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Usufructuary Mortgage

Usufructuary mortgage is one kind of mortgage recognised under TPA
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property law (SSAL002)

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AN ANALYSIS OF THE EXISTING LAW ON USUFRUCTUARY MORTGAGE IN

INDIA

-Shivani. K, 4th yr, BBA(H.)

ABSTRACT:

Mortgage can be understood as the transfer of an interest in a property to another, in order to secure a loan from the latter. The customary practices of mortgage have been prevalent in India since time immemorial. The law was finally codified and the statutory provisions relating to Mortgage were incorporated under s. 58 of the Transfer of Property Act, 1882. This section provides for 6 types of mortgages as recognized in our country. One such unique kind of mortgage is known as the usufructuary mortgage. Under this type of mortgage, the lender (hereinafter referred to as mortgagee) has the right to retain the possession of the property and enjoy the benefits arising thereof until the redemption of the mortgage through appropriation of such benefits. What further distinguishes this mortgage from the other kinds is that, it does not impose a personal liability on the borrower (hereinafter referred to at the mortgagor). The outcome of this being, there is no legal remedy which can be enforced by the mortgagee. It is because of this reason, that this kind of mortgage is generally not opted for.

In view of the above, this article aims to explain the concept of mortgage, the most sought after means of transferring an immovable property, with special reference to the concept of Usufructuary mortgage. In order to understand a concept at its core, it is important to view the same from various dimensions. For this reason, the article includes various illustrations as well as relevant case laws for a more practical comprehension of the statute. Additionally, the rights and liabilities of the mortgagor and mortgagee arising as a result of an usufructuary mortgage is also analyzed.

Keywords – Mortgage, Kinds of mortgage, S of TPA, Usufructuary mortgage, S (d) of TPA, S. 62 of TPA, Equitable Redemption, Lease, Rights and Liabilities of Mortgagor and Mortgagee, Appropriation of rent and profit, Zuri-peshgi

INTRODUCTION

Mortgage:

The process of transferring one’s interest in their immovable property to a lender for securing a debt, fulfilling any contractual obligations or for the performance of some act is known as Mortgage. An interest in property could mean, possession, enjoyment and even the right to sell. 1 A lender requires some sort of security in case they are unable to recover the loans advanced. Under mortgage, the person seeking the loan provides their immovable property to the lender as a security for the loan they receive. This is usually done under a Mortgage Deed which shall govern the terms and conditions of the mortgage including its redemption. Upon satisfying or performing the terms of mortgage, the interest in such property shall be returned back to the owner.

In case of such a transaction, the person seeking the loan or otherwise, the person who is transferring his interest in his immovable property (transferer) is referred to as the Mortgagor. Whereas, the person who receives the same (transferee) or otherwise, the person who advances the loan is known as the Mortgagee.

Historically, it is believed that the term Mortgage (Mortuum Vadium) meaning ‘dead pledge’, is called so because more often than not, the mortgagor fails to perform the conditions stipulated for redemption of the property and the pledge is considered forfeited.

In India, the legal position of such transactions prior to the enactment of The Transfer of Property Act,1882 was rather cumbrous and insufficient. As early as the late 17th Century, Mortgages were legally recognized and legislated for. However, due to the various loopholes, people resorted to a simple mortgage- consisting of a covenant to pay and pledge of property- which was not covered by the law. As a result, unscrupulous creditors exploited the debtors whose interest were not protected legally.

In light of this, the law-makers of our country had decided to codify in a vast and exhaustive manner, the law on mortgage of immovable property under the Transfer of Property Act, 1882.

1Mallika taly, Vepa P Sarathi’s Law of Transfer of Property (6th ed.)

landmark judgements of the Indian Courts of Justice on Mortgage, every word of the definition is formulated.

