Rights And Liabilities Of Mortgagor And Mortgagee

The Transfer of Property Act, of 1882 (hereinafter referred to as "the Act") consists of legal provisions related to 'modes of transfer' and states how a property can be transferred in India. A mortgage is one form of the transfer of property. The Act provides the rights and liabilities of the mortgagor or in simple terms the borrower and the mortgagee of the mortgage.

As per Section 58(a) of the Act, a mortgage is the transfer of an interest in a specific immovable property to secure payment for money loaned, a debt, or an engagement that may lead to future financial liability. In simple words, in mortgage a property is used as a security for a loan. A mortgage, basically, provides security to the effect that if the mortgagor fails to pay back the loan or satisfies his financial liability, the money of the mortgagee can be recovered.

Who Is A Mortgagor?

Section 58 of the Act provides that the transferor is called a mortgagor. A mortgagor is a person who alienates an interest in his/her immovable property in favour of another called the mortgagee for the purpose of securing a financial loan. The mortgagor still had the ownership of his property and gave the mortgagee an interest in the same. The mortgagor uses the value of his property to raise a financial benefit and promises to refund or pay a loan or be able to fulfil a duty. The asset acts as a collateral claim for the mortgagee to enforce a right to claim and sell the asset on the failure of the mortgagor to meet his obligations.

Who Is A Mortgagee?

As per Section 58 of the Act, the transferee is called the mortgagee. A mortgagee is the party who receives an interest in the immovable property from the mortgagor as security for a financial obligation. The mortgagee does not become the outright owner of the property. He only acquires an interest in it which gives him certain rights. This interest becomes his security for the loan or debt given to the mortgagor.

Right Of A Mortgagor

The Act provides the following rights of the Mortgagor:

Right of redemption (Section 60)

This is the basic right of the mortgagor. It vests him with full ownership of the mortgaged property, and he can exercise this right anytime after the principal amount of the loan becomes due. A decree for redemption by a court is neither necessary nor relevant for exercising this right.

Redemption of a portion of the Mortgaged property (Section 60)

Usually, a person with a stake in only a part of a mortgaged property cannot redeem just their share by paying a proportional amount of the debt. The exception to this rule is if the mortgagee has, in some way, gained ownership of a share belonging to one of the mortgagors. In such a scenario, the other mortgagors would have a right to redeem only their portion.

Right to transfer to a third party (Section 60A)

Where a mortgagor has a redemption right, they may exercise their right to have the property transferred directly to a third party instead of first getting the property returned to them. The mortgagor orders the mortgagee to assign the debt and transfer the property to that third party. The mortgagee must comply with this requirement. This option is not available where the mortgagee is, or has at any time been, in actual possession of the property.

Right of Inspection and Documents to be produced (Section 60B)

As long as the mortgagor is exercising his right of redemption, he is entitled, without cost, to inspect and be given copies of any documents relating to the property which are in the control of the mortgagee.

Right to Redeem separately or simultaneously (Section 61)

This right accrues to a situation whereby there are consecutive mortgages created by the same mortgagor in reference to different properties but with the same mortgagee. The mortgagor may redeem each of those mortgages separately and/or all the mortgages together when the principal amounts of two or more of such mortgages fall due. This can be done unless otherwise provided for under the mortgage agreement.

Rights Specific to Usufructuary Mortgages (Section 62)

 A Usufructuary mortgage is a type of mortgage by which the mortgagee takes into possession of the mortgaged property and is also entitled to enjoy the income of the property for the purposes of extinguishing the mortgage. In such a mortgage, the mortgagor is entitled to redeem the usufructuary mortgage with all documents pertaining thereto.

• Full repayment through income: If the mortgage deed allows the mortgagee to recover fully the amount due with the assistance of earnings on the property, then the mortgagor may reclaim possession once the mortgagee has recovered the full amount.
• Maturity or payment :If the mortgagee was only allowed to recover part of the debt from the earnings on the property, the mortgagor may recover possession once the period of the mortgage has expired and one of the following is attained:
  • Pay or tender to pay the balance to the mortgagee
  • The balance can be deposited with the court

Rights relating to accessions (Section 63)

An accession is something added to a property. If the mortgagee has possession of the property and something is added, the mortgagor usually gets to keep it when they pay off the mortgage, unless otherwise agreed. If the lender pays for the addition with his own money, it might become part of the mortgage, but the borrower may have to reimburse the lender for this.

