A PROJECT REPORT ON
Foreclosure & Redemption: A detailed analysis Submitted to: Ms. Apurva Verma (Faculty, Transfer of property Act) By: Pranav Vaidya Roll no:-117 Semester-IV C, BA.LLB(Hons.)
Date of Submission: 18th February 2015 Hidayatullah National Law University
Declaration I, Pranav Vaidya, hereby declare that, the project work entitled, “Foreclosure & Redemption: A detailed analysis” submitted to Ms. Apurva Verma, Faculty, H.N.L.U., Raipur is record of an original work done by me under the guidance of Ms. Apurva Verma, Faculty, Transfer of Property Act, H.N.L.U, Raipur.
Pranav Vaidya Semester IV Roll No. 117 Section C
ACKNOWLEDGEMENTS
First & foremost, I take this opportunity to thank Ms. Apurva Verma, Faculty, Transfer of Property , HNLU for allotting me this challenging topic to work on. She has been very kind in providing inputs for this work, by way of suggestions and by giving his very precious time for some discussion. Hence I would like to thank her for all hier cooperation and support. I would also like to thank the University Administration for equipping the University with such good library and IT lab. Last but not the least; I would like to thank my friends for having a wonderful debate and discussion in the hostel, and hence creating a knowledge base for various aspects of this society as well as our education.
Pranav Vaidya Roll No.-117, Sec-C Semester- IV
Contents:
\
Declaration
Acknowledgements.
Objectives.
Research Methodology.
Introduction.
Section I- The Right to Redeem.
Section II- The Right of Foreclosure or Sale.
Section III- Differences under English Law and Indian Law.
Conclusion.
Objectives: The objective of the project is: 1. To understand & analyze the rights of foreclosure and redemption with regard to mortgagor & mortgagee. 2. To discuss both the rights under English as well As Indian laws. 3. To draw comparison between the two. .
Methodology: This projects work is based on the descriptive approach as it requires a deep study of the topic followed by thorough description. It is based on secondary sources, i.e., books and electronic
sources (internet). Websites, dictionaries and articles have also been referred.
Introduction
Under the Transfer of Property Act of 1882, the term Mortgage has been defined under Section 58 which in general terms can be defined 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 in present or in future”. It is not the transfer of absolute interest in the property. While, lease is also a kind of transfer of interest in a property on the payment of rent, the main purpose of transfer of interest in a mortgage is to secure the payment of loan. According to Maitland, when in consideration of a money loan, A transfers B a piece of land with a stipulation that if the money lent was repaid with interest on a given day, then B will revert the property back to A. But if the money wasn’t repaid, then the properties ownership goes to B. As the parties engaged in a transfer of property are known as transferor and transferee, similarly the parties involved in a mortgage are known as mortgagor and mortgagee. Mortgagor is the person who gives the property in mortgage, while mortgagee is one who takes the property of mortgage. So as stated earlier, that the main purpose of mortgage is to secure the payment of money advanced; when a person lends money to the other, he can sue the borrower if he fails to repay the money. But if the borrower becomes insolvent, the lender loses all of his money and he doesn’t have any remedies for his loss. So, by attaching some security for the repayment of loan, the rights of the lender are also protected. So, under this project, I am going to deal with the rights of mortgagor under Sec.60 of the Transfer of Property Act known as the Right of Redemption as well as the rights of mortgagee given under Sec.67 known as the Right of Foreclosure or Sale and hence put forth a comparative analysis between the two rights.
