Legal Note On Equitable Mortgages
During the course of reviewing security documentation, a common misunderstanding about the law relating to equitable mortgages is often seen. The discussion that follows would clarify the issue.
A regular “sale” of immovable property and a “mortgage” of immovable property have certain similarities. Both constitute a “transfer” of property. When a property is sold by the seller to the buyer it becomes the property of the buyer. After having made the sale the seller cannot sell this property to another person. The purchaser from him would acquire no title since the seller has none (having already transferred it to the buyer). If after the sale any attachment is levied against the sold property or any recovery for any unpaid taxes or other governmental dues is sought to be recovered by sale of the property, such attempt would fail because the seller is no more the owner of the property. The buyer can always step forward and tell the attaching creditor or governmental department that they should not touch the property since it belonged to the buyer and the seller had ceased to have any title or interest in the property. A buyer having effectively purchased the property as above is under no obligation to transfer it back to the seller, if the seller wants to reacquire the same.
In the case of a “mortgage”, the mortgagee is in the same position as that of the buyer discussed above, and is a “transferee” of property having acquired a “title” to the property. However, since the transfer is by way of “security” he is required by law to retransfer the property to the transferor (by a deed of redemption or return of the title documents, as the case may be) if the transferor (mortgagor) discharges the obligation for which the property had been “transferred”, by way of security. After transfer of the property by way of mortgage, the seller does not retain any “title” as absolute owner, but only retains a right known, in legal parlance, as “equity of redemption” i.e. he has the right to redeem the property by discharging the secured obligations. After a proper mortgage has taken place, the only transferable interest that remains with the seller is this “equity of redemption” and any purchaser from him, or any attaching creditor or governmental department, cannot reach the property (which already stands transferred to the mortgagee) but can only attach or acquire the “equity of redemption”. In other words the purchaser, any attaching creditor, or department, that acquires or seizes the property may redeem the property by fully discharging the obligations secured on it. Without doing this, they cannot touch the property of the transferee (mortgagee).
The law recognizes two modes of transferring a property by way of mortgage. One mode would be a regular mortgage deed “registered” with the Registrar of Documents. The other mode is that where the mortgagor deposits “title deeds” of the property with the mortgagee or its agent, such deposit operates as a mortgage, commonly known as “mortgage by deposit of title deeds” and also as “equitable mortgage”. Where the documents that are deposited with a creditor are not “title deeds” such deposit does not operate as a mortgage. In such situation if the property were to be attached by some other creditor, or seized for tax recovery or sold to some other person, such attaching creditor, government department, or purchaser could always say that they had taken over the property of the owner free of any mortgage since the mortgage (claimed on the basis of deposit of documents other than a title deeds) was no mortgage in the eyes of law.
A person having purchased any property under any “title deeds” is expected to retain with himself the title deeds. The absence of title deeds in his hands is taken by law as ample warning to all persons dealing with him that the deeds might have been deposited with some third party by way of security. As far as “jamabandis”, “mutations”, “girdawaries”, “aks shajra” and similar revenue papers or certified copies of title deeds or mere correspondence relating to transfer of title are concerned, it is possible for the owner to be having as many copies of them as he may desire. Jamabandis, mutations etc. are meant only at maintaining or updating public record required for land revenue and land administration purposes. They are not document by which a title is created. Deposit of such documents with any creditor is not recognized by law as a mortgage.
In the case of quite a few transactions only mutations/ jamabandis etc. are being taken into custody on the assumption that their deposit operates as a valid mortgage. In fact, in the revenue papers, entries of only mutations relating to the registered “token mortgage” of Rs.50,000/- or Rs.100,000/- are made. The revenue entries, in such cases, mention the registered deed by which the token mortgage had been created, or the mutation based on such registered mortgage deed. These deeds represent only the token mortgage, and in such cases any transferee from the mortgagor could say that he had no notice of any mortgage other than the token mortgage, and there was no occasion for demanding title deeds since the rights of the seller were based on inheritance, or other revenue entries such as oral sales, and not on any title documents. Although the present banking law prohibits sale of mortgaged property (under certain conditions, as stated in the law), such sale in breach of the Financial Institutions (Recovery of Finances) Ordinance, 2001 (if made before a suit had been filed), does not make the sale void or a nullity at law.
From the above discussion, it can be seen that where the title of a mortgagor is based only on revenue entries, and not on title deeds, it is not advisable to rely on equitable mortgages. In such cases, (subject to the Sindh exception, discussed below) only a registered mortgage should be accepted.
The Transfer of Property Act, 1882 is not fully applicable in all provinces of Pakistan. As far as the Province of Sindh is concerned, the Act is applicable in its entirety. However, as regards Punjab only a few provisions are applicable. These provisions require that certain transactions must be in writing and be registered [Section 54: Sale of land; Section 59: Mortgages, except equitable; Section 107: Lease exceeding one years; Section 118: Exchange of land; Section 123: Gifts (except oral gifts under Islamic law)]. The entire section 58 of the Act (relating to various kinds of mortgages) is not directly applicable. In Punjab, equitable mortgage is accepted on the basis of tradition and equitable considerations and not by statutory force. Since the entire Transfer of Property Act, 1882 is fully applicable in the Province of Sindh, benefit can be taken there of an amendment that had been brought in the year 1986 in section 58(f) of the Act, whereby as regards properties for which only revenue entries are available, a mortgage in favour of a bank can be created by making revenue entries only (in other words without deposit of any title deeds where no such title deed are available). The relevant provision is reproduced below:-
(f) Mortgage by deposit of title-deeds.— Where a person [ *** ] 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 deed:
[Provided that, where a mortgage by deposit of title deeds is to be created in favour of a banking company as defined in the Banking Tribunals Ordinance, 1984 (LVI of 1984), the same may also be created by an entry in the record-of-rights against the entry relating to such immovable property].
Here it may also be pointed out that equitable mortgage is an oral transaction. The mortgage is created by the act of deposit of title deeds with the intention of creating a security on the property. The MODTD itself does not create the mortgage. The MODTD should merely acknowledge that a mortgage had earlier been created by deposit of title deeds for certain properties to secure certain obligations up to a maximum amount. It should not contain any terms and conditions of the mortgage. In case terms and conditions are contained then such document would become a “mortgage deed” and require registration. If unnecessary details are included as to the conditions on which the title document would be held, then the document may be held to be an “agreement” relating to deposit of title deeds, that would attract a heavy stamp duty under item No.6A of the Stamp Act, 1899. A mere MODTD does not require any registration or stamp duty. Any practice requiring that MODTD should be got registered, would be contrary to the spirit of the transaction. The transaction is oral in nature and not a transaction brought about by any writing.
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.