First it is important to determine whether a transfer is Mortgage or not, before trying to find out what kind of mortgage it is. For this, merely the words of a deed will not decide the nature of transaction. The jural nature created by the deed will be considered. Moreover, the intention of the parties plays a major role as a deciding factor. In Kottayya v Annapurnamma 5 , a debtor had borrowed a sum of money from the creditor. On his failure to repay the same, he offered the creditor a right to possess and enjoy a land for a stipulated time of 20 years. In this case, it was held that such transfer amounted to ‘lease’ and not ‘mortgage’.

Moreover, the main purpose of a mortgage is to secure a debt incurred. If a transfer of interest in a property is given to discharge a loan, it will not amount to mortgage. For instance, if X borrows money from Y and as a means of discharging the debt, provides his land to Y for a period of 10 years, it does not amount to Mortgage but rather a grant of land.

In short, the essentials of a valid mortgage are as follows:

  1. There must be 2 parties

  2. There should be a transfer of any interest (except right of ownership)

  3. The interest must be vested in a specific immovable property

  4. Transfer is made for securing a debt incurred or for securing the performance of a contract.

Kinds of mortgage:

In order to understand the nature of the mortgage and its redemption, it Is important to understand the various types of Mortgages as provided under S of the Transfer of Property Act, 1882. The legally recognized mortgages in our country are as follows 6 –

  1. Simple Mortgage (S. 58(b)) –

Under Simple Mortgage, the Mortgagor does not deliver the possession of the property to the Mortgagee but merely an interest in the property. The former undertakes a personal liability to

5 AIR 1945 Madras 189 6 Supra, note 2, S.

repay the loan he has taken from the latter. However, the Mortgagor must either expressly or impliedly agree that on his failure to repay the loan, the mortgagee can approach the court of law and obtain a decree to the extent that the mortgaged property can be sold and proceeds thereof can be adjusted towards the mortgage money due. In case the amount realized from sale is insufficient, personal action against the mortgagor will be initiated. Where the money is in excess, it shall be returned to the mortgagor to that extent. The mortgagee also has a remedy to obtain a money decree against the mortgagor.

  1. Mortgage by conditional sale (S. 58(c)) –

Under this type of mortgage, the mortgagor ‘ostensibly’ sells the mortgaged property to the mortgagee subject to certain conditions. Here, the term ostensible means that though it appears to the eye as a sale, it is not a sale. The possession of the property is not transferred until the conditions of such ostensible sale are met-

i. On Mortgagor’s default of payment of the mortgage-money on the stipulated date, the sale will be deemed to be absolute. ii. On prompt payment of the mortgage money, the sale shall become void. Moreover, the property shall be transferred back to the Mortgagor.

In order to constitute a mortgage by conditional sale, the conditions of repayment of mortgage money must be contained in the document which is intended to effect the sale. Moreover, the intention of parties shall be considered to determine whether it was a mortgage by conditional sale or an outright sale. The only remedy available to the mortgagee is to approach the court of law by instituting a suit for foreclosure.

  1. Usufructuary Mortgage (S. 58 (d))-

Usufructuary Mortgage is a type of mortgage wherein, the Mortgagor expressly or impliedly agrees to transfer his possession of the property as a security to the Mortgagee until repayment of the Mortgage money. He also authorizes the latter to enjoy the rents, profits and benefits arising out of such property which he can appropriate towards the payment of interest and/or the principal amount of money borrowed. Under this type of Mortgage, no personal liability arises. Due to this, the Mortgagee is not entitled to legal remedies such as foreclosure or sale of such

mortgage. This clause was specifically enacted to protect the interests of people who enter into various customary mortgages prevalent in our country. In this type of mortgage, the interests of the parties are governed and regulated by the terms of the instrument effecting this transaction.

For instance, if under a usufructuary mortgage, the mortgagor also takes upon himself a personal liability to repay the debt, it ceases to be an absolute usufructuary mortgage as it incorporates the features of a simple mortgage as well. This will now be regarded as an Anomalous Mortgage.

USUFRUCTUARY MORTGAGE:

Meaning:

The term ‘usufruct’ from the phrase usufructuary mortgage can further be dissected into 2 parts – the usus and the fructus. The right of usus vests within a person the right to utilize something in its purest form, without altering it, whereas, the right of fructus vests within a person the right to enjoy the fruits or benefits arising out of the property.

