge. A charge is a right to payment out of the property specified without any charge of ownership.

Section 100 of the Transfer of Property Act defines a charge as under:

“Where immovable property of one person is by act of parties or operation of law made security for the payment of money to another, and the transaction does not amount to a mortgage, the latter person is said to have a charge on the property.

A charge can be created by act of parties or by operation of law.

Charge by act of Parties.-A inherited an estate from his grandmother and executed an agreement to pay his sister B a sum of Rs. 100 per month out of the income of the estate. B has a charge on the estate.

Charge by Operation of Law.-A vendor’s lien for unpaid purchase money is an instance of a charge by operation of law.

So has a buyer a charge for money paid in advance.

Mortgage and Charge Distinguished,-A charge may be distinguished from a mortgage with the aid of the following chart:

	Charge	Mortgage
1.	There is no transfer of interest in the property, but the creation of a right of payment out of the property type specified.	It is a transfer of an interest in immovable property.
2.	It is not a right in rem and is only good as against a subsequent transferee with notice.	It being a transfer of interest is a right in rem and is good against subsequent transferees even though they be bona fide purchasers for value without notice.
3.	It can be created by act of parties or by operation of law.	It can be created only by act of parties.
4.	It does not necessarily imply a debt.	It implies a debt.
5.	There is no personal liability.	There is a personal liability to pay in a simple mortgage.
6.	One created by operation of law does not require registration.	A simple mortgage requires registration.

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DIFFERENT KINDS OF MORTGAGES MENTIONED IN THE TRANSFER OF PROPERTY ACT

DISTINCTION BETWEEN A MORTGAGE BY CONDITIONAL SALE AND SALE WITH CONDITION OF REPURCHASE

THE ESSENTIALS OF AN ENGLISH MORTGAGE

DISTINCTION BETWEEN AN ENGLISH MORTGAGE AND (A) MORTGAGE BY CONDITIONAL SALE AND (B) A SIMPLE MORTGAGE

THE REMEDIES AVAILABLE TO THE MORTGAGEE UNDER AN ENGLISH MORTGAGE AND A SIMPLE MORTGAGE

CLASSIFICATION OF MORTGAGES

The Transfer of Property Act divides mortgages into the following groups viz.,

(i) simple mortgage,

(ii) mortgage by conditional sale,

(iii) usufructuary mortgage,

(iv) English mortgage,

(v) equitable mortgage and

(vi) anomalous mortgage.

SIMPIE MORTGAGE

Where, without delivering possession of the mortgaged property, the mortgagor binds himself personally to pay the mortgage-money, and agrees, expressly or impliedly, that, in the event of his failing to pay according to his contract, the mortgagee shall have a right to cause the mortgaged property to be sold and the proceeds of sale to be applied, so far as may be necessary, in payment of the mortgage-money, the transaction is called a simple mortgage. [S. 58 (b)]

A simple mortgagor has the following three characteristics, viz.

(i) The mortgagor binds himself personally to pay the mortgage money.

(ii) The mortgagor agrees that in case of his failing to pay according to his contract, the mortgagee shall have a right to cause the mortgaged property sold through court by obtaining a decree for sale and the proceeds of sale to be applied in payment of the mortgage money.

(iii) No possession is delivered to the mortgagee.

The essential element which constitutes a simple mortgage is the right to cause the property to be sold for the purpose of realizing the mortgage debt. The words ‘cause the property to be sold’ indicate that the power of sale is not to be exercised without the intervention of the court. [Kishanlal v. Gangaram, 13 All. 28).

The outstanding feature of a simple mortgage is that possession is not delivered to the mortgagee, but remains with the mortgagor.

Since the mortgagee is not put into possession of the property, he has not the right to satisfy the debt out of the rents and profits, nor can he acquire the absolute ownership of the mortgaged property by foreclosure.

The mortgagee has, on default of the mortgagor, a two-fold cause of action-one arising out of the breach of the covenant to repay and the other arising out of the mortgage. The mortgagee may, therefore, sue him for the mortgage money or may proceed against the property or may combine both these remedies in one suit. If he sues on personal undertaking only, he obtains a money decree but if he sues on the mortgage he obtains an order for the sale of the property.

MORTGAGE BY CONDITIONAL SALE

Where the mortgagor ostensibly sells the mortgaged property on condition that on default of payment of the mortgage-money on a certain date the sale shall become absolute, or on condition that on such payment being made the sale shall become void, or on condition that on such payment being made the buyer shall transfer the property to the seller, the transaction is called a mortgage by conditional sale. [So 56 (c)]

The characteristics of this mortgage are:

(i) The mortgagor conditionally sells the mortgaged property to the mortgagee.

(ii) The conditions are that

(a) the sale shall be absolute in default of payment on a particular date or

(b) that the conditional sale shall be void on payment and the property retransferred.

(iii) It must be created by one document and not by two documents in order to distinguish it from a sale with a condition of repurchase.

DISTINCTION BETWEEN A MORTGAGE BY CONDITIONAL SALE AND SALE WITH A CONDITION OF REPURCHASE

A sale with a condition of repurchase is not a mortgage. There is no debt.

It is a transfer of all the rights in the property reserving only a personal right (right in personam) of repurchase which is lost if not exercised within agreed time. In a mortgage by conditional sale, however, there is a debt and the transfer is made for the purpose of securing the payment of the debt. The right of taking back the property is not lost even though the mortgagor fails to pay on a certain date.

