This article has been written by Khalid Ali Khan Afridi, a student of PSIT College of Law
An equitable mortgage of real estate or mortgage by deposit of the title deed is a common way to secure a loan obtained from banks and other financial organizations in India. However, fraud can happen with ease. This is due to the fact that it is only created by the lender receiving the title deeds. A written document is not required to establish such a mortgage. According to the Indian Registration Act of 1908, such a mortgage does not need to be registered because there is no written document. Although this type of mortgage is not registered, this fact also makes it easier for dishonest borrowers to commit fraud.
The National Housing Bank, for instance, has recognized specific instances of falsifying title papers, duplicate financing on the same property, and sales of real estate subject to equitable mortgages as frequent methods of fraud in the housing finance industry. Since the introduction of equitable mortgage in India 140 years ago, the requirements for loan financing, the way lending institutions are set up, and the nature of the land markets have all undergone significant change.
ORIGIN OF EQUITABLE MORTGAGE IN ENGLAND:
When the title document was deposited with the lender in the case of Russell v. Russell, the Honorable Court of Chancery recognized the conduct as creating an equitable mortgage of the property, which is where the doctrine of equitable mortgage had its start in England in the 18th century. Prior to this ruling, the only way to establish a legal mortgage in England was to give the lender a written document transferring ownership of the immovable property with the stipulation that the borrower would receive the property back after the loan was repaid.
The Honorable Court of Chancery ruled in the case that even if a formal deed of mortgage is not executed, a mortgage is created if the documents are given to the lender. In England at the time, there was no system in place for registering property and the transactions associated with it with a governmental body. Later, even after the introduction of registration in England, this type of mortgage was exempt from registration thanks to a saving clause in Section 13 of that country’s Law of Property Act of 1925.
EQUITABLE MORTGAGE IN INDIA:
In India, Section 58(f) of the Transfer of Property Act 1882 provides for a mortgage by deposit of title deeds or an equitable mortgage.
Even though all other forms of mortgages must be in writing and registered, an equitable mortgage can be established simply by giving the lender the title deeds.
As a matter of policy, registration was made necessary for nearly all transactions involving immovable property at the time the Transfer of Property Act, 1882, was passed, therefore the inclusion of equitable mortgage in the statute was an anomaly. At the time this law was being written, there were various points of view on the subject.
According to the Fourth Law Commission’s report, which was submitted in 1879, “the equitable mortgage is against the policy of our registration-law.” It violates the principle of making the transfer of real estate as much as feasible a system of public transfer and results in the evasion of stamp duty. However, the legislative body incorporated this clause despite the Fourth Law Commission’s recommendations.
An equitable mortgage continues to be widely used in India by lending institutions and borrowers since it is the simplest type of loan security. The borrower avoids paying stamp duty and registration fees, and the lender avoids making a trip to the registrar’s office to register the mortgage deed. For instance, a sizable number of home loans are given out in India with an equitable mortgage serving as collateral.
MEASURES TO PREVENT FRAUD IN RELATION WITH EQUITABLE MORTGAGE:
In order to promote the registration of equitable mortgages, certain states have reduced stamp duty and registration costs on the memorandum of deposit of title documents. However, fewer equitable mortgages are filed even with lower fees. Because lenders and borrowers are not required to register such a transaction, this is the cause. In the case of State of Haryana v. Narvir Singh, the Honorable Supreme Court even stated that the construction of an equitable mortgage does not require the creation of a formal agreement or memorandum.
The Indian Registration Act, 1908 was amended to require an equitable mortgage notification to the Registrar in the states of Gujarat and Maharashtra. This is a useful technique for establishing equitable mortgages. But only these two states are covered by this system.
The Government of India established the Central Registry of Securitization Asset Reconstruction and Security Interest of India (CERSAI) in accordance with the provisions of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, in order to prevent fraud in loan cases involving multiple loans from different banks on the account of the same immovable property. According to this specific Act, it is required or mandatory for all banks and financial institutions to submit information on any equitable mortgages created in their favour on the CERSAI platform. The data of CERSAI can be accessed by other lenders and potential buyers to learn about any equitable mortgage on a property. This effective action to record equitable mortgages merely addresses a portion of the issue with regard to equitable mortgages. Lenders other than banks and financial institutions are not subject to the provisions of this Act while making loans. Equitable mortgages that are formed on agricultural property are likewise exempt from CERSAI registration requirements. As a result, a sizable fraction of equitable mortgages remain hidden from view.
CONCLUSION:
Due to the fact that there was no legal way to create a mortgage without giving the mortgagee possession of the property, the idea of an equitable mortgage was developed in England. In England at that time, there was no mechanism in place for registering property transactions in the public records. Additionally, it was founded on the common law and equity ideas that were used in England.
However, things were very different in India at the time the Transfer of Property Act was passed. And historically, India does not use this kind of mortgage. In India, neither of the elements nor circumstances that supported equitable mortgage existed. However, it was created as a part of a statute that went against the Transfer of Property Act of 1882 and the Indian Registration Act of 1908’s principle of public transfer of immovable property.
The country where it originated, the United Kingdom, has abolished the equitable mortgage. It is now appropriate to abolish it in India as well. Instead of using an equitable mortgage to secure immovable property against a loan, a simple mortgage in accordance with Section 58(b) of the Transfer of Property Act, 1882 should be employed. According to the Indian Registration Act of 1908, a simple mortgage can only be established through a registered deed, unlike an equitable mortgage (Section 96, Transfer of Property Act 1882).
Due to the high expense of stamp duty and registration fees as well as the requirement that a lender be physically present at the time of registration, lenders and borrowers are likely to oppose this prescription. However, these drawbacks can be eliminated by making the necessary changes to the law. Given that there is no actual transfer of real property involved in this transaction, it is appropriate to excuse simple mortgages from stamp duty and registration fees. Throughout the whole loan term, the mortgager keeps the property with them. Only in cases of loan default does the mortgagee have the legal authority to sell the mortgaged property with the assistance of the court.
The property is only actually transferred ownership when it is sold in accordance with the court’s order. At that point, the buyer can be charged for the registration cost and stamp duty. Therefore, the simple mortgage exemption from stamp duty and registration fees won’t actually result in a financial loss for the government. In any case, the government currently does not profit from the stamp duty and registration fee on equitable mortgages, which are the majority of the time used as collateral for loans.
Additionally, by amending the Registration Act of 1908 as necessary, the lender’s attendance at the time of simple mortgage registration may be waived. Such a shift has long been needed and will be very advantageous to both borrowers and financial institutions.
SOURCES:
- The Transfer of Property Act, 1882
- The Indian Registration Act, 1908
- Law of Property Act, 1925 (England)
- Russel v Russel (1783)
- Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
- State of Haryana v. Narvir Singh (2014) 1 SCC 105
- https://vidhilegalpolicy.in
- https://www.thehindu.com
- https://papers.ssrn.com
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