In other words, we can say that an ‘usufruct’ is a sort of legal right which is granted to a person and which entitles him to enjoy the possession as well as the income and profits arising out of an immovable property. The person who enjoys or usufructs the property is known as an usufructuary. 7

Usufructuary mortgage is a kind of mortgage as provided for by the Transfer of Property Act, 1882 u/s 58 (d). An analysis of this legal provision helps us understand the meaning of an usufructuary mortgage as one in which 8 -

a) The mortgagor delivers the possession or either expressly or impliedly agrees to deliver the possession of an immovable property (referred to as mortgaged property) to the mortgagee. b) Mortgagee is entitled to retain the possession of such property as a security for the loan advanced until it is recovered. c) Mortgagee is also empowered to receive any income such as, rents or profits or any part thereof, which accrues over the property. d) Mortgagee can further utilize such rents or profits towards the appropriation of interest due or principal mortgage-money, either wholly or partly.

7 Dictionary, Merriam-Webster 8 Supra, note 2, S (d)

If the following conditions are fulfilled, the transaction can be termed as an Usufructuary mortgage and the mortgagee is called as an Usufructuary Mortgagee.

Under this type of mortgage, the right of possession and enjoyment of property which is an incident of ownership of a property, is transferred to the mortgagee until the period of mortgage subsists. The very essence of this type of mortgage is that, the latter gets to retain possession until redemption of the debt.

It is also very interesting to note that, customary practices of mortgage followed by the persons belonging to the Hindu religion during the period of British India, shares similar characteristics with that of an Usufructuary mortgage. It involved the delivery of possession to the lender which was accompanied with the right to enjoy the usufruct of the same towards the interest due and generally no personal liability was created. However, by an agreement between parties or by local customary usage, the mortgagee could either claim the recovery of money advanced from the mortgagor or institute the sale of the property. Similary, the practice of ‘Rahn’ under Mohammaden law includes usufructuary mortgages in addition to the other types of mortgages. 9

In a nutshell, the characteristics of usufructuary mortgage are as follows-

a) There is a delivery of possession or at least an undertaking to deliver the possession of an immovable property for the purpose of securing a loan taken. b) The mortgagee can retain possession and enjoy the benefits arising thereupon. This income may also be appropriated towards the interest or principal amount due. - In the case of Feroz Shah v. Sobhat Khan 10 , it was adjudged by the court of law that the mortgagee need not necessarily exercise physical possession over the property. The mortgagor can continue to retain his possession of the property by acting as a lessee of the mortgagee. However, the mortgage deed must contain a clause stating that the possession is delivered to the mortgagee in order to constitute a valid usufructuary mortgage. c) There is no specific time period for such a mortgage, it is an indefinite period until the loan is repaid. If any time period is specified and involves the mortgagor’s personal liability to repay

9 Law Commission of India, Report 70, pt. 54 10 (1933) 35 BOMLR 877

in the nature of an Usufructuary Mortgage. The monthly rent being paid by the occupants of the mortgaged building can be utilized by D (mortgagee) and appropriated towards the amount due from C (Mortgagor). Upon realizing the mortgage-money, the possession of the property shall be transferred back to C.

RIGHTS AND LIABILITIES OF THE MORTGAGOR ARISING OUT OF USUFRUCTUARY MORTGAGE:

Hereinafter, the rights and liabilities of the mortgagor of an Usufructuary mortgage shall be discussed. 14

Rights:

  1. S. 62- Right of mortgagor of an Usufructuary mortgage to recover possession- The mortgagor is vested with the right to recover the possession of the mortgaged property and all the documents, including but not limited to, the mortgage deed which is in the possession of the mortgagee provided either of the following situations take place- a. In a situation where the mortgagor is intended to recover the mortgage-money through the usufruct or the rents and profits arising out of that property, it is so recovered. b. In a situation where the mortgagee uses the usufruct to recover the mortgaged money partly, when the term of repayment has expired and the mortgagor pays the mortgagee the mortgage money/ the balance pending or deposits the same in the court of law.