It is therefore a mortgage in which the ostensible sale is conditional and intended simply as a security for the debt. The word ‘ostensible’ means that it has an appearance of sale but is not really a sale. It is merely executed in the form of sale with a condition attached to it. The ostensible sale need not be accompanied with possession.

The mortgagee does not acquire any personal right against the mortgage. The essential characteristic of this mortgage is that on breach of the condition of repayment within a stipulated period, the transaction is closed and becomes one of absolute sale to be enforced by process known as foreclosure. It should be noted that the sale does not become absolute in default of payment on the due date by itself until there is a decree absolute depriving the right of redemption of the mortgagor.

USUFRUCTUARY MORTGAGE

Where the mortgagor delivers possession or expressly or by implication binds himself to deliver possession of the mortgaged property to the mortgagee, and authorizes him to retain such possession until payment of the  mortgage-money, and to receive the rents and profits accruing from the property or any part of such rents and profits and to appropriate the same in lieu of interest, or in payment of the mortgage money or partly in lieu of interest and partly in payment of the mortgage-money, the transaction is called a usufructuary mortgage.

The essential characteristics of this mortgage are:

(i) There is a delivery of possession to the mortgagee.

(ii) The mortgagee is to retain possession until the repayment of the mortgage money and to receive the rents and profits.

(iii) The rents and profits may be appropriated

(a) in lieu of interest,

(b) in lieu of principal or

(c) in lieu of principal and .interest.

(iv) There is no personal liability on the mortgagor.

(v) No time limit is fixed.

“The essence of the transaction is that the mortgagor is bound to put the mortgagee in possession of the property. If the possession is not delivered the mortgagee may sue for possession or for the recovery of the mortgage-·money. The mortgagor cannot be sued personally for the debt. The mortgagee is only entitled to remain in possession of the mortgaged property till the principal and interest are defrayed according to the terms of the agreement. (Atmaram v. Siyan. 1928 lah. 355). Since a usufructuary mortgagee is entitled to remain in possession, until the debt is paid off, no time limit can be fixed expressly during which the mortgage is to subsist. (Ramnarayan Singh v. Adhindra Nato, 441.A. 87).

ENGLISH MORTGAGE

Where the mortgagor binds himself to repay the mortgage-money on a certain date and transfers the mortgaged property absolutely to the mortgagee, but subject to a proviso that he will retransfer it to the mortgagor upon payment of the mortgage-money as agreed, the transaction is called an English mortgage. [5S. 58 (e)].

The essential characteristics of this mortgage are:

(i) It is followed by delivery of possession.

(ii) There is a personal covenant to pay the amount.

(iii) It is effected by absolute transfer with a provision for retransfer in case of repayment of the amount due.

This mortgage is mostly prevalent in presidency towns of Calcutta, Bombay and Madras.

ENGLISH MORTGAGE AND MORTGAGE BY CONDITIONAL SALE COMPARED

An English mortgage resembles a mortgage by a conditional sale in so far as both of them belong to that class of securities in which the ownership of the property mortgaged is liable to be transferred from the mortgagor to the mortgagee on default of payment. There are, however, the following points of difference between the two forms of mortgage:

(a) In an English mortgage, the mortgagor ordinarily undertakes to pay the debt personally. But in a mortgage by conditional sale, the mortgagor does not necessarily make himself personally liable for the payment of the mortgage money and accordingly the mortgagee has his remedy against the mortgaged property alone.

(b) In an English mortgage the ownership in the mortgaged property is absolutely transferred to the mortgagee, who is, however, liable to be divested by the repayment of the loan as agreed. In a mortgage by a conditional sale, the mortgagor acquires only a qualified ownership, which, by the terms of the agreement generally, ripens into absolute proprietorship on default of the mortgagor.

ENGLISH MORTGAGE DISTINGUISHED FROM SIMPLE MORTGAGE

(1) In an English mortgage there is an absolute transfer of property with a provision for retransfer in .case of repayment. In a simple mortgage there is no transfer of property, but affords a right to cause the mortgaged property to be sold.

(2) An English mortgage is followed by delivery of possession, but no possession is delivered in a simple mortgage.

(3) In an English mortgage where neither of the parties is a Hindu, Mohammedan or Budd-list or a member of any other race, sect, tribe or class from time to time specified by the State Government.

In the Official Gazette, the power of sale, without the intervention of the court, can be validly exercised by the mortgagee; but in a simple mortgage the sale is through court.

REMEDIES IN ENGLISH MORTGAGE AND SIMPLE MORTGAGE

The remedies in English and simple mortgage are the same, viz.,

(i) sale and

(ii) suit on the personal covenant for recovery of the mortgage money.

MORTGAGE BY DEPOSIT OF TITLE DEEDS

Where a person in any of the following towns, namely, the towns of Calcutta, Madras and Bombay, (me in any other town which the State Government concerned may, by notification in the official Gazette, specify in this behalf, delivers to a creditor or his agent documents of title to immovable property, with intent to create a security thereon, the transaction is called a mortgage by deposit of title deeds. [S. 58 (1)].

THE ESSENTIAL CHARACTERISTICS ARE:

(i) It is created in certain specified towns, the restriction referring to the place where the deeds are delivered and not to the situation of the property mortgaged.

(ii) It is effected by deposit of material title deed, no delivery of possession of the property taking place.

