Mortgage documentation — the six kinds, the right to redeem, and who may actually sell

What a mortgage is, and what it is not

Three words in that definition carry the whole chapter. Transfer: something actually moves, at the moment the mortgage is made, not on default. An interest: not the whole ownership, only so much as the security requires, which is why the owner remains the owner. Specific: the property has to be identified, so a general promise to secure “my properties” creates nothing.

What it is not is equally worth saying. It is not a sale with a right to buy back, although one of the six kinds looks like that and is treated as a mortgage precisely because the law sees through the form. It is not a personal loan agreement, which creates an obligation to pay but touches no property; our loan agreement page deals with that document, and it says plainly that where immovable property is offered as security the position changes entirely. And it is not an agreement to create a mortgage later, which is a contract and not a security.

The last distinction matters more than it sounds. A great many private lending arrangements in India consist of a loan document, some post-dated cheques and the original title deeds in a drawer. Whether that is a mortgage at all depends on facts the parties never thought about at the time, and by the time anybody needs the answer the facts can no longer be improved.

Mortgage, charge, hypothecation, pledge and lien

Five words are used interchangeably in ordinary speech and mean five different things.

The mortgage-versus-charge line is the one that comes up. Section 100 provides that where immovable property is made security for the payment of money and the transaction does not amount to a mortgage, the person is said to have a charge. A mortgage moves an interest; a charge creates a right to be paid out of the property. That difference shapes the remedies, and it is why describing an arrangement loosely in the document creates real uncertainty about what the lender actually holds.

The six kinds under Section 58

Section 58 does not offer a menu of styles. Each kind carries its own consequences, and the deed has to be internally consistent with whichever is chosen.

The practical point of this table is that a deed which grants possession to the lender and also reserves a personal covenant and also purports to allow sale without a court has not chosen a structure. It has borrowed clauses from three of them, and when it is eventually read the mismatch is argued about rather than the debt.

The simple mortgage, and what it really gives a lender

Section 58(b): the mortgagor, without delivering possession, binds himself personally to pay the mortgage-money and agrees, expressly or impliedly, that in the event of his failing to pay, the mortgagee shall have a right to cause the mortgaged property to be sold and the proceeds applied so far as may be necessary in payment of the mortgage-money.

It is the commonest form in private lending, and it does two things at once. It keeps the borrower in possession, which is usually what both sides want, and it gives the lender two routes rather than one — a personal claim on the covenant, and a claim against the property.

What it does not give is any power to take possession or to sell. Read the words again: the mortgagee has a right to cause the property to be sold. That is a right to obtain a sale through the court under Section 67, not a right to arrange one himself. Lenders regularly assume that a mortgage deed in their hands is an instrument they can act on directly, and it is not.

A simple mortgage therefore needs its personal covenant drafted properly — the amount, the rate and how it is computed, the due date or the instalment schedule, and what constitutes default — because in practice the personal covenant is the part that gets used first, and it is also what a guarantor, if there is one, is guaranteeing.

Mortgage by conditional sale — and its proviso

Under Section 58(c) the mortgagor ostensibly sells the property on condition that on default of payment on a certain date the sale shall become absolute; or that on such payment being made the sale shall become void; or that on such payment the buyer shall transfer the property back to the seller.

It is an old form and a dangerous one, because on its face it looks exactly like a sale. The statute guards against that with a proviso added in 1929, and the proviso decides cases.

The consequence is stark. Where the sale deed is executed and the buy-back condition is recorded in a separate agreement, an undertaking, or an exchange of letters, the transaction is not a mortgage. It is a sale. The seller has no interest left to redeem, and his remedy, if any, lies in the law of contract rather than in Chapter IV.

This is not a theoretical risk. Arrangements of exactly this shape are proposed to people in difficulty every day: sell it to me now, pay me back within two years, and I will transfer it back. Where the condition does not sit inside the sale document itself, the protection Section 58(c) was written to give simply is not there. If an arrangement of this kind is genuinely intended, the condition belongs in the deed of sale and nowhere else.