In a leading judgement of the Supreme Court in 2014 15 , it was held that under an usufructuary mortgage there is no time limit for recovering possession of the property. The usufructuary mortgagor’s right to recover possession begins when the mortgage money is paid out of rent or profits wholly or partly by rents and profits and partly by directly paying the mortgagee or depositing the same in the court. This right is not contingent on the expiry of 30 years (the usual limitation period) from the date of the mortgage. The court also brings out the distinction between usufructuary mortgage and other types of mortgages by referring to the special provision of S. The court is of the view that, this right of an usufructuary mortgagor is an equitable one, backed by the force of law and it cannot be defeated by any other principle of law.

14 Supra, Note 2, Ch. 4, Part 2 15 Singh Ram (D) Thr.L v. Sheo ram and ors (2014)

  1. S - Mortgagor’s right to inspection and production of documents-

Holding his right to redemption, mortgagor is entitled to ask the mortgagee to provide the documents related to the mortgaged property for his inspection or to take copies of the same. However, the costs incurred shall be borne by the mortgagor.

  1. S – Accession to Mortgaged property –

Under usufructuary mortgage, profits arising out of any accessions to the property, acquired at the cost of mortgagee can be adjusted towards the interests payable on the money so spent. Provided there isn’t any contract in existence which provides for the contrary.

  1. S – Improvements made to the mortgaged property-

Clause 1: During the period of mortgage, if the mortgaged property in the possession of the mortgagee has been improved by him, the mortgagor will be entitled to enjoy the same upon redemption (unless there exists a contrary provision in the contract) and he won’t be liable to repay the costs to the mortgagee except under circumstances provided under clause (2) of this section.

  1. S. 64 – Renewal of a mortgaged property which is a lease

During the continuance of the mortgage period, if the mortgagee secures a renewal of the lease of the property, upon redemption the Mortgagor can enjoy the same (unless there exists a contrary provision in the contract).

Liabilities:

  1. S (2): Liability to reimburse mortgagee for expenses incurred on improvement

During the period of mortgage, if the mortgagee has incurred expenses for the improvement of property owing to the reasons mentioned below, then the Mortgagor is liable to reimburse the costs in addition to the principal mortgage money along with an interest as payable on the principal amount or in the absence of such rate of interest, at 9% p (unless there exists a contrary provision in the contract). However, if there are any profits arising due to this improvement, it shall be transferred to the Mortgagor. The improvements may have been done -

a) To preserve the property from any sort of destruction.

Moreover, the mortgagee can also insure the property (if applicable) and he is entitled to recover this as well by adding it to the principal money along with specified interest or in its absence, at the rate of 9% p. However, if the deed specifies a maximum amount with regard to insurance, it must be adhered to. In the absence of such specification, insurance cannot be more than 2/3rd of the amount required to reinstate the property in case of a total destruction of it.

  1. S – Right to claim accession to mortgaged property

If an accession is made to the mortgaged property after the date of entering into a mortgage, the mortgagee will be considered to be entitled to the same as a part of the security.

  1. S. 68 – Right to sue for mortgage-money

Under clause (b) of this section, where the mortgaged property is wholly or partially destroyed or the security is insufficient and the mortgagor was duly notified by the mortgagee but he failed to take necessary action, the mortgagor can sue for mortgage-money.

Under clause (d) of this section, where the mortgagor fails to deliver the possession of the property to the mortgagee who is entitled to the possession thereof, the mortgagee can sue for the mortgage money and interest thereon.

