- The traditional practice where the mortgagee forfeited the mortgaged property in the event of any default in payment is not considered to be good in law anymore. The mortgagee has to exercise his rights in the procedure prescribed by the Act.
- Right of foreclosure is the right through which a mortgagee can obtain a decree to get the amount lawfully due to him. Section 67 of the Transfer of Property Act envisages the right of foreclosure.
- Where a property mortgaged by transfer of sale deeds was transferred during the pendency of the suit of foreclosure, it was held that such a transfer would not be valid due to the doctrine of Lis pendens.
The Transfer of Property Act, 1882 is the primary statute dealing with the regulation of transfer of property in India. It came into effect on July 1, 1882. This Act also governs the mortgage of property. The Act also provides the rights and duties of the mortgagor and mortgagee. This Act is a beneficial legislation and aims at ensuring that no party is able to exploit the other.
Section 58 of the Transfer of Property Act defines the mortgage as transfer of certain specific interest in the immovable property for obtaining an advanced payment, loan, debt or for such performance which incurs pecuniary liability. Mortgagor is the person who transfers interest in immovable property and the person who advances the loan is the mortgagee. The advanced sum of money or the liability incurred is the mortgage money. There are various types of mortgages such as simple mortgage, English mortgage, usufructuary mortgage and mortgage by conditional sale.
RIGHT OF FORECLOSURE
The traditional practice where the mortgagee forfeited the mortgaged property in the event of any default in payment is not considered to be good in law anymore. The mortgagee has to exercise his rights in the procedure prescribed by the Act. This means that the mortgagee cannot appropriate or sell the property to himself. He has to obtain a decree of the Court enabling his to sale the property.
Once the mortgage deed is executed, the mortgagee becomes entitled to recovering the principal amount advanced to the mortgagee once the amount becomes due. The Transfer of Property Act also vests the right of recovering the loan amount on the mortgagee
Right of foreclosure is the right through which a mortgagee can obtain a decree to get the amount lawfully due to him. Section 67 of the Transfer of Property Act envisages the right of foreclosure. Under Section 67, once the amount becomes due, the mortgagee has the right to obtain a court decree restricting the mortgagor from exercising his right of redemption or for selling the mortgages property. Such decree can be obtained once the principal amount becomes due and before the mortgagee either obtains a Court decree for exercising his right of redemption or before the mortgage pays back the mortgaged amount. Thus, the essentials under Section 57 can be classified as the following:
- The mortgage amount becomes due
- The mortgagor has not obtained a decree for exercising his right of redemption
- The mortgagor has not paid back the mortgaged money
- The mortgage deed should not contain a clause to the contrary
The right of foreclosure can be exercised after the expiry of the period of repayment as specified in the mortgage deed. The right of foreclosure can be exercised within a period of 30 years from the day on which the application of this right becomes enforceable. If the mortgage deed states that the right of foreclosure is applicable once the mortgage is executed, then such a right is subject to a limitation of 12 years.
Once the mortgagee initiates the suit of foreclosure, the mortgagor is barred from transferring the mortgaged property. If during the pendency of the suit of foreclosure, the mortgagor transfers the mortgaged property to a third party, then such transfer could be challenged before the Court to be violative of the doctrine of Lis pendens. In the case of Parsotam v Chedda Lal, (1907) ILR 29 All 76, it was held that a foreclosure suit is considered to be pending as long as a final decision is passed on the matter.
RIGHT OF FORECLOSURE AND TYPES OF MORTGAGES
The right of foreclosure also depends on the nature of the mortgage. In case of a simple mortgage, the mortgagee cannot exercise the right of foreclosure as he does not receive the actual possession of the mortgage property. The only remedies that are available to the mortgagee are sale of mortgage property or proceeding personally against the mortgagee.
In the case of unconditional sale of mortgage, upon the failure of repayment of debt, the mortgagee can bar the mortgagor from exercising his right of redemption and thus the mortgage matures into resale.
In the case of a usufructuary mortgage, the mortgagee retains the possession of the mortgaged property as long as the mortgagor repays the money. He will also be entitled to interest, if any. Thus, we see that the right of foreclosure is not available in this case too. Where there are several mortgagees and one of the mortgagee is interested in only a proportion of the mortgaged money, he may institute a suit with respect to only that corresponding part of the mortgaged property. However, in this case the mortgagees must have severed their interests by the consent of the mortgagor.
In case of an English mortgage, the mortgagee has the remedy of sale of property.
Where the mortgage is a combination of multiple mortgages, that is anomalous
Mortgage by deposit of title deeds
Section 96 deals with mortgages through title deeds. This Sections provides that the provisions applicable to a simple mortgage will be applicable to mortgage by deposit of sale deeds. Hence, the remedy available to a mortgagee in case of mortgage by deposit of sale deeds would be the sale of the mortgage property or proceeding against the mortgagor. The mortgagee cannot exercise the right of foreclosure.