Section-I The Right to Redeem Right of redemption is the right which every mortgagor possess, which is created by virtue of the mortgage deed. This right is considered to be inalienable, and cannot be taken away from a mortgagor by means of any contract to the contr ary. According to Black’s Law Dictionary, term “redemption” can be defined as the act of the vendor of property in buying it back again from the purchaser at the same or an enhanced price. “Right of Redemption” can be defined under the same dictionary as an agreement, by which the vendor reserves to himself the power of taking back the thing sold by returning the price paid for it . This right finds place under Section 60 of the Transfer of Property Act, 1882 which makes mortgagor the owner of the property mortgaged, and makes him able get his property back from the mortgagee on paying the amount borrowed from him. Clog on a right means the insertion of any clause or any provision under the mortgaged deed which would alienate mortgagor of his property under certain circumstances. Under Indian legal system, such provisions would not be able to alienate a mortgagor of his “Right of Redemption”, and such provisions would be void ab initio. The reason for such clauses under the mortgage deed being void is quite interesting and reasonable. It would not be difficult to understand that a person mortgages his property when he is in need of money, and would not be in the same position as that of the mortgagee. Also, it wou ld not be difficult to understand that mortgagee would try to misuse his position to exploit the mortgagor, and it is for this reason that such clause becomes obvious which would alienate a mortgagor of his property. It is highly possible that a person agrees to enter in a mortgage having clauses which extinguish his right of redemption, but it would not be necessary that the provisions have been accepted by him willingly. In need of money, a person would agree to the terms and conditions of the mortgagee even if he doesn’t want to do so. But, law doesn’t sit silent and in such cases it steps in the picture, and save the basic rights of a mortgagor. Law doesn’t allow any person to alienate a mortgagor of his “Right of redemption”. Such right would remain effective unless the property has been sold off or under any statutory provision. Even if mortgage has went to the court for the foreclosure of the property mortgaged, mortgagor can redeem his property by paying off the full amount in the court.
Under English Law:
Under the English law, the mortgagor’s r ight of redemption is known as The Equity of Redemption. This right has been introduced by the English law itself. It got its name because of the fact that that the courts of the common law were not able to deal with certain types of cases where redress was needed. So eventually the King established the Court of Chancery to deal with such petitions with the help of his chancellors. So the chancellor, in dealing with such petitions wasn’t bound by strict laws, but rather on the grounds of equity or natural justice. Henceforth, the Court of Chancery was later on come to be known as the Court of Equity. So, as stated earlier that the main purpose of mortgage is to give security to the lender for the repayment of his loan, if the borrower isn’t able to return the loan taken in the given time. But even if the fixed time is passed, and the borrower isn’t able to return the money in a given amount of time, he can redeem with the lender. So the right to redeem a mortgaged property by application to the Chancery was known as Equity of Redemption. Originally equity intervened only in cases of fraud by the mortgagee but soon came to recognize a general right to redeem in all cases ( Salt v Marquess of Northampton1). Thus, equity allows the mortgagor to redeem even after the date fixed by the mortgage agreement for repayment has passed. Of course, since this right is enforceable in equity only, it is subject to the general principle that equitable remedies are discretionary in nature and all the equitable maxims (particularly the ‘clean hands’ doctrine) will apply. Furthermore, in deciding whether redemption is possible, equity will look at the substance of the agreement, not its form. Accordingly, a mortgage which is drafted to look like an outright transfer of the property, rather than the creation of an interest by way of security, will still be subject to the equitable right to redeem, if the facts are such as to indicate that only a grant by way of security was intended.
1 . [1892] AC 1.
In equity the mortgagor is described as owning the ‘equity of redemption.’ This must be distinguished from the equitable right to redeem. The equity of redemption is the mortgagor’s equitable interest in the property and it consists of the sum total of the mortgagor’s rights in relation to the land (including, inter alia, the right to redeem). The equity of redemption is therefore an interest in land and can be dealt with like any other equitable interest. So the right of redemption given to the mortgagor cannot be avoided by some contract on the ground that he expressly abandons his right to redeem the property. Accordingly, in the case of
Stanley v. Wilde 2 , Lord Lindley considered the nature of a mortgage and said: "The principle is this: a mortgage is a conveyance of land or an assignment of chattels as a security for the payment of a debt, or the discharge of some other obligation for which it is given. This 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. That, in my opinion, is the law. 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,' but I do not understand that this principle involves the further proposition that the amount or nature of the further debt or obligation, the payment or performance of which is to be secured, is a clog or fetter within the rule. A clog or fetter is something which is inconsistent with the idea of security;" In simpler terms, it means an obstruction to the equity of redemption. Henceforth, some principles have been developed stated as follows3: (a) That the mortgagor is allowed to redeem even after the legal date has passed so long as he repays all money outstanding under the mortgage. (b) That any term of the mortgage which is a clog on the equity of redemption will be void and can be ignored by the mortgagor. (c) That equity will apply to the above two principles to any transaction, which is in substance a mortgage whatever outward form the transaction takes.