Liabilities:

  1. S. 76 – Liabilities of mortgagees in possession of mortgaged property

a) He is liable to manage the property as his own, just as a prudent man would. b) He must collect the rent and profits promptly c) He must pay government charges and public revenue out of the income of the said property in possession (unless there exists a contrary provision in the contract) d) He must make necessary repairs to the property out of the usufruct after paying the above-mentioned charges in clause (c) and payment of interest on the mortgage-money. e) He should not destruct or cause permanent injury to the property f) He must apply the insurance claims towards the reinstatement of the property unless instructed by the mortgagor to adjust it towards the mortgage money due.

g) He must maintain proper financial accounts during the continuance of the mortgage period and provide the copies of the same for inspection by the mortgagor upon his request. h) He must utilize the excess receipts from the mortgaged property after deducting the costs incurred to manage the property, collect the rent and profits, interest, etc towards any amount of interest due to him; subsequently towards the mortgage money due to him and the balance must be paid back to the mortgagor. i) In the case where the mortgagor tenders or deposits the mortgage money due, the mortgagee must account for his receipts from the property from the date of the tender or from the date on which he can collect the deposit from the court and he cannot deduct any further amount on account of expenses incurred on the mortgaged property.

If the mortgagee fails to perform his duties as provided under this section, he will be held liable for any loss arising due to such failure in a suit for legal proceedings.

  1. S. 77 – Receipts appropriated towards interest

If there is a contract between the mortgagor and mortgagee that the receipts from the property during the term of mortgage shall be appropriated in lieu of the interest or the interest and part of the principal, then S. 76 (b), (d), (g) and (h) will not apply.

REMEDIES AVAILABLE UNDER USUFRUCTUARY MORTGAGE-

As already discussed above, this kind of mortgage does not give rise to a personal liability on the mortgagor. As a result, the mortgagee cannot sue the mortgagor for a money decree nor can he institute a suit of proceedings for the sale or the foreclosure of the property. An exception to this is the cases provided u/s 68 (b) and (d) 17 where the mortgagee can sue for the mortgage-money. It has to be remembered, the mortgagee cannot unilaterally extinguish such a mortgage through his act or omission.

Moreover, since there is no time limit for redemption of such mortgage under our law, the only available remedy to the usufructuary mortgagee is to retain the possession of the mortgage property and settle the mortgage money and interest due thereon through the usufruct (i, rent and profits) so obtained from the property.

17 Supra, note 2

In the case of Hathika v Puthiya Purayil Padmanathan, 19 the mortgagee had advanced a loan of Rs/- to the mortgagor who retained the possession of the mortgaged property. The mortgage deed was described as an usufructuary one. However, it contained a clause which said that on the failure of redemption of the mortgage within a period of 6 months, the mortgagee was entitled to sell the property to realise the mortgage money. The court held that, this is not an usufructuary mortgage just because the deed is so described. It is rather, an anomalous mortgage because the features of a simple mortgage such as the right to sell are also present.

As regards the redemption of mortgage money –

In the case of Prithi Nath Singh v. Suraj Ahir 20 , it is acknowledged by the court of law that upon repayment of the mortgage money, the mortgagor’s liability towards the mortgagee comes to an end. In other words, the mortgage comes to an end. The transfer of possession of the property is made as a security for the debt incurred. When such debt ceases to exist, it is only legally rightful that such possession be transferred back to the mortgagor.

As regards the difference between lease and mortgage –

In the case of Ramdhan Puri v. Bankey Bihari Saran 21 , the Supreme Court held that in cases where there exists an ambiguity as whether it shall be termed as a tenancy agreement or a mortgage, the only guiding rule derived from the previous judgements is to first ascertain the intention of the parties. Moreover, if there is a debt which is secured by a land for its redemption, it shall be deemed to be a mortgage under any name so called.

As regards usufructuary mortgage and payment of interest through rent –

In the case of Shyam Sundar v. Seth Balmukund 22 , the defendants borrowed a sum of Rs, from the plaintiffs. They further executed a usufructuary mortgage of their property in favour of the plaintiff. In order to retain possession of property during said period, they had executed a rent-note and agreed to become the tenant of the mortgagee (plaintiff) by paying a rent of Rs. 25/- p. The defendants argued that the rent they were paying was in favour of the interest on mortgage money. However, the court held that upon execution of a rent-note, they had become

19 (AIR 1994) Ker 141 20 1963 AIR 1041 21 1958 AIR 941 22 AIR 1964 ALL 370

the tenants of the plaintiff and the rent paid was for the occupancy of the property. Therefore, the court held that though the mortgage and tenancy subsisted at the same time, they were independent of each other and such rent cannot be considered as usufruct to repay the mortgagee.

