Financing of real estate transactions largely entails security against the loans. The security is the underlying asset for which the funding would be advanced. The form of creation of the security is the most interesting aspect since charge creation is not only a very cumbersome and legal process but is also a very expensive affair. It is widely known that mortgage is created on the real estate properties in favour of the lender when a loan is advanced. Of course, the mortgage can be created either in case of a loan advanced for purchasing the subject real estate property or for any other purpose if the real estate property is offered as security in favour of the lender.
While there are several forms of creating mortgage, the most convenient and widely used method is ‘mortgage by deposit of title deeds’. Considering its significance, this article discusses the key legal aspects of creating a mortgage by deposit of title deeds.
Section 58(a) of Transfer of Property Act 1882:
A mortgage is the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which amy give rise to a pecuniary liability.
Section 58(f): Mortgage by deposit of title deeds:
Where a person in any of the following towns, namely, the towns of Calcutta, Madras, and Bombay, and 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.
Mortgage by deposit of title deeds is also called as Equitable Mortgage. Also, most of the cities and towns are notified by all the state governments in India.
Key Legal Aspects & Analysis:
- The place of depositing the title documents should be notified. The property could be located anywhere i.e., whether or not the place of property is notified under Section 58(f) of Transfer of Property Act, 1882. To comply with this, Bank Branches mention their branch and head office addresses and obtain the stamp papers in the Head Office jurisdiction so that the notified area requirement is met.
- The deposit of title is necessarily made only to secure the debt by creating a charge on the subject immovable property. The loan may have been already advanced or would be advanced later. However, if the to-be advanced debt is not advanced later, the charge under the mortgage will not have validity.
- The deposit may or may not have been formalized by way of a written ‘Memorandum of Deposit of Title Deeds’. Even in the absence of any such Memorandum, Equitable Mortgage is created when title deeds are deposited.
- The most significant issue is about registration of the Memorandum. This assumes significance since the very nature of Equitable Mortgage is to create a charge by mere deposit of title deeds. Also, Section 59 of Transfer of Property Act provides that every mortgage other than a mortgage by deposit of title deeds can be effected only by a registered instrument. This clearly implies that Equitable Mortgage need not be registered. However, the following relevant aspects need to be noted:
- As per Section 17(1)(c) of Indian Registration Act, 1908, Equitable Mortgage is compulsorily registrable. Registration fee is payable under Article 1(1)(b) as per the Table of Registration Fee vide notification dated 6th November 2006.
- Article 6 of Schedule I-A of the Indian Stamp Act, 1899 provides for rate of stamp duty payable on deposit of title deeds.
- In view of the above, Supreme Court of India, in its judgement dt. 7th October 2013 in the case of State of Haryana vs. Navir Singh and another (civil appeal no. 9030 of 2013) pronounced the following points:
- Memorandum which contains only the details of deposit of title deeds but without any details or terms of the loan doesn’t constitute an instrument of mortgage. Such a memorandum would not be an instrument of mortgage.
- If the Memorandum contains other terms and details of the loan and with regard to the deposit then such a Memorandum requires registration.
iii. Finance Commissioner, Ministry of Finance, Government of India vide letter dated 29th March 2007 stated that instrument of deposit of title deeds is compulsorily registrable under Section 17(1) (c) of the Registration Act.
- In case of a Memorandum with contains only the details of deposit, the charge of mortgage can be entered in to the revenue records and for that purpose instrument of mortgage is not necessary. Accordingly, the question of payment of registration fee and stamp duty doesn’t arise. This is the case where there could be other documents detailing the loan and terms and conditions but Memorandum contains only details of deposit of title deeds but doesn’t contain the loan terms or other details.
- However, if the Memorandum is the sole evidence of the loan transaction and / or it has the terms and conditions of the loan and other details, then registration of the Memorandum is compulsory. Only when the Memorandum is registered in such a case, will the document be considered as evidence under Indian Evidence Act to prove the charge holders right over the property.
It may be noted that while initially mortgage by deposit of title deeds served in a very crude manner for the lenders to create security for their loans, as the law has evolved gradually in the best interests of the lenders and the credit culture, the present practice through mortgage by deposit of title deeds has emerged as a reliable and a settled mode of security creation.
Dr.Kishore is a finance professional. He can be reached at email@example.com