RIGHT OF REDEMPTION AND RIGHT OF FORECLOSURE
The primary difference between the right of redemption and the right of foreclosure is that the right of redemption is an absolute right while the right of foreclosure is not an absolute right. The mortgagor itself cannot restrict or suspend his right of redemption. The right of foreclosure, on the other hand, can be restricted by virtue of the contract between the parties. This is clear from the language of Section 67 which itself states that the provisions of the Section would be applicable in the absence of any contract to the contrary. The reason behind this distinction can be attributed to the fact that law assumes the mortgagee to be in a superior position when it comes to instances of mortgages. As the mortgagors usually mortgage their property out of any urgency of money, the law gives them the benefit of the weaker position and makes the right of redemption an absolute right. The same protection cannot be attributed to the mortgagees who are assumed to be in a superior position and well aware of their rights.
A similarity between the right of redemption and right of foreclosure is that both the rights cannot be exercised before the date on which the mortgage money becomes due. However, the mortgagee cannot exercise his right of foreclosure after the mortgagor exercises his right of redemption.
RIGHT OF SUBROGATION
The Right of Subrogation is envisaged under Section 92 of the Transfer of Property Act. Subrogation refers to the redemption of mortgaged property by a person, other than the mortgagee, who has interest in the mortgaged property. Where any such person exercises the right of subrogation, he becomes the new mortgagee and enjoys the same rights as that of the original mortgagee. Since partial Subrogation is not recognised by the law, it is essential that the person pays the entire debt and the mortgage is redeemed completely. Subrogation carries an equitable charge and can be exercised only by operation of law. Hence, only a person having an interest in the property can exercise this right.
CODE OF CIVIL PROCEDURE AND MORTGAGE
Order XXXIV, Rule 1 of the Code of Civil Procedure provides that " all persons having an interest either in the mortgage-security or in the right of redemption shall be joined as parties to any suit relating to the mortgage."
XXXIV Rule 14 provides that the mortgagee can establish a claim for resale if the claim is borne out of a mortgage and the mortgagee is permitted to file a suit for enforcement of the mortgage.
In the landmark case of KS Dhillon v Punjab Financial Corp, AIR 2012 P&H 75, a property mortgaged by transfer of sale deeds was transferred during the pendency of the suit of foreclosure and it was held that such a transfer would not be valid due to the doctrine of lis pendens.
In the landmark case of Achaldas Durgaji Oswal v. Gangabisan Heda, the mortgagor had failed to pay the mortgage money to the mortgagee. The case related to a usufructuary mortgage and the possession of the property was transferred to the mortgagee for a period of 5 years. The mortgagor had filed for a suit of redemption before the Court. At the same time, the mortgagee filed a suit for exercising his right of fore-closure. The Court gave a time of 3 months to the mortgagor to deposit the amount. The mortgagor failed to do so but deposited the amount after 3 years and pleaded to the Court for a final decree. The mortgagor's plea was rejected by the lower court but upheld by the High Court. The matter thereafter went to the Supreme Court. The Supreme Court, while upholding the decision of the High Court, observed that irrespective of the fact that the mortgagor had defaulted in making the payment, he could still exercise his right of redemption as he had made the payment within the period of 30 years as prescribed under the Limitation Act. Thus, in this case the Apex Court laid down an essential principle by stating that the mortgagor could exercise his right of redemption by making the payment within the Limitation period.
In the landmark judgment of Narayan Deorao Javle (Deceased) v. Krishna & Ors., the Supreme Court of India held that “the right of redemption and the right of foreclosure are coextensive, therefore, no sooner than a decree for foreclosure is passed, the right to redeem extinguishes.”
Thus, we see that the mortgagee has two rights in the event of non-payment of principal amount of debt,
- He can recover the amount from the proceed of the sale of the mortgage property
- He can sue the mortgagor for the recovery of the money.
The right of foreclosure can be exercised only upon the failure of the mortgagor to repay the principal amount. The mortgagee can absolutely bar the mortgagor from exercising his right of redemption by obtaining a court decree. The right of foreclosure, however, is not applicable in case of all the mortgages. In such mortgages where the mortgagee does not obtain the actual possession of property, he cannot exercise the right of foreclosure. The right of foreclosure, thus, cannot be exercised in the case of a simple mortgage, mortgage by transfer of sale deeds and mortgage by conditional sale.
Another pertinent point is that the right of foreclosure is not an absolute right and is subject to the terms of the mortgage deed. This right can be limited by the terms of the contract and mutual consent of the parties. This is in contradiction to the right of redemption which cannot be limited by any contract.