As regards improvement to the mortgaged property-

In Ram Asray v. Hiralal 23 , a building was mortgaged in favour of the mortgagee who was entitled to enjoy the possession of the same. The mortgagee completely demolished and built a new building in place of the old one without seeking the permission or authority from the mortgagor. The mortgagor claimed for the additional income arising out of the new building. The court held that it is an improvement of the property and not an accession. Since it is occurred at the cost of the mortgagee and such costs cannot be claimed from the mortgagor under the law in force, the mortgagor cannot claim such benefit.

CONCLUSION

In conclusion, mortgage is one of the most common forms of transfer of immovable property. An usufructuary mortgage is a kind of mortgage in which the mortgagor transfers one of the incidents of ownership namely – possession, to the mortgagee in order to secure the loan advanced by the latter. This right of possession comes along with an additional right of enjoying the usufruct, i., the rent, profits and other benefits so accrued on the property. This usufruct can be used to adjust the interest on mortgage money wholly, the principal amount wholly or the interest amount partially and mortgage amount partially. A peculiar feature of this type of mortgage is that it does not create a personal liability on the mortgagor and hence, the mortgagee is not given the remedy of sale or foreclosure. This type of mortgage is legally backed by S(d) and S of the Transfer of Property Act, 1882. It is clearly defined and distinguished from the other types of mortgage as well as lease.

Shifting the focus to rural parts of India, such mortgage is in fact one of the customary lending practices which have been prevalent in our country from the mid-19th century. Arising out of urgent need of huge sums of money to meet personal or medical expenses, farmers would be willing to pledge their land to any lender who is willing to advance the amount of money desired. It is understood that the land shall be in the possession of the lender until the loan is repaid. If we

23 AIR 1949 ALL 681

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Usufructuary Mortgage

Course: property law (SSAL002)

25 Documents
Students shared 25 documents in this course

University: Tamil Nadu Dr. Ambedkar Law University

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AN ANALYSIS OF THE EXISTING LAW ON USUFRUCTUARY MORTGAGE IN
INDIA
-Shivani. K, 4th yr, BBA.LLB(H.)
ABSTRACT:
Mortgage can be understood as the transfer of an interest in a property to another, in order to
secure a loan from the latter. The customary practices of mortgage have been prevalent in India
since time immemorial. The law was finally codified and the statutory provisions relating to
Mortgage were incorporated under s. 58 of the Transfer of Property Act, 1882. This section
provides for 6 types of mortgages as recognized in our country. One such unique kind of
mortgage is known as the usufructuary mortgage. Under this type of mortgage, the lender
(hereinafter referred to as mortgagee) has the right to retain the possession of the property and
enjoy the benefits arising thereof until the redemption of the mortgage through appropriation of
such benefits. What further distinguishes this mortgage from the other kinds is that, it does not
impose a personal liability on the borrower (hereinafter referred to at the mortgagor). The
outcome of this being, there is no legal remedy which can be enforced by the mortgagee. It is
because of this reason, that this kind of mortgage is generally not opted for.
In view of the above, this article aims to explain the concept of mortgage, the most sought after
means of transferring an immovable property, with special reference to the concept of
Usufructuary mortgage. In order to understand a concept at its core, it is important to view the
same from various dimensions. For this reason, the article includes various illustrations as well
as relevant case laws for a more practical comprehension of the statute. Additionally, the rights
and liabilities of the mortgagor and mortgagee arising as a result of an usufructuary mortgage is
also analyzed.
Keywords – Mortgage, Kinds of mortgage, S.58 of TPA, Usufructuary mortgage, S.58 (d) of
TPA, S. 62 of TPA, Equitable Redemption, Lease, Rights and Liabilities of Mortgagor and
Mortgagee, Appropriation of rent and profit, Zuri-peshgi
1

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