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When a customer secures an advance on the security of specific immovable property the charge created thereon is called a mortgage. Section 58 of the Transfer of Property Act, 1882, defines a mortgage as, The transfer of an interest in a specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, on existing or future debt, or the performance of an engagement which may give rise to pecuniary liability. The instrument through which it is affected is called a mortgage deed, the customer (transferor) is called the mortgagor and the bank (transferee) is called the mortgagee. The payment so secured which includes both the principal money and the interest thereon is called the mortgage money.
Section 58 of Transfer of Property Act, recognizes six types of mortgagers which are discussed hereinafter.
In case of simple mortgage, the mortgagor does not give possession of property, but binds himself personally to pay the mortgage money. He agrees expressly or impliedly that in case he fails to make the payment according to the contract, then the mortgagee shall have right to cause the mortgage property to be sold and proceeds of sale to be applied, as far as may be necessary, in payment of the mortgage money. The mortgagee himself cannot sell the property, but has to seek intervention of the court.
Mortgage by Conditional Sale:
Under this form of mortgage the mortgager ostensibly (on the face of it) sells the mortgaged property with any one of the following conditions:
I. On default of payment of mortgage money, the sale shall become absolute.
II. On payment being made on a certain date, the sale shall become void.
III. When the payment is made, the buyer shall transfer the property to the seller.
Unlike the simple mortgage which is non-possessory, in case of usufructuary mortgage, the mortgagor delivers possession of the mortgaged property. The mortgagee is also entitled to receive rents and profits accruing from the property and appropriate the same in lieu of interest or in payment of mortgaged money or both. When the debt is so discharged or repaid, the mortgagor is entitled to recover possession of his property. There is no personal liability on the mortgagor.
In case of English mortgage, there is transfer of ownership on the condition that the mortgagee will re-transfer the same on the payment of mortgage money. Further, the mortgagor personally undertakes to repay the mortgaged money. In case of default, the mortgagee has the right to sell the property without seeking permission of the court in the special circumstances mentioned in section 69 of the Transfer of Property Act.
Mortgage by deposit of title deeds (equitable mortgage):
This mortgage is affected by deposits of title deeds of the property by the debtor in favour of the creditor to create a security thereon. This type of mortgage is called equitable mortgage in English law. In India, it is restricted to the cities of Delhi, Mumbai, Kolkata and Chennai or any other town which the concerned state government may notify in the official gazette in this behalf. No registration is necessary and delivery can be either actual or constructive. There is personal liability of the mortgagor to pay, and the mortgagee can sell the property with the sanction of the court if the mortgaged money is not repaid.
A mortgage which is not simple mortgage, mortgage by conditional sale, usufructuary mortgage, English mortgage and mortgage by deposit of title deeds (equitable mortgage) is called an anomalous mortgage. If the terms of the mortgage do not strictly adhere to any of the above five types, e.g. in case of simple mortgage if the mortgagee is allowed to use the mortgage property, then it will not be called simple or usufructuary but an anomalous mortgage. Under this the rights and liabilities of the parties are determined by the terms agreed upon in the mortgage deed, and in the absence of such a deed by the local usage.
Legal Mortgage vs. Equitable Mortgage
From the point of view of transfer of title to the mortgaged property, a mortgage may either be a legal mortgage or an equitable mortgage.
Legal Mortgage: legal mortgage can be enforced only if the mortgage money is Rs. 100 or more. It is affected by transfer of legal title to the mortgage property by the mortgagor in favour of the mortgagee. All this involves expenses in the form of stamp duty and registration charges. At the time of repayment of mortgaged money, the property is retransferred to the mortgagor.
Equitable Mortgage: In case of equitable mortgage, only documents of title are transferred in favour of the mortgagee and not the legal title. No registration is necessary and no stamp duty of deposit, the mortgagor undertakes to execute a legal mortgage in case of default in payment within the stipulated time. The reputation of the mortgagor is not affected, since in absence of registration no one comes to know about the mortgage. However, this can prove risky also if through negligence or fraud, another party is induced to advance money on the security of the mortgaged property as the subsequent mortgagee will have priority over the first.