Usufructuary and English mortgages

Under Section 58(d) the mortgagor delivers possession, or expressly or by implication binds himself to deliver possession, and authorises the mortgagee to retain possession until payment, and to receive the rents and profits, appropriating them in lieu of interest, or in payment of the mortgage-money, or partly in one and partly in the other.

Two features define it. The lender is paid out of the property rather than by the borrower, and there is no personal covenant and no fixed date for repayment, which is why a usufructuary mortgagee cannot sue for the money or for foreclosure — he stays in possession until he is paid out of the income. Section 62 gives the mortgagor a matching right to recover possession once the mortgage-money has been paid or discharged out of the rents and profits.

Under Section 58(e), an English mortgage is one in which the mortgagor binds himself to repay the mortgage-money on a certain day and transfers the property absolutely to the mortgagee, subject to a proviso that he will re-transfer it on payment of the mortgage-money as agreed.

The absolute transfer is what distinguishes it, and it is also what makes it the one form in which Section 69 may give a power of sale without the intervention of the court. It is the structure most institutional lending in India was historically modelled on, and elements of it survive in standard bank documentation even where the security is actually taken by deposit of title-deeds.

Deposit of title-deeds, and the memorandum trap

Section 58(f): where a person in a town which the State Government has notified for this purpose 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.

It is the form most bank lending uses, and it is the only one that needs no registered instrument, because there is no instrument. The mortgage is made by the act of deposit coupled with the intent. Three elements have to be present — a debt, a deposit of documents of title, and the intent that they be held as security — and the place has to be one notified for the purpose.

Then comes the trap, and it is entirely about how the accompanying paper is worded.

The difference lies in tense and in function, and it is settled at the moment the paper is drafted. This is the single most common reason we are asked to look at an equitable mortgage after the event, and by then nothing can be done about the wording. It is also why a deposit should be documented with a dated record of what was handed over, a list of the documents, and evidence of where the deposit took place.

Section 59: registration and two attesting witnesses

Both requirements are independent and both are frequently got wrong. Registration without two attesting witnesses does not satisfy the section; attestation without registration does not either. The hundred-rupee threshold is not a typographical survival to be ignored — it simply means that in practice every mortgage anybody documents today falls above it.

Attestation has its own requirements: an attesting witness must have seen the executant sign, or received from him a personal acknowledgement of his signature, and must sign in his presence. A witness who signs later, or who signs having been handed the document, has not attested. Lenders should also avoid using their own employees or interested parties where it can be helped.

Execution requires every person whose interest is being mortgaged to sign. A mortgage executed by one of two joint owners secures that owner’s interest and nothing more, and a lender who takes it believing he has the whole property has taken a share in something he cannot deal with. Where a power of attorney is used, its own validity and scope become part of the security, which our power of attorney page deals with.

What an unregistered mortgage is worth

The answer is supplied by the Registration Act, 1908, and it is unforgiving.

Section 17(1)(b) makes non-testamentary instruments which purport or operate to create, declare, assign, limit or extinguish any right, title or interest in immovable property of the value of one hundred rupees and upwards compulsorily registrable. A mortgage deed is squarely within it.

So an unregistered mortgage deed does not create the security it describes. What survives is what the proviso preserves — a contract, capable of being sued on, and evidence of collateral matters such as the fact that money was lent. The lender is left with a personal claim against a borrower who by then is usually not in a position to meet it, and with no priority against anyone else.

The same logic reaches the memorandum discussed earlier. If the document is the bargain rather than a record of it, and it is not registered, Section 49 applies to it too. That is why the wording is not a drafting nicety.

The right of redemption

Everything in Chapter IV is built around one idea: a mortgage is security, not a sale, and the owner must be able to get his property back by paying.

The proviso is the engine of the whole doctrine. It means the right of redemption is not simply a term of the bargain that the parties may write out of it. It survives agreement, which is why the maxim “once a mortgage, always a mortgage” has practical force rather than rhetorical force.