(iii) It is made to secure a debt or advances already made or to-recover further advances.

(iv) No registration is necessary.

(v) In case of default in payment, the remedy is by sale of the property for which the title deeds are deposited with the mortgagee.

Section 96 of THE TRANSFER OF PROPERTY ACT places mortgages by deposit of title deeds on the same footing as simple mortgages.

The security can, like a simple mortgage, be enforced by a suit for sale of the mortgaged property.

ANOMALOUS MORTGAGE

A mortgage which is not a simple mortgage, a mortgage by conditional sale, an usufructuary mortgage or An English mortgage by deposit of title deeds within the meaning of this section is called an anomalous mortgage, [5.58(e)]

The essential characteristic of this mortgage is that it is a combination of two or more mortgages of the kind detailed in numbers (1) to (5) above. A combination of a simple mortgage and a usufructuary mortgage will be an anomalous mortgage. In such combination the mortgagee is in possession and pays himself the debt out of the rents and profits and there is also a personal covenant with right of sale. A mortgage usufructuary by conditional sale is another instance of an anomalous mortgage. Here the mortgagee is in possession as a usufructuary mortgagee for a fixed period and if the debt is not discharged at the expiry of the period he gets all the rights of a mortgagee by conditional sale. In case the debt is not paid within the time fixed, the mortgagee gets right of foreclosure that is a right to deprive of the mortgagor’s right: of redemption.

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RIGHTS AND LIABILITIES OF THE MORTGAGOR

(1) RIGHT OF MORTGAGOR TO REDEEM

The most important right possessed by the mortgagor is the right to redeem II the mortgage. Under S. 60 of THE TRANSFER OF PROPERTY ACT at any time after the principal money has become due, the mortgagor has a right, on payment or tender, at a proper time and place, of the mortgage money, to require the mortgagee

(a) to deliver to the mortgagor the mortgage deed and all documents relating to the mortgaged property which are in the possession or power of the mortgagee;

(b) where the mortgagee is in possession of the mortgaged property, to deliver possession thereof to the mortgagor; and

(c) at the cost of the mortgagor either to retransfer the mortgaged property to him or to such third persona she may direct, or to execute and (where the mortgage has been effected by a registered instrument) to have registered an acknowledgment in writing that any right in derogation of his interest transferred to the mortgagee has been extinguished; provided that the right conferred by this section has not been extinguished by act of the parties, or by decree of a court.

The right conferred by this section is called a right to redeem.

2. OBLIGATION TO TRANSFER TO THIRD PARTY INSTEAD OF RE-TRANSFERENCE TO MORTGAGOR

The mortgagor has a right, and the mortgagee is under an obligation when so required, to transfer the mortgage-debt to a third person named by the mortgagor. The right of the mortgagor and the obligation of the mortgagee arises only when the mortgage-debt has become payable and the mortgagor has fulfilled the conditions laid down is S.60 of THE TRANSFER OF PROPERTY ACT, discussed above. (S. 60-A).

3. RIGHT TO INSPECTION AND PRODUCTION OF DOCUMENTS

The mortgagor has a right to inspect and take copies of the document of title relating to the mortgaged property which are in the possession of the mortgagee. (S. 60-B). The right subsists so long as his right of redemption subsists.

4. RIGHT TO REDEEM SEPARATELY OR SIMULTANEOUSLY

A mortgagee who has executed two or more mortgages in favour of the same mortgagee shall, in the absence of a contract to the contrary, when the principal money of any two or more of the mortgages has become due, be entitled to redeem anyone of such mortgages separately, or any two or more of such mortgages together. (S.61).

5. RIGHT OF USUFRUCTUARY MORTGAGOR TO RECOVER POSSESSION

In the case of an usufructuary mortgage, the mortgagor has a right to recover possession of the property together with the mortgage deed and all documents relating to the mortgaged property; which are in the possession or power of the mortgagee (a) where the mortgagee is authorised to pay himself the mortgage money from the rents and profits of the property, when such money is paid; and (b) where the mortgagee is authorised to pay himself from such: rents and profits or any part thereof a part only of the mortgage money” when the term, if any, prescribed for the payment of the mortgage money has expired and the mortgagor pays or tenders;, to the mortgagee the mortgage money or the balance thereof or deposit sit in court. (S.62).

6. ACCESSION TO MORTGAGED PROPERTY

Where the mortgaged property in possession of the mortgagee has, during the continuance of the mortgage, received any accession the mortgagor, upon redemption, shall in the absence of a contract to the contrary, be entitled as against the mortgagee to such accession. (S. 63).

The above provisions relate to accessions or accretions due to natural causes. Where however such accession has been acquired at the expense of the mortgagee and is separable, without detriment to the principal property, the mortgagor desiring to that the accession, must pay to the mortgagee the expense of acquiring it. If, however, separate possession or enjoyment of such accession having been made at the mortgagee’s expense is hot possible, the mortgagor is liable to pay the cost only

(1) if the acquisition was necessary to preserve the property from destruction, forfeiture or sale, or

(2) if the acquisition was made with his consent.