Rights relating to improvements (Sections 63A)

 Where the mortgagee enhances the mortgaged property during the holding period, usually the borrower is allowed to retain such improvements at the time of discharging the mortgage without paying for the improvements

In other instances, such improvements will require payment on discharge by the mortgagor if they were:

• Absolutely necessary to prevent destruction: To prevent deterioration of the property or value loss in it.
• Absolutely necessary to protect security: To retain sufficient value of the property.
• Made in compliance with the lawful order of any public servant or public authority
• Contractual obligation: Stipulated in the mortgage deed

Right to enjoy renewal of mortgage lease (Section 64)

Where the property mortgaged is a lease and the mortgagee renews this lease, generally, the mortgagor enjoys the renewed lease on redemption, unless a contract states otherwise.

Right to Lease the Property (Section 65A)

• Leasing rights: Provided that the mortgage does not prohibit them, a mortgagor may lease a mortgaged property, so long as they are lawfully in possession.
• Binding leases: The leases entered by the mortgagor are binding on the mortgagee, that is, the mortgagee has to perform as per the terms of the lease.

Protection against Unnecessary Liability for Wear and Tear (Section 66)

A mortgagor in possession is not liable to the mortgagee for any loss that his property may suffer by way of decay or otherwise. But no mortgagor would do anything which shall radically and permanently injure the value of the property, especially anything which would render the security inadequate.

Rights regarding Revenue Sale or Compulsory Acquisition (Section 73)

If the government sells the mortgaged property (e.g., due to unpaid taxes) or acquires it compulsorily (e.g., for a public project), and this was not caused by the actions of the mortgagee, the mortgagee has a right to claim the mortgage money from the proceeds. This claim takes precedence over most other claims, except those from earlier encumbrances.

Rights of the Co-mortgagors (Section 95)

If one of multiple mortgagors redeems the entire property, they can use their right of subrogation (stepping into the shoes of the original mortgagee) to recover proportionate expenses from other co-mortgagors.

Liabilities Of A Mortgagor

As per the Act, the mortgagor has the following liabilities:

• Liability to repay the Debt: The primary and the first liability of the mortgagor is that he has to repay the loan or debt for which property was mortgaged as security. The absence of repayment of debt permits the mortgagee to take legal steps, such as foreclosure, to recover the money.
• Liability not to impair Security (Section 65(a)): The mortgagor shall not create any hindrance to the security interest of the mortgagee. He shall not commit an act that lowers the value of the mortgaged property.
• Liability to defend the title of the mortgagor (Section 65(b)): It is the liability of the mortgagor to defend his title over the property.
• Liabilities to pay public charges (Section 65(c)): Any tax and other public charge imposed or levied upon or charged against mortgaged property shall be liable to be paid by the mortgagor. The mortgagee will pay public charges if the latter is not paid by the mortgagor but he must collect them as well and add it to the debt.
• Liability to prevent Forfeiture (Section 65(d)): Where the mortgaged property is let out on a lease, the mortgagor shall take proper care to prevent forfeiture or determination of a tenancy and to comply with the terms thereof so as not to lose security.
• Liability to waste by mortgagor in possession (Section 66): Section 66 provides that a mortgagor in possession of the mortgaged property is not liable to the mortgagee for any deterioration of the property. The mortgagor cannot commit destruction or permanent injury to the property if such destruction or permanent injury would make the security insufficient. According to the explanation for this Section, a security is considered insufficient “unless the value of the mortgaged property exceeds by one-third, or, if consisting of buildings, exceeds by one-half, the amount for the time being due on the mortgage.”
• Liability to compensate for breach of Contract (Section 68): In case the mortgagor commits breach of the mortgage deed, he may be liable to make up for loss caused. This means failure in paying the debt, inability in passing a clear title, or any other form of breach of the mortgage agreement.

Right Of A Mortgagee

Below is a summary of the rights of a mortgagee as provided under the Act:

Right of Foreclosure or Sale (Section 67)

In case of foreclosure, if the person takes a mortgage and fails to repay, the mortgagee can ask for selling the property in simple or English mortgages or can get full ownership in the mortgage with conditional sale.

However, there are some exceptions:

• Types of mortgages: Full ownership is allowed only in certain types of mortgages, such as conditional sale; the majority are usufructuary mortgages.
• Trustee mortgagees: When the mortgagor acts as a trustee, they can only apply for a sale, not a transfer in full.
• Public properties: Mortgages on public interest properties (like railways) cannot be foreclosed or sold.
• Partial interests: Those with a share in only part of the mortgage cannot act on just their portion unless the interests are formally divided.

