‘Note’ On Documentation For Creating Security On Properties Owned By Housing Societies, Development Agencies, GHQ, etc.
As security for various financial facilities, it is visualized that the Bank would obtain a mortgage by “deposit of title deeds.” It would be necessary to point out that such security can, of course, be created where an original title deed is available. However, in many transactions relating to the sale of property by various development authorities or cooperative housing societies (“Authority”), a sale deed is executed only after a house has been constructed. In the first instance, only an allotment letter or an agreement to sell is executed. It is also a common practice that property exchanges hands by assignment of rights from the allotment holder, without a sale deed having been executed by the Authority. In such cases, the Authority issues a letter in favour of the assignee acknowledging that the assignee would have the same interest in the property as the assignor. The absence of a transfer deed creates certain problems where a mortgage by deposit of title deeds is to be created.
The peculiar issues of mortgage by deposit of title deeds would become clear from the discussion that follows:
a) Mortgage, in case of land, means “transfer” of the property by a mortgagor to the mortgagee as security for some financial or other obligations. Once the secured obligation has been discharged, the mortgagee has to “re-transfer” the property back to the mortgagor. If the obligations are not discharged, the mortgagee can bring the mortgaged property to sale, and convey to the purchaser title to the property.
b) Transfer of immovable property in urban areas can take place only through a transfer deed registered with the Registrar of Documents. In case of mortgages, the law provides that where the mortgagor holds “title deeds”, regarding the land, he may create a mortgage by mere “deposit” of the title deeds with the mortgagee or his agent. If he does not have title deeds, but is owner of the property, he must create a mortgage by a “registered instrument”. Deposit of a document, whose nature is not that of a “title deed” cannot create any mortgage interest.
c) Where a property development authority or agency, such as DHA, LDA, CDA, various cooperative housing societies etc. (“Authority”), issues allotment letters to an allottee and, in cases of transfer from the allottee to a new person issues him a letter of “transfer of allotment”, then these documents are only evidence of “contractual obligations” between the Authority and the holder of the allotment interests. As long as the Authority has not transferred the property to the allottee by a registered sale deed, the title in the property continues to remain with the Authority, and the Authority continues to be the “owner” of the property.
d) Even where the allottee himself (without having obtained a registered sale deed from the Authority), transfers his allotment interest to another person by a registered deed, such deed cannot be a document of title to the relevant land for the simple reason that the transferring allottee himself holds no registered “Title Deed”.
e) An “allottee” cannot, therefore, either create a registered mortgage so as to “transfer” by way of mortgage the relevant land as security nor can he create an equitable mortgage by deposit of the allotment letters, since allotment letters are not title documents.
In view of the above legal position, the question arises whether a security can be created, at all, over the “contractual rights” of the allottee, in favour of a financial institution? The answer to this question is that a security can certainly be created, but this has to be by “assigning” the allottee’s contractual interest in favour of the person who wants to be secured. Such a transaction cannot properly be called a mortgage of land, but it is more in the nature of a “hypothecation/assignment” of benefit of contractual rights, by way of security. If the transaction is structured properly, the secured person would be entitled to bring to sale, the allotment interests of the allottee.
For proper structuring of the transaction for creating a security interest over allotment rights, the following measures could be adopted:-
a. The Bank must obtain a copy of the bye-laws of the Authority.
b. The Bank must also obtain a copy of the original allotment letter issued by Authority so as to know its terms and conditions.
c. The Bank must follow the procedure set out in the allotment letter/bye-laws for encumbering the rights of an allottee. Ordinarily, permission of Authority is required.
d. After permission to assign the interest of the allottee by way of security has been granted, a security instrument encumbering the interest of the allottee in favour of the Bank must be prepared.
e. It must be reported to the Authority, thereafter, that the security interest had been created and such interest should be recorded in the relevant file of Authority.
f. Authority should confirm that a lien has been marked on the record of Authority regarding relevant allotted plot and that the Authority would not allow transfer of that plot to any person as long as a written NOC has not been issued by the Bank.
g. The allottee should surrender to the Bank all original documents pertaining to the plot, with a covering letter stating that this was being done in recognition of the security interest created in favour of the Bank.