7. IMPROVEMENTS TO MORTGAGED PROPERTY

The general rule is that ordinarily a mortgagee is not at liberty to make improvements and charge the mortgagor therewith. Accordingly S. 63-A of the Act lays down that where mortgaged property in possession of the mortgagee has, during the continuance of the mortgage, been improved, the mortgagor, upon redemption, shall, in the absence of a contract to the contrary, be entitled to the improvement,

and the mortgagor shall not be liable to pay the cost thereof. But the mortgagor shall be liable to pay the cost of improvements in the following cases only:

(i) if improvement was necessary to preserve the property from destruction or deterioration, or

(ii) was necessary to prevent the security from becoming insufficient;

(iii) was made in compliance with the lawful order of any public servant or public authority.

8. RENEWAL OF MORTGAGED LEASE

Where the mortgaged property is a lease, and the mortgagee obtains a renewal of the lease, the mortgagor, upon redemption, shall, in the absence of a contract by him to the contrary, have the benefit of the new lease. (S.64).

9. MORTGAGOR’S POWER TO LEASE

A mortgagor, while lawfully in possession of the mortgaged property, shall have power to make leases thereof which shall be binding on the mortgagee, subject to the following’ conditions, viz.,

(a) the lease shall be such as would be made in the ordinary course of management of the property concerned and in accordance with any local law, custom or usage;

(b) the lease shall reserve the best rent that can reasonably be obtained and no premium shall be paid or promised and no rent shall be payable in advance;

(c) no such lease shall contain a covenant for renewal;

(d) the lease shall operate from a date not later than six months from the date on which it is made; and

 (e) in case the mortgaged property be a building, the duration of the lease shall in no case be more than three years, and the lease shall contain a covenant for payment of !:he rent and a condition for re-entry  on the rent not being paid within a time therein specified. (S. 65-A).

10. WASTE BY MORTGAGOR IN POSSESSION

A mortgagor in possession of the mortgaged property is not liable to the mortgagee for allowing the property to deteriorate; but he must not commit  any act which is destructive or permanently injurious thereto, if the security is sufficient or will be rendered insufficient by such act. (S. 66).

11. IMPLIED CONTRACTS BY MORTGAGOR

Section 65 THE TRANSFER OF PROPERTY ACT embodies the implied covenants the mortgagor. It lays down that, in the absence of a contract the contrary, the mortgagor shall be deemed to contract with mortgagee

(a) Covenant for title.-The interest which the mortgagor professes to transfer to mortgagee subsists, and the mortgagor has power to transfer the same.

(b) Defence of title.-The mortgagor next covenant professes to transfer to that he will defend his title when he is in possession of the mortgagee property or will help the mortgagee in defending it when the latter is in possession

(c) liability to pay public charges.-The mortgagor will, so long as the mortgagee is not in possession of the mortgaged property, pay all public charges accruing due in respect of the property

(d) Performance of conditions of the lease where the mortgaged property is a lease.-Where the mortgaged property is lease-hold, the mortgagor is deemed to covenant that he has paid all the rent and performed all the conditions of the lease up to the time of the mortgage and if after the mortgage he continues in possession of the leasehold he further undertakes to pay there and to observe the conditions of the lease.

(e) liability to discharge prior mortgages.-In the case of a second or subsequent mort9age, the mortgagor is deem to covenant that he will pay the interest from time to time accruing due on each prior incumbrance as and when it becomes due, a will at the proper time discharge the principal money due on such prior incumbrance.

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IMPLIED CONTRACTS BY MORTGAGOR WITH THE MORTGAGEE IN THE ABSENCE OF A CONTRACT TO THE CONTRARY TO THE MORTGAGOR SHALL BE DEEMED TO CONTRACT WITH THE MORTGAGEE:

a) that the interest which the mortgagor professes to transfer to the mortgagee subsists, and that the mortgagor has power transfer the same;

(b) that the mortgagor will defend, or, if the mortgagee in possession of the mortgaged property enable him to defend, the mortgagor’s title thereto;

(c) that the mortgagor will, so long as the mortgagee is not in possession of the mortgaged property, pay all public charges accruing due in respect of the property;

(d) and, where the mortgaged property is a lease that the rent payable under the lease, the conditions contained therein, and the contract~ binding on the lease have been paid, performed and observed, down to the commencement of the mortgage; and that the mortgagor will so long as the security exists and the mortgagee is not in possession of the mortgaged property, pay the rent reserved by the lease; or if the lease be renewed, the renewed lease, perform the conditions contained therein and observe the contracts binding‘ on the lease and indemnify the mortgagee against all claims sustained by reason of the non-payment of the said rent or the non-performance or non-observance of the said conditions and contracts;

(e) and, where the mortgage is a second or subsequent incumbrance on the property, that the mortgagor will pay the interest from time to time accruing due on each prior incumbrance as and when it becomes due, and will at the proper time discharge the principal money due as such prior incumbrance.

The benefit of the contracts mentioned in this section, shall be annexed to, and shall go with the interest of the mortgagee as such, and may be enforced by every person in whom that interest is, for the whole or any part thereof from time to time, vested.

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THE PRINCIPLE ON WHICH THE MORTGAGOR’S RIGHT TO REDEEM THE MORTGAGED PROPERTY IS BASED

“EQUITY OF REDEMPTION’

The equity of redemption is the right of the mortgagor to redeem the mortgaged property by paying off the principal and interest. It is the right of the mortgagor to get back his property on payment of the mortgage-debt. It arises when the principal money secured by the mortgage becomes due in accordance with the terms of the mortgage, and subsists so long as it is not barred by limitation or foreclosure.