Two related provisions are worth knowing. Section 60B gives a mortgagor a right at all reasonable times to inspect and take copies of documents of title in the mortgagee’s custody, at his own cost, which is useful where a lender has become uncooperative. Section 91 lists the persons besides the mortgagor who may sue for redemption, including a co-mortgagor, a subsequent mortgagee and a surety; and Section 92 gives a person who redeems the rights of the mortgagee he paid off, which is the principle of subrogation.

Clogs on redemption

Because Section 60 protects the right of redemption from being extinguished by the act of the parties, terms whose effect is to prevent or hamper redemption are open to challenge however they are drafted. These are the clogs, and the same shapes recur.

• A bar on redemption for a period unreasonably long in relation to the loan.
• A term that if any instalment is missed, the right to redeem is lost altogether.
• An option given to the mortgagee to purchase the property on default.
• A penal rate or additional sum payable only if redemption is sought.
• A condition that on default the mortgage converts into a sale.

The test is substance rather than form, and it is applied to the transaction as a whole. A term is not saved by having been agreed, nor by being described as a separate contract, nor by the borrower having taken independent advice, although all of those may be relevant to whether the bargain was oppressive.

There are two sides to this in practice. A borrower faced with such a term should not assume it binds him. And a lender should understand that writing a clog into the deed does not strengthen his security — it introduces a clause that is likely to be struck at, and it invites a court to look closely at the rest of the document at the same time.

What the owner still owes, and may still do

The mortgagor remains the owner, but he holds the property subject to obligations the Act implies whether or not the deed repeats them.

Section 65 implies covenants by the mortgagor: that the interest he professes to transfer subsists and he has power to transfer it; that he will defend the mortgagee’s title or enable him to defend it; and, where the property is not in the mortgagee’s possession, that he will pay all public charges accruing due. Section 66 makes a mortgagor in possession liable for waste that renders the security insufficient.

Section 65A is the provision lenders most often overlook, and it deals with leasing.

Two consequences follow. A tenancy created outside those conditions is not binding on the mortgagee, which is what a lender needs to know when he eventually seeks possession — and what a tenant needs to know before taking premises he has not checked. And because the section allows the power to be excluded or restricted by the deed, a lender who wants control over letting must say so; silence leaves the statutory power in place.

The mortgagee’s remedies

Section 67 is the principal remedy provision. In the absence of a contract to the contrary, at any time after the mortgage-money has become due and before a decree has been made for redemption or the mortgage-money has been paid or deposited, the mortgagee has a right to obtain from the court a decree that the mortgagor be absolutely debarred of his right to redeem the property, or a decree that the property be sold.

Which of the two is available depends on the kind of mortgage. Foreclosure — the first — is the remedy of a mortgagee by conditional sale and of an anomalous mortgagee whose deed so provides. Sale is the remedy of a simple mortgagee, an English mortgagee and a mortgagee by deposit of title-deeds. A usufructuary mortgagee has neither, because he is being paid out of the property.

Section 68 gives a separate right to sue for the mortgage-money in stated cases, including where the mortgagor has bound himself to repay it — the personal covenant again — and where the security is lost or rendered insufficient by an act of the mortgagor. Section 67A requires a mortgagee holding two or more mortgages by the same mortgagor, in respect of each of which he has a right to sue, to sue on all or on none.

The word that runs through all of it is court. Section 67 is a right to obtain a decree. It is not self-help, and a deed that says otherwise does not make it so.

Why most lenders cannot simply sell

Section 69 is the exception, and it is deliberately narrow.

A power to sell without the intervention of the court is available where the mortgage is an English mortgage and neither the mortgagor nor the mortgagee is of certain communities specified in the section; where an express power of sale is conferred by the mortgage-deed and the mortgagee is the Government; or where an express power is conferred and the mortgaged property or any part of it was, at the date of the mortgage-deed, situate within the towns of Kolkata, Chennai or Mumbai, or in any other town or area which the State Government has notified for this purpose.