For all cases where a “title deed” is not available and only “agreements to transfer” exist, it would be necessary to design a standard “Assignment Agreement” for creating security interest in favour of the Bank.
If the above procedures are followed, it would be ensured that no third party can acquire the plot of the allottee and claim that he was an innocent purchaser without notice of the claim of the Bank. Since no sale of Authority’s property (till such time that Authority itself has not executed in sale deed), can take place without permission of Authority, no purchaser from the allottee can claim to be a bona-fide purchaser of the property free of the claims of the Bank.
Below are the practices of certain Authorities.
1. DHA LAHORE, LDA, COOPERATIVE HOUSING AUTHORITIES ETC.:
In case of DHA Lahore, LDA and various cooperative housing societies etc. the practice is to issue an allotment letter or a transfer agreement in the first instance. Conveyance deed is executed only when a house has been erected at the site according to the approved site plan. Very often property changes hands after taking permission from the relevant authority. The transfer of interest is accepted by the Authority on the same terms and conditions as original allotment/transfer letter.
2. DHA KARACHI:
(I) In the case of DHA, Karachi the procedure that is followed is that, in the first instance, a Sub-lease in Form-A is granted authorising the lessee to raise construction on the relevant plot. Once that has been done, a 99 years lease in Form-B is issued. Since in both cases a regular “Sub-lease” is issued it should be possible in the case of sub-lease in Form-A to create security by its deposit under an MDTD coupled with execution of an “Assignment Agreement”. Financing in relation to Form-A sub-lease would, of course, be for the purpose of building a house at the site. Considering the nature of this lease, permission to create security would also be required from DHA in an agreed form.
(ii) As regards Sub-lease in form-B, if financing is to be provided for purchasing a house covered by this kind of lease then security can be created by deposit of this document with the Bank under a “Memorandum of Deposit of Title Deeds” and thereafter DHA may be informed about the security interest.
3. ARMY OFFICERS HOUSING SCHEME PART-II:
Before rendering an opinion here regarding appropriate security structure for providing facility to erect a house in the Scheme, or to purchase an already constructed house, it would be useful to refer to certain provisions of the Scheme and also “GHQ Finance Scheme on Mark up Basis through Banks”.
i) Army Officers Housing Scheme Part-II (as per their Brochure of January 2003) visualizes that in the first instance an eligible officer, who is a member of the Scheme, would have a plot earmarked for him on which he may construct a house. Clause 8 (l) makes it very clear that formal allotment letter would be issued only when construction of a house had been completed on the plot. After allotment has been made the allottee would, under clause 9(a) be eligible for grant of “lease rights”. Even where lease rights have been formally granted, any transfer of such rights to persons who do not belong to the Army would require special permission.
ii) From the above it can be seen that if the Bank were to provide finance for erecting a house in any Army Officers’ Housing Scheme, then the relevant plot cannot be available by way of security, since allotment rights would be conferred on an officer only after the house has been constructed.
iii) Even where a lease has been granted to an officer for a plot having a fully constructed house, if finance were to be provided by the Bank for purchase of the house by the officer then the difficulty in enforcing the security over the house would be that the house would not be saleable to the public at large without special permission from Army authorities under Clause 9(e). The requirement of special permission would have a serious negative effect on the liquidation value of the security.
iv) In view of the above, properties in the Scheme are not suitable as collateral security for financing in general. Where financing is required to build a house in the Scheme, mortgage should also be obtained over some property not falling within the Scheme.
4. LEASEHOLD PROPERTIES:
Leasehold properties can be acceptable only when the lease is assignable. If consent of the lessor for assignment is required then his permission to mortgage should be obtained. The Bank has to carefully consider whether the lease has sufficient period to run. The Bank must also monitor the lessee’s performance obligations under the lease to ensure that it is not forfeited on account of default by the lessee. The Bank should obtain an assurance from the lessor that the Bank would be given opportunity to cure any default on part of the lessee.
We hope that this discussion proves helpful in understanding the matter generally. However, if any action is to be taken, relating to this Article, please consult your professional advisors.