The common law courts in England enforced the condition with regard to the time and manner of payment of the mortgage money strictly, and if the mortgagor failed to pay the loan on the appointed day, then at law he lost his right to recover the property. The courts of equity, however, prevented manifest mischief and injustice by holding that “mortgages ought to be treated as a mere security for the debt to the mortgagee; that the mortgagee held the estate, although forfeited at law, as a trust and that the mortgagor had what was significantly called an equity of redemption, which he might enforce against the mortgagee, as he could against any other trust, if he applied within a reasonable time to redeem, and offered a full payment of the debt and of all equitable charges.” The courts of equity, therefore, compelled the mortgagee to surrender the property if the mortgagor applied to redeem at any time before sale. They granted this relief to the mortgagor on the ground that equity looked to the essence’ of the transaction and that a mortgage is in essence a borrowing transaction; that the borrower is in need of protection and a condition whereby if he .loses his property he should be relieved against and that the condition of forfeiture in default of payment on the due date is a penalty.

EQUITY OF REDEMPTION AND EQUITABLE RIGHT TO REDEEM ARE TWO DIFFERENT THINGS.

THE DIFFERENCES BETWEEN THE TWO ARE AS UNDER:

(1) Equity of redemption arises when the mortgage is created, but the equitable right to redeem comes into existence only after the expiry of the period of redemption.

(2) Equitable right to redeem is one of the incidents of the equity of redemption.

In Manik Chand V. Salim Mohammed, A.I.R, 1969 S.C. 751, it was observed that in a suit for redemption on the payment of mortgage money, the mortgagor is entitled to reliefs as are enumerated under clauses (a), (b) and (c) of section 60 of the Transfer of Property Act. If all or any of these reliefs is claimed in a suit the suit can be taken as a suit for redemption.

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ONCE A MORTGAGE ALWAYS A MORTGAGE

Redmption is of the very essence of a mortgage and equity does not permit any device or contrivance which is designed to impede redemption.

This principle was explained by Lindlay, M.R.:

“A mortgage is a conveyance of laid as a security for the payment of a debt or the discharge of some oth.ar obligation for which it is given. That is the idea of a mortgage and the security is redeemable on the payment or discharge of such debt or obligation, any provision to the contrary notwithstanding. Any provision inserted to prevent redemption on payment or performance of the debt or obligation for which the security was given is what is meant by a clog or fetter on the equity of redemption and is, therefore, void. It follows from this that ‘once a mortgage always a mortgage.’ The courts of equity have fought for years to maintain the doctl’in3 that a security is redeemable.”

A mortgage is regarded as a security for money and the mortgagor can always redeem on payment of principal, interest and costs and no bargain preventing such redemption is valid, nor will unconscionable bargains be enforced.

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EXTINCTION OF THE RIGHT OF REDEMPTION RIGHT

 ‘CLOG ON THE EQUITY OF REDEMPTION’

THE RIGHT OF REDEMPTION IS ENFORCEABLE AND INVIOABLE

The right of redemption is inseparably connected with the mortgage, and equity does not permit any device or contrivance designed or calculated to prevent or impede redemption. Any such device or contrivance is termed a clog on the equity of redemption or the right to redeem, and is consequently void.

It was observed by Lord Davey in Noakes v. Rice [(1902) A.C. 24]: “There are three doctrines of the Courts of equity in the country: The first is expressed in the maxim “once a mortgage always a mortgage”. The second is that the mortgagee shall not reserve to himself any collateral advantage outside the mortgage contract; and the third is that a provision or stipulation which will have the effect of clogging or fettering the equity of redemption is void. The third doctrine to which I have referred is only a corollary from the first and might be expressed in this form ‘once a mortgage always a mortgage and nothing but mortgage.’ The meaning is that the mortgagee shall not make any stipulation which will prevent a mortgagor, who has paid principal, interest and costs, from getting back his mortgaged property in the condition in which he parted with it,”

In India section 60 of the Transfer of Property Act confers on the mortgagor a statutory right of redemption which cannot be fettered by any condition impeding or obstructing redemption.

“Since the object of a mortgage is merely to afford security to a lender, it follows that any contract which ·directly or indirectly prevents the recovery by the mortgagor of his property upon the performance of the obligation for which the mortgage was given security, is inconsistent with the very nature of the transaction,  for upon such performance being complete there is no longer any need or justification for the retention of the security. On grounds, therefore, of logic as well as of justice, the courts have consistently held void any contract which in this sense is repugnant to the nature of a mortgage transaction.” (Cheshire, 584).

The principle was explained by Romer, J. in (1904) A.C. 323:

“Now there is a principle which I will accept without any qualification that on a mortgage you cannot, by contract between the mortgagor and mortgagee, clog, as it is termed, the equity of redemption so as to prevent the mortgagor from redeeming on payment of principal, interest and costs.”

It must, however, be clearly understood that in order to amount to a clog, the stipulation must form part of the mortgage agreement.

Any prohibition subsequent to or independ3nt of the mortgage does not amount to a clog. It was observed by Vaughan Williams, L.J. in Reeve v. Lisle (1902) A.C., 461 that “the mortgagee cannot, at the momi3nt when he is lending his money and taking his security, enter into an agreement the effect of which would be that the mortgagor should have no equity of redemption. But there is nothing to prevent that being done by an agreement which in substance and in fact is subsequent to, and independent of, the original bargain.”