Even where the power exists, Section 69(2) attaches conditions before it may be exercised: notice in writing requiring payment of the principal money must have been served on the mortgagor and default made in payment for three months after service; or some interest amounting to at least five hundred rupees must be in arrear and unpaid for three months after becoming due. Section 69A allows a mortgagee having a power of sale to appoint a receiver instead.

Put plainly: an ordinary private mortgage over a flat in a city that is not notified, taken by an individual lender, carries no power of sale at all. A clause in the deed saying the lender may sell on default does not create one. The lender’s route is Section 67, through a court, and the time and cost of that route should be understood before the money is advanced rather than after.

The mortgagee in possession

Where a mortgagee is in possession — a usufructuary mortgagee, or any mortgagee who has lawfully taken possession — the Act imposes duties that are easy to breach without meaning to.

Section 76 requires him to manage the property as a person of ordinary prudence would manage it if it were his own; to use his best endeavours to collect the rents and profits; in the absence of a contract to the contrary, to pay government revenue and other charges out of the income; to make necessary repairs out of the income; not to commit any act destructive or permanently injurious to the property; to keep clear, full and accurate accounts of all sums received and spent, and to give them to the mortgagor on demand; and to apply the receipts first to interest and then to the principal, in the absence of a contract to the contrary.

Section 72 works the other way, allowing a mortgagee to spend money where necessary — to preserve the property from destruction, forfeiture or sale, to support the mortgagor’s title, to make his own title good against the mortgagor, and to renew a lease — and to add what he properly spends to the principal, with interest.

The reason to know these is that possession is not a costless advantage. A lender who takes possession inherits an accounting obligation, a management obligation and a repair obligation, and on redemption he has to be able to show the accounts. Where a mortgage contemplates possession, the deed should deal with all of this expressly rather than leaving it to be reconstructed years later.

SARFAESI — who it is for

Everything above is the general law. Banks and certain financial institutions operate under a separate and much faster statute, which is why bank recovery looks nothing like the court process just described.

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 allows a secured creditor, as that Act defines the term, to enforce a security interest without the intervention of a court or tribunal. Section 13(2) requires a notice giving the borrower sixty days to discharge his liabilities in full, after the account has been classified as a non-performing asset. Section 13(3A) requires the secured creditor to consider any representation or objection the borrower makes and, if it is not acceptable, to communicate the reasons within the period the section provides.

Where the borrower does not comply, Section 13(4) permits the secured creditor to take possession of the secured assets, take over management of the business, appoint a manager, or require any person who has acquired the secured assets and from whom money is due to pay the creditor directly. Section 14 allows the secured creditor to apply to the Chief Metropolitan Magistrate or the District Magistrate for assistance in taking possession.

There are limits. Section 17 allows any person aggrieved by measures taken under Section 13(4) to apply to the Debts Recovery Tribunal, ordinarily within forty-five days, and Section 31 lists the cases to which the Act does not apply, including security interests in agricultural land. Whether a particular notice or action is sound depends entirely on facts and on the loan documentation, and it is a matter to take to an advocate quickly, because the forty-five days run whether or not anyone is attending to them.

The private lender’s position

This section exists because the misunderstanding it addresses is almost universal, and it is expensive in both directions.

SARFAESI is not available to a private lender. Its enforcement machinery belongs to banks and notified financial institutions falling within the Act’s definition of a secured creditor. An individual who lends against a mortgage, a family member who advances money against a property, a company that takes security from a debtor, a builder who takes a flat as security — none of them has the sixty-day notice, the Section 13(4) powers or the Magistrate’s assistance, whatever the deed says.

What such a lender has is Chapter IV. A simple mortgage gives him a personal covenant he can sue on and a right to obtain a decree for sale under Section 67. A mortgage by conditional sale gives him foreclosure. A usufructuary mortgage gives him possession and the income. None of them gives him the right to take possession himself or to sell without a court unless Section 69 applies, which for most private mortgages it does not.