Right to Possession (Section 65A)

In some types of mortgages, such as a usufructuary mortgage, the mortgagee has the right to possession and can hold onto the property until all debts and interest are repaid. The income generated by the property can be applied towards debt repayment.

Right to Sue for Mortgage Money (Section 68)

If the mortgagor defaults, the mortgagee can sue for the mortgage money. This right exists when the mortgagor has committed any act that harms the mortgagee’s interest, such as damaging the property or neglecting its maintenance.

Power of Sale without Court Intervention (Section 69)

In certain cases, the mortgagee can sell the property without a court order if the loan is not repaid. This power is limited to specific circumstances, such as when the government is the mortgagee, the property is located in certain regions, or in the case of English mortgages. A formal notice must be issued, and the sale occurs through a public auction after waiting three months for repayment.

Right to Appoint a Receiver (Section 69A)

When the mortgagee has the right to sell the property without court involvement, they can also appoint a receiver to manage the income from the property. The receiver collects income to meet expenses, pay debts, and settle mortgage interest, with any excess funds returned to the entitled person.

Right to Accessions (Section 70)

If no specific clause states otherwise, the mortgagee is entitled to any accessions or improvements to the mortgaged property after it was signed. This includes interest accrued and ensures that their security grows with the property's value.

Right to Enjoy the Proceeds of Renewed Leases (Section 71)

When the mortgaged property is under lease and the lease is renewed, the benefits of the new lease automatically extend to the mortgagee, protecting their security interest.

Rights of Mortgagee in Possession (Section 72)

A mortgagee who takes possession of a mortgaged property must manage it prudently. They can recover expenses for necessary preservation, title defense, or lease renewal, with notice to the mortgagor. The mortgagee may insure the property and charge the cost to the mortgage debt.

Right to Proceeds of Revenue Sale or Compensation on Acquisition (Section 73)

If the government sells or acquires the mortgaged property, the mortgagee can claim the outstanding mortgage money from the sale proceeds or compensation, with priority over most other claims.

No Merger if Subsequent Encumbrance is Created (Section 101)

If a mortgagee gains additional rights or ownership in the mortgaged property, it does not merge with their original mortgage if later encumbrances exist. This ensures that their first claim remains in priority.

Liabilities Of A Mortgagee

The mortgagee is also subject to certain liabilities under the Act:

• Liabilities of mortgagee in possession (Section 76): Section 76 of the Act provides for following liabilities of a mortgagee:
  • Managing the property responsibly: The mortgagee should manage the property like a prudent person would manage his own property.
  • Collecting rent and paying expenses: The mortgagee should collect the rent or profits of the property. They should also pay expenses such as government revenue, taxes, and any existing rent dues, from the collected income.
  • Making necessary repairs: The income collected from the property must be used for making necessary repairs after deducting expenses as well as interest payments.
  • Protecting the property: No act shall be done by the mortgagee that shall deteriorate or destroy the property.
  • Management of insurance proceeds: If the property is insured and is damaged or destroyed, the mortgagee shall use the insurance proceeds to restore it or rebuild it, or to pay a loan if the mortgagor so agrees.
  • Accounting: The mortgagee shall be under an obligation to keep accounts of all the incomes and expenses related to the property. Upon a request by the mortgagor, he shall provide copies of such records and their supporting documents with the mortgagor bearing the costs.
  • Deduction of expenses and repayment of loan: The expenditure incurred on management and interest should be deducted from the collected rent and the remaining amount should be used towards loan repayment. Surplus belongs to the mortgagor. If he is living on the property, the mortgagee should determine what he considers to be a reasonable amount of rent for his occupation and then deduct the expenses from that amount.
  • Accounting for receipts: After the promise of the mortgagor to pay off the loan, which can be full repayment of the amount concerned, the mortgagee should provide an account of income received from the property starting on the date when the mortgagor promised to pay off the loan.
  • Bearing the loss for negligence: If such performances were not delivered by the mortgagee, this leads to the loss, then in court proceedings, they will be liable for that loss.
• Liability to account for Receipts (Section 77): The Section requires the mortgagee to account for all sums received from the mortgaged property and to present the accounts for inspection to the mortgagor on demand.

Conclusion

The Transfer of Property Act, 1882, provides a detailed scheme outlining the rights and liabilities of a mortgagor and mortgagee in India. Rights of the mortgagor ensure that the property can be redeemed once the debt has been repaid against it. Rights of the mortgagee guarantee its right of repayment of the loan. Corresponding obligations on both sides, i.e., the rights of the mortgagor and the rights of the mortgagee come with respective liabilities which must not be overlooked in the process by borrowers and lenders.