KREGLINGER V. NEW PATAGONIA MEAT CO

The leading case on the subject is that of Kreglinger v. New Patagonia Meat Co. (1914) A.C. 25. in this case a firm of wool-brokers lent to a company carrying on business as meat preservers a sum of £ 10,000 upon the security of a floating charge upon the undertaking of the company. The agreement provided that for five years from the date of the loan the company should sell its sheepskins only to the lenders and should pay them a commission upon sales to others. It was held that the right of pre-emption was enforceable notwithstanding that the loan was paid off earlier as the stipulation was a collateral bargain and a condition of the loan and was not invalid as a clog on the equity of redemption. It was observed by Lord Parker:

“There is no rule in equity which precludes a mortgagee from stipulating for any collateral advantage, provided such collateral advantage is not either

(i) unfair or unconscionable;

(ii) in the nature of a penalty clogging the equity of redemption; or

(iii) inconsistent with or repugnant to the contractual or equitable right to redeem.”

Lord Parker of Waddington further observed: “I doubt whether, even before the repeal of the usury laws, this perfectly fair and business like transaction would have been considered a mortgage within any equitable rule or maxim relating to mortgages. The only possible way of deciding whether a transaction is a mortgage within any rule or maxim is by reference to the intention of the parties. It never was intended by the par ties that if the defendant company exercised their right to pay off the loan they should get rid of the option. The option was not in the nature of a penalty, nor was it, nor could it ever become inconsistent with or repugnant to any other part of the real bargain within any such rule or maxim. The same is true of the commission payable on the sale of skins as to which the option was not exercised. Under these circumstances it seems to me that the bargain must stand and that the plaintiffs are entitled to the relief they claim.”

In Bigg v. Hoddinott [(1898) 2 eh. 307] the mortgage to brewers was for five years certain, with a “tie” during the continuance of the mortgage. Two questions that fell for consideration were is to the right of the mortgagor to redeem before the expiration of the five years and as to the validity of the tie. Romer, J. held that there was no objection to the five years period, either in itself or when taken in conjunction with the tie. He observed:

“I am of opinion that it is obviously to the advantage of both the mortgagor and mortgagee that such a provisi.oll should be enforced. Of course, that does not prevent the Court in a proper case from preventing the application of the clause if it is too large or there are circumstances connected with the proviso which renders it, in the opinion of the Court, unreasonable or oppressive.”

Marshall thus summarizes the two propositions emanating from the modern decisions:-

(1) The postponement of the contractual right to redeem cannot be impugned on the ground that its length is unreasonable but only in the ground that it is oppressive.

(2) A collateral stipulation in a mortgage transaction is not invalid qua collateral stipulation, and if not unconscionable, it may form part of the security.

What is a clog on equity of redemption is a matter of fact in each case. The following instances would make it clear:

 (1) Condition of sale in default- If one ·of the terms of the mortgage is that on the failure of the mortgagor to redeem the mortgage within the specified period, the mortgagor will have no claim over the mortgaged property, and the mortgage deed will be deemed to be a deed of sale in favour of the mortgagee, it cannot be given effect to. It takes away the mortgagor’s right of redemption of his mortgaged property.

(2) long term for redemption.-A long term is not necessarily a clog on redemption. In Gangadhar v. Shankarlal. A.I.R. (1958) S.C. 773, it was held by the Supreme Court that the term in the mortgage that it will not be redeemable until the expiry of 85 years was not a clog in the circumstances of the case.

Accordingly the rule is that if the length of the term is found oppressive, redemption· would be allowed before the expiry of the term.

(3) Stipulation barring mortgagor’s right of redemption after certain period.-If there is a stipulation which bars the mortgagor’s right of redemption after certain period, the stipulation is treated as a ‘clog’ on the mortgagor’s equitable right of redemption.

(4) Condition postponing redemption in case of default-In Mohammad Sher Khan v. Sethi Swami Dayal, (1922) 44 All. 185, the mortgage was for a term of five years with a condition that if the money was not paid the mortgagee might enter into possession for a period of twelve years during which the mortgagor cannot redeem. It was held that such a condition was a clog because it hinders an existing right to redeem.

(5) Restraint on alienalion.-A stipulation that the mortgagor shall not alienate the mortgaged property or shall not take loan on the security of the mortgaged property has been held to be a dog.

(6) Redemption restricted to mortgagor.-I\n agreement that redemption should be available to the mortgagor, and not to his heirs has been held as a dog.

(7) Penalty ill case of default.-A stipulation to charge enhanced rate of interest from the date of the mortgage in case of default in payment, has been held to be a clog. 

In Gulab Chand v. Saraswati Davi, A.I.R. (1977) S.C. 242, the Supreme Court observed that a condition in the mortgage which seeks to take away the right of redemption even before the period within which the mortgagor was entitled to pay off the debt had run out, is a clog on the right of redemption because it takes away the right even before the time of mortgage has expired.

Exception.-Under the proviso to S. 60 of the Transfer of Property Act, it is open to the parties to extinguish a mortgage by, mutual agreement before the expiry of the term mentioned therein. But a tenant who is lawfully inducted on the property under the terms of the mortgage cannot be evicted by the mortgagor on redemption of the mortgage before the expiry of the period mentioned therein.

Extinguishment of the right of redemption.-The mortgagor’s right of redemption is extinguished,

(a) by foreclosure; and

 (b) when the mortgagee has exercised power of sale.