2 . (1898) 2 Ch. 307. 3 . M Harwood, English Land Law, (London: Sweet & Maxwell, 1975), pp.402-403.
So, in English law, according to Earl of Nottingham, LC; a mortgage can never provide any condition at the time of making the loan which the equity of redemption can be discharged and the conveyance gets violated4.
Under Indian Law:
As far as Indian position in this regard is considered, as much of the Indian law stems from English law, rights and liabilities of mortgagor in transfer of property being no exception to the rule, is also congruous (in many aspects) with the corresponding English position. These rights are dealt with in s.60 of the Transfer of Property Act, 1882. Section 60 reads as follows: “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 the mortgagor either to re-transfer the mortgaged property to him or to such third person as he may direct, or to execute and (where the mortgage has been effected by a registered instrument) to have registered an acknowledgement 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 and a suit to enforce it is called a suit for redemption. As it is clear from the reading of section 60 that the right of redemption in India is a statutory right and therefore cannot be extinguished even by express agreement made at the time of mortgage as part of transaction. This right of redemption is an incident of a subsisting mortgage and it subsists as long as mortgage subsists. Right of redemption presupposes the existence of a ‘mortgage’. It must also be noted that the section 60 is not prefaced by any words like ‘in the absence of contract to contrary’. Therefore the right of
4. Vemon v. Bethell, (1972) 2 Edn. 110, P.113.
redemption is a statutory right, which can be fettered by any condition that impedes or prevents redemption. Any such condition is void as clog on redemption. Basically, there are some instances which puts forth the circumstances under which any clog on the mortgagor’s right to redeem will be invalid:
Condition of sale in default: Any contract whose effect is to deprive the mortgagor his
right to redeem will be considered as invalid by the courts as the right to redeem in India is a statutory right. So, if one of the terms of mortgage is that, on the failure of the mortgagor to redeem the mortgage within the specified time, the mortgagor won’t have any claim over the property and such property will be deemed to be a deed of sale in favor of the mortgagee. Such condition takes away the right to redeem of the mortgagor, and hence such condition in itself is invalid5.
Long term for redemption: A long term is not necessarily an obstruction on
redemption. In the case of Gangadhar v. Shankartala6 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. However, if the time period which seems to be unreasonable will be considered as a clog on redemption7.
Stipulation barring mortgagor’s right of redemption after certain period: If there is
a stipulation which bars mortgagor’s right of redemption after a certain period, the stipulation is treated as a “clog” on the mortgagor’s equitable right of redemption8.
Condition postponing redemption in case of default: A condition which postpones the
mortgagor’s right of redemption will be considered as a clog because it hinders the mortgagor’s existing right to redeem 9.
Restraint on Alienation: 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 clog10.
5. Gangadhar v. Shankar lal, AIR 1958 SC 773. 6 . AIR 1958 SC 773. 7 . Fateh Mohammad v. Ram Dayal (1927) 2 Luck. 588 I.C. 160. 8 . Murarilal v. Deo Karan AIR 1965 SC 225. 9 . Mohammad Sher Khan v. Seth Swami Dayal (1922) 44 All. 185. 10 . Ram Saran v. Amrit, (1980) 3 All. 369 F.B.
Redemption restricted to mortgagor:
An agreement that the right of redemption
should be available to the mortgagor and not to his legal heirs has been held as a clog.
