27 February 2019 - 14:00,
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Financing Real Estate transactions necessitate security against the loans. The security is the underlying asset for which financing is required. Charge creation is a burdensome and legal process which makes the form of creation of security a fascinating aspect. It is widely known that mortgage is created on the real estate properties in favor of the lender when a loan is advanced. A mortgage can either be created in case of a loan required for purchasing the said real estate property or if the real estate property is offered as security to acquire a loan.
There are numerous forms in which mortgages can be created however the most common of them all is ‘mortgage by deposit of title deeds’.
Let us look at the key legal aspects of creating a mortgage by deposit of title deeds.
Section 58(a) of Transfer of Property Act 1882 states “A mortgage is the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability.”
Section 58(f): Mortgage by Deposit of Title Deeds: Where a person in any of the following towns, namely, the towns of Calcutta, Madras, and Bombay, and in any other town which the State Government concerned may, by notification in the Official Gazette, specify in this behalf, 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.
Mortgage by deposit of title deeds is also known as Equitable Mortgage.
Key Legal Aspects:
- The place of depositing the title documents must be notified. To comply with this, Bank Branches mention their branch and head office addresses and obtain the stamp papers in the Head Office jurisdiction so that the notified area requirement is met.
- The deposit of title is necessarily made only to secure the debt by creating a charge on the immovable property. The loan may have been already acquired or would be acquired later. However, if the to-be-acquired debt is not advanced later, then the charge will be invalid.
- The deposit may or may not have been officiated by way of a written ‘Memorandum of Deposit of Title Deeds’. Even in the absence of any such Memorandum, Equitable Mortgage is created when title deeds are deposited.
- The most significant issue is about registration of the Memorandum. This assumes significance since the very nature of Equitable Mortgage is to create a charge by mere deposit of title deeds. Section 59 of the Transfer of Property Act clearly states that every mortgage other than a mortgage by deposit of title deeds can be effected only by a registered instrument. This clearly implies that Equitable Mortgage need not be registered.
However, the following relevant aspects need to be noted:
- Equitable Mortgage is compulsorily registrable and a registration fee is payable.
- Stamp Duty is payable on deposit of title deeds.
- A Memorandum which only contains the details of deposit of title deeds but not the details of terms of the loan will not constitute as an instrument of the mortgage. Such an instrument would be requiring registration.
- The instrument of deposit of title deeds is compulsorily registrable under section 17(1) (c) of the Registration Act.
- Where a Memorandum contains only the details of deposit, the charge of mortgage can be entered in the revenue records and for that purpose, the instrument of mortgage is not necessary. In such a case, the registration fee and stamp duty do not arise. In this scenario, the Memorandum contains only details of deposit of title deed and other documents detail the loan and other terms and conditions.
- Where the Memorandum is the sole evidence of loan transaction and details the terms and conditions, registration of the Memorandum is compulsory. Only a registered Memorandum will serve as evidence under Indian Evidence Act to prove the charge holder’s right over the property.
Thus, it may be noted that while initially, mortgage by deposit of title deeds served in a very crude manner, the present practice has emerged as a reliable and settled mode of security creation.