The consequence for drafting is that a private mortgage should be built for the route it will actually have to take. That means a properly drawn personal covenant, because the money claim is faster than the property claim; a guarantor where one is available, which our surety and guarantee page deals with; a clear definition of default and of the date from which limitation will run; complete and registered documentation; and a realistic view of the value of the security after costs. It also means being honest with a lender at the outset about how long enforcement takes, which is information that changes decisions.

Thirty years and twelve years

The two limitation periods that govern mortgages are strikingly different, and mixing them up costs lenders their security.

A mortgagor therefore has a long time in which to redeem, and a mortgagee a much shorter one in which to enforce. A lender who allows a mortgage to sit for fifteen years while accepting occasional part payments, without documenting them in a way that affects limitation, may find that the debt is no longer enforceable against the property while the owner’s right to clear the record remains alive.

Two habits follow. Record every payment with a dated, signed acknowledgement, because what a payment does to limitation depends on how it is evidenced. And diarise the outer date from the start.

CERSAI, and the mortgage that leaves no trace

A mortgage by deposit of title-deeds is created without any registered instrument. That is its convenience and also its risk, because a property can appear entirely free of encumbrance in the sub-registrar’s records while carrying a subsisting bank mortgage.

The central registry established under the SARFAESI framework exists to close that gap. Secured creditors record their security interests in it, including equitable mortgages, and the register is searchable. For anyone buying property, lending against it or taking a second charge, a search there belongs alongside the registered encumbrance search rather than instead of it — the two cover different things, and a clean result from one says nothing about the other.

In a full title exercise we run both, together with the chain of title, the mutation record, tax receipts, the society or authority position and any pending litigation. That work is set out on our title verification page, and it is the same exercise whether the purpose is a purchase or a mortgage — a lender is buying an interest in the property and has exactly the buyer’s exposure to a defect in it.

Fees, forms and timelines for these searches change, so we confirm them rather than printing them. What does not change is the order of work: verify first, document second. A mortgage drafted before the title is checked is a document waiting to be amended.

What a mortgage file contains

A complete file is what makes a security enforceable years later, when the people who arranged it have moved on and only the paper remains.

Where mortgage documentation goes wrong

• Not choosing a kind, so the deed borrows clauses from three of them and is internally inconsistent.
• A buy-back condition on a separate paper, which the proviso to Section 58(c) turns into a plain sale.
• An unregistered deed, which Section 49 stops from affecting the property at all.
• A memorandum that creates rather than records a deposit of title-deeds.
• Fewer than all the co-owners signing, leaving a share as security.
• A clause allowing the lender to sell on default where Section 69 gives no such power.
• Assuming SARFAESI applies to a private lender.
• A clog written into the deed, which weakens the document rather than the borrower.
• No CERSAI search, so an existing equitable mortgage is never discovered.
• Leaving Section 65A unaddressed, and finding a tenant in possession later.
• No redemption paperwork on repayment, so the record still shows a mortgage years afterwards.

What we do, and what it costs

Documentation starts at ₹4,500 and ordinarily takes 3 – 10 days, with the timeline set by the searches and the sub-registrar’s appointment rather than by the drafting.

We should be exact about our role. We are a documentation practice. We do not lend, we do not introduce lenders, and we do not advise anyone on whether borrowing against a property is a sensible thing to do — that is a decision for you, and where the sums are significant it deserves independent advice. What we do is make sure that the arrangement you have decided on is documented so that it works.

Stamp duty, registration fees and search charges are at actuals. Nothing is payable in advance. Where a matter has already gone into dispute, or a notice has been received, that is work for an advocate and we will say so and help you find one through our directory.

If you are being offered a sale with a promise to transfer the property back, bring that to us before signing anything. It is the arrangement on this page that goes wrong most often and most completely.