Penalty in case of default: Stipulation to charge an excessive amount of interest from
the date of mortgage, in case of default of payment, has been held to be a clog.
Section-II The Right to Foreclosure or Sale Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan. Formally, a mortgage lender (mortgagee), or other lienholder, obtains a termination of a mortgage borrower (mortgagor)'s equitable right of redemption, either by court order or by operation of law11 (after following a specific statutory procedure). Usually a lender obtains a security interest from a borrower who mortgages or pledges an asset like a house to secure the loan. If the borrower defaults and the lender try to repossess the property, courts of equity can grant the borrower the equitable right of redemption if the borrower repays the debt. While this equitable right exists, it is a cloud on title and the lender cannot be sure that they can successfully repossess the property. Therefore, through the process of foreclosure, the lender seeks to foreclose (in plain English, immediately terminate) the equitable right of redemption and take both legal and equitable title to the property in fee simple. The transaction is effected through a document called the mortgage deed. The relevant provisions regarding foreclosure are contained under Section 67 of The Transfer Property Act. The foreclosure right can be enforced on failure of the mortgagor to repay the money borrowed on the due date. The mortgagee has a right to obtain from a court a decree that the mortgagor should be absolutely debarred of his right to redeem the property, or a decree that the property be sold. A suit to obtain a decree that the mortgagor be absolutely debarred of his right to redeem the mortgaged property is called a Suit for Foreclosure . This right of foreclosure can be exercised by a mortgagee only if these conditions have been met:
The money has become due for payment.
There are no contrary conditions in the mortgage deed.
At any time after the mortgage money has become due to the mortgagee but before the mortgagor gets a decree of redemption of the mortgaged property.
11 . Britain, Great (1761). "Mortgage". Statues at Large from the Magna Carta to 1761 in Great Britain.
At any time after the mortgage money has become due to him but before the mortgage money has been paid or deposited by the mortgagor 12.
The remedy depends on the nature of the mortgage. In case of a simple mortgage, the right of foreclosure is not available. The remedy is either to proceed against the mortgagor personally or for sale of the mortgaged property. This is also the option available in case of usufructuary mortgage. In this case, the mortgagee will be in possession of the property and will continue to be so until the debt is repaid in full. A person interested in only a part of the mortgage money may institute a suit relating only to a corresponding part of the mortgaged property. However, this is subject to the condition that the mortgagees have severed their interests under the mortgage with the consent of the mortgagor. In case of anomalous mortgage, the remedy depends on the terms of the mortgage. In the case of an English mortgage, the mortgagee may bring a suit for sale of the property. In case of conditional sale, the mortgage matures into sale on the failure of the payment of debt. The mortgagee may foreclose depriving the right of redemption. In case of mortgage by deposit of titles deeds, the remedy is to sue for personal decree or for sale of the property. The mere difference between English law and the Indian law on the right to foreclosure or sale is that under English law, before the amending act of 1929, an English Mortgagee could sue either for the foreclosure or for sale. But now he can only bring a suit for the sale of mortgage property. While under Indian law, a simple mortgagee cannot foreclose. His remedy is to bring a suit for sale of the mortgaged property in order to release the mortgage, as well as he can also sue for on the personal covenant and obtain a money decree against the mortgagor. And both the remedies under Indian law are independent of each other because they arise from different cause of action.
12 . Section 67 Transfer of Property Act, 18825.
Section-III Difference under English law and Indian law
The Right to Redeem: Under the English common law, a mortgagee became the owner of a property mortgaged to him subject to a covenant for re-conveyance if his mortgage dues were paid to him within a fixed time. The mortgagor's right to redeem the mortgage until he was debarred from it by foreclosure or the mortgaged property was sold under the orders of the Court was recognized by the Courts of Equity which held that a mortgage was merely a security for money.
This right is called the equity of redemption, even when the mortgagor was given this right, the mortgagee continued to be the legal owner of the mortgaged property. This lasted until the Law of Property Act, 1925, was passed where under the legal ownership was vested in the mortgagor. Two important points of difference between the English law and the Indian law on this subject may be noted: Firstly , no such expression as "the equity of redemption" has been used in the Indian law.