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PARTIAL REDEMPTION

The last paragraph of S. 60 of the Transfer of Property Act states that any person having a share in the mortgaged property cannot redeem as of right his own share of the property only. In other words, where there are several mortgagors none of them can redeem his own share alone, but any of them can redeem the entire mortgage. There is a counterpart of this rule, stated in S. 67 that anyone of the several mortgagees cannot sue to enforce on his share of the mortgage debt by fore closure or sale. It is based on the principle that the mortgage is one and indivisible in Nilakant v. Smesh Chunder. (11186) 12 Cal. 414, the Privy Council observed:

“It would put him (mortgagee) to a separate suit against each purchaser of a fragment of the equity of redemption through purchasing without his content, and he would have separate suits against each of them, and suits in which no one of the parties would be bound by anything which took place in a suit against another. Different propositions of value might be struck in the different suits, and the utmost confusion and embarrassment would be created.”

For example, if four fields are mortgaged for Rs. 400, and the mortgagor sells field No.1 to A for Rs. 100, field No.2 to B for Rs.100, field No.3 to C for Rs. 100 and the fourth to the mortgagee for Rs.100, then the mortgage of the fourth field is extinguished and there remains a mortgage of three fields for Rs. 300. But since the mortgagee purchased field No.4, the integrity of the mortgage as a whole has been split up with the result that A, B, or C may each redeem his one field for Rs. 100.

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RIGHTS AND LIABILITIES OF THE MORTGAGEE

“THE RIGHT TO REDEEM AND THE RIGHT TO FORECLOSE ARE, CO-EXTENSIVE”

“REDEEM UP, FORECLOSE DOWN”

THE RIGHTS OF A MORTGAGEE MAY BE DETAILED AS UNDER:

1. RIGHT TO FORECLOSURE

 In the absence of a contract to the contrary, the mortgagee has, at any time after the mortgage money has become due to him, and before a decree has been made for the redemption of the mortgaged property, or the mortgage-money has been paid or deposited in the court, a right to obtain from the court a decree that the mortgagor should be absolutely debarred of his right to redeem the property. A suit to obtain from the court a decree that the mortgagor shall be absolutely debarred of his right to redeem the mortgaged property is called a suit for foreclosure. (S.67, Transfer of Property Act).

When a mortgagor has thus failed to pay off the mortgage money within the proper time, the mortgagee is entitled to bring an action praying that a day may be fixed on which the mortgagor is to pay off the debt, and that in default of payment on that day the mortgagor may be foreclosed of his equity of redemption.

A suit for foreclosure or sale can be brought at any time after the mortgage money has become due. But this right is subject to a contract to the contrary. The mortgagee may curtail his right of foreclosure or sale. On the other hand, the right of redemption is not subject to a contract to the contrary.

According to Megarry, “foreclosure was the name given to the process whereby the mortgagor’s equitable right to redeem was extinguished and the mortgagee left owner of the property both at law and in equity. The right to foreclose does not arise until the legal right to redeem has ceased to exist, i.e., until the legal date of redemption has’ passed.”

In India under the Transfer of Property Act the remedy of foreclosure is confined to the case of a mortgage by conditional sale and an anomalous mortgage where the terms of the deed have stipulated for foreclosure.

CO-EXTENSIVE RIGHTS OF REDEMPTION AND FORECLOSURE The right to redeem and the rights to foreclosure are co-extensive. When a date is fixed for the payment of the mortgage debt, the mortgagor cannot redeem the mortgage before the due date, nor can the mortgagee enforce his security before the due date. The mortgagee can neither ask for redemption nor does the mortgagee recalls his mortgage money before the due date. After the mortgagor’s right to redeem becomes complete and he has not availed himself of his right to redeem, it is then that the mortgagee’s right to foreclose arises. The two rights, therefore, accrue at the same time and it may be said that the right to redeem and the right to foreclosure are co-extensive. There is, however, one important difference between the two rights. Whereas the right of redemption is not subject to a contract to the contrary, the reason being that the mortgagor requires protection against oppression, the right of foreclosure is subject to the contract to the contrary because the mortgagee is not in the need of the same protection. Hence a mortgagee can curtail his right of foreclosure or sale by contract.

REDEEM UP FORECLOSE DOWN - UNDER S.91 (A) OF THE TRANSFER OF PROPERTY ACT a subsequent mortgagee has a right to redeem a prior mortgagee, while under S. 94 a prior mortgagee has a right foreclose, that is, to deprive of the right of redemption of a puisne mortgagee. In other words, prior mortgagees can foreclose subsequent mortgagees, while subsequent mortgagees can redeem prior mortgagees. Foreclosure is downwards: redemption is upwards.

ILLUSTRATION

(1) A mortgages X to ………………B

(2) A mortgages X to ………………C

(3) A mortgages X to ………………..D

C is the assignee of part of the right of redemption of A against B and  has therefore the right to redeem B. D is also the assignee of the part of the right of redemption of A against B and C and therefore D and redeem both B and C. In other words since C’s mortgage is subject to B’s, C has a right to wipe off the incumbrance and since D’s mortgage is subject to C’s and B’s, D has the right to payoff C and B. This is ‘redeem up’. There is not ‘redeem down’, that is a prior mortgagee has no right to pay off a subsequent mortgagee. He can simply foreclose or deprive the right of redemption of a subsequent mortgagee. Hence B can foreclose A and as part of A’s right of redemption has been transferred to C and D, B can foreclose C or D or both. This is the familiar rule ‘foreclose down’.