The right which a mortgagor has been given under Section 60 of the Transfer of Property Act is the right to redeem. It will be quite incorrect to consider this expression to be a substitute for "the equity of redemption" because the latter expression imports that the ownership at law is vested in someone other than the holder of the equity of redemption. Secondly , a mortgage is, according to Section 58 of the Transfer of Property Act, the transfer of an interest in specific immoveable property and not that of the immoveable property itself.
Ownership does not pass by way of mortgage bull by way of sale as defined in Section 54, It seems to me that the conflict of authority on the question of whether the mortgagor holds a tangible immoveable property or only an intangible right has arisen generally because, in some cases, the distinction between the Indian law and the old English law has not been kept in view with the result that, taking the mortgagor's interest to be a bare equity of redemption and not that of an owner, it has been held that he has only an intangible right13.
13 . AIR 1959 Pat 153.
The Right to Foreclosure or Sale: Nowadays, nearly all states have enacted statutes incorporating the equity of redemption, and many also have enacted periods of redemption, specifying lengths of time within which the borrower may redeem. Although some debtors, or mortgagors, are able to avoid foreclosure through the equity of redemption, many are not, because redeeming means coming up with the balance of the mortgage plus interest and costs, something that a financially troubled debtor might not be able to accomplish. However, because foreclosure upends the agreement between mortgagor and mortgagee and creates burdens for both parties, lenders are often willing to work with debtors to help them through a period of temporary difficulty. Debtors who run into problems meeting their mortgage obligations should speak to their lender about developing a plan to avert foreclosure.
Under English law, if the mortgagor fails to redeem, it results in foreclosure of the borrower's rights in the real estate, which is then sold by the county sheriff at a public fore-closure sale. At a foreclosure sale, the lender is the most frequent purchaser of the property. If the bid at the sale is less than the debt, even if it is for fair market value, the lender may be granted a deficiency judgment for the balance of the debt against the debtor, with the right to resort to other assets or income for its collection. Under Indian law, the right to institute a suit for foreclosure or sale is not available to a mortgagee for any work of maintenance in which the public is interested. A mortgagee may hold two or more mortgages executed by the same mortgagor. In respect of each of such mortgages, he may have a right to obtain a decree of foreclosure. In case he sues to obtain such a decree on any one of the mortgages, he will be bound to sue on all the mortgages in respect of which the mortgage money has become due. If the mortgagor has paid or deposited the mortgaged property, then there comes no question for the exercise of the right of foreclosure or sale.
CONCLUSION Historically, a mortgage was given as security for a loan, which took the form of a conveyance to the lender of the borrower’s legal title. It is upon repayment of the loan, the mortgagee reconvened legal title to the mortgagor. However if the mortgagor failed to pay the contractual date of redemption, the mortgagee’s title would become absolute at law. To mitigate the harshness of the common law relating to mortgage transactions, equity had to step in and create the equitable right of redemption and right of redemption and the right to foreclosure.
The equity of redemption regarded the mortgagor by equity as being the real owner of the mortgaged property, which still provides the theoretical underpinning of mortgage law. It essentially put a check upon three main types of additional gains that mortgagees sought through mortgage deeds: to become owners of the mortgaged property, to get back more than they advanced, and to secure collateral advantages. While the mortgagee has a right to obtain from a court a decree that the mortgagor should be absolutely debarred of his right to redeem the property, or a decree that the property be sold.
However, by creating these doctrines, the law clogs up the exercise of power upon the mortgagor as well as mortgagee by giving both of them certain rights.
Bibliography
Transfer of Property, 28th edn, Allahabad Law Agency, Dr. S.N Shukla.
The Transfer of Property Act, R.K.Sinha..
Transfer of Property Act, Sir Dinshaw Mulla.
Transfer of Propert Act, 1882.