2. RIGHT TO SELL

Under S.67 of the Act the mortgagee has another remedy against the mortgaged property, viz., that of sale. In the case of simple mortgages, English mortgages and mortgages by deposit of title deeds, the mortgagee, in the absence of a contract to the contrary, has at any time after the mortgage money become due to him, and before a decree has been made for the redemption of the mortgaged property, or the mortgage-money has been paid or deposited, a right to obtain a decree from the court that the property be sold.

3. RIGHT TO SUE FOR MORTGAGE MONEY

The mortgagee has also a right to sue for the mortgage money

(a) where the mortgagor binds himself to repay the same, viz., in a simple or English mortgage,

(b) where the mortgaged property is wholly or partially destroyed or the security rendered insufficient,

(c) where the mortgagee is deprived of the whole or part of his security by or in consequences of the wrongful act or default of· the mortgagor and

(d) where the mortgagor fails to deliver possession of the mortgaged property to the mortgagee ill case the mortgagee be entitled to such possession. (S. 68).

4. APPOINTMENT OF RECEIVER

Under S. 69-A a mortgagee having the right to exercise a sale without the intervention of the court shall be entitled to appoint a receiver of the income of the mortgaged property or any part thereof. Such receiver shall be deemed to be the agent of the mortgagor.

5. MORTGAGEE’S RIGHT TO ACCESSION TO THE MORTGAGED OF THE BALANCE OF THE ACTUAL PROPERTY

If, after the date of a mortgage, any accession is made to the mortgaged property, the mortgagee, in the absence of a contract to the contrary, shall, for the purposes of Ire security, be entitled to such accession. (S. 70).

6. RENEWAL OF MORTGAGED LEASE

When the mortgaged property is a lease, and the mortgagor obtains a renewal of the lease the mortgage, in the absence of a contract to the contrary, shall for the purposes of the security, be entitled to the new lease. (S.71).

7. RIGHTS OF MORTGAGEE IN POSSESSION

A mortgage. may spend such money as is necessary-

(a) for the preservation of the mortgaged property from destruction, forfeiture or sale;

 (b) for supporting the mortgagor’s title to the property;

(c) for making his own title thereto good against the mortgagor ; and

(d) when the mortgaged property is a renewable leasehold, for the renewal of the lease; and

may, in the absence of a contract to the contrary add such money to the principal money, at the rate of interest payable on the principal, and, where no such rate is on is fixed,  at the rate of  Nine percent per annum.

But expenditure of Money by mortgagee under cl. (a) or cl. (b) shall not be deemed to be necessary unless the mortgagor has been called upon and has failed to take proper and timely steps to preserve the property or to support the title.

Where the property is by its nature insurable and if the mortgagor has not insured, the mortgagee, in the absence of a contract to the contrary is authorized to insure against loss or damage by fire the whole or any part of such property, and add the premium to the mortgage debt. (S. 72).

LIABILITIES OF THE MORTGAGEE IN POSSESSION

When during the continuance of the mortgage, the mortgagee takes possession of the mortgaged property-

(a) he must manage the property with ordinary prudence ;

(b) he must use best endeavour to collect rents and profits;

(c) he must, in the absence of a contract to the contrary, pay the Government revenue and all other charges of a public nature and rent. Out of the income of the property;

 (d) although not bound to spend money on repairs out of his own pocket, he must make necessary repairs to the property out  of the balance of actual realization from the property after deducting therefrom the payment made towards Government revenue and all other charges of a public nature;

(e) he must not commit waste whereby the property is destroyed or damaged;

(f) where property subject to mortgage has been destroyed and such property had been insured against loss or damage, by fire, he must apply any money which he receives under the policy either in reinstating the property or In reduction or discharge of the mortgage-money;

(g) the mortgagee is bound to keep a clear, full and accurate account of all sums received and spent by him as mortgagee;

(h) after tender or deposit of the mortgage-money the mortgagee is not entitled to deductions for expenses of management, collection charges, public charges or repairs. (S. 76).

LOSS OCCASIONED BY DEFAULT

If the mortgagee fails to perform any of the duties imposed upon him by S. 76 discussed above, he may when accounts are taken in pursuance of a decree made under the provisions of the relevant Chapter of the Transfer of Property Act, viz., Chapter IV, be debited with the loss, if any, occasioned by his failure. (S. 76).

Disclaimer: In this note, we have attempted to summarise some of the significant aspects to be kept in mind by readers to ensure compliance of tax laws and regulations. Readers should ensure to verify specific provisions as applicable to each case before taking any business decisions. It would be pertinent to note that some changes are being made to the tax laws and rules and regulations on a continuous basis by way of notifications, clarifications etc issued by the department based on their practical experience in implementing the legislation.

It may be noted that nothing contained in this note should be regarded as our opinion.  Professional advice should be sought for applicability of legal provisions based on specific facts. Though reasonable efforts have been taken to avoid errors or omissions in this note we are not responsible for any liability arising to readers directly or indirectly due to any mis-statements or error contained in this note. It must be noted that the views expressed in the note are based on our understanding of the law and regulations as published by the Government authorities and we may or may not agree or subscribe to such views. This blog, between contributor and readers, shall not create any attorney-client relationship.