Creation of Equitable Mortgage

By Advocate S. R. Agarwal

These days finance, particularly against housing and property, is being made available by the banks and the housing finance companies against the security of the properties by way of equitable mortgage, known in our Indian legal system as the “Mortgage by Deposit of Title Deeds”.

In terms of Section 58 (e) of the Transfer of Property Act, such a mortgage is created the moment title deeds of the property are handed over to the lender with the intention to create security for a loan in the Presidency towns of Bombay, Calcutta and Madras and the towns notified by the State Governments.

In most of the States in our Country, important towns and the District Head Quarters have been notified for the purpose of creation of equitable mortgage. In some States, even the Tehsil / Taluka Head Quarter has been notified.

In the State of Maharashtra a number of towns such as Ahmed Nagar, Akola, Alibagh, Amravati, Bhandara, Bhir, Buldhana, Chandrapur, Dhulia, Jalgaon, Kolhapur, Nagpur, Nanded, Nasik, Osmanabad, Parbhani, Poona, Ratnagiri, Sangli, Satara, Solapur, Thane, Wardha and Yeotmal have been notified by the State Govt. for this purpose.

In exercise of the powers by virtue of Section 3, Sub Section (4) of The Bombay Provincial Municipal Corporation Act, 1949, the State Government has constituted a city of New Bombay for the area specified in the Schedule to the Notification dated 17.12.1991 with effect from the 1st January 1992, but this city of New Bombay has not yet been notified by the State Government under Section 58 (e) of the Transfer of Property Act for the purposes of equitable mortgage.

In the area of New Bombay, the various financial institutions are adopting different procedures inasmuch as some of the banks, particularly Public Sector Banks, accepting the documents from the borrowers at New Bombay keep the same in their offices located in the area of Mumbai, whereas some of the banks and financial institutions are keeping the same in their Offices in New Bombay. Legally speaking, keeping the documents obtained as a security for loans in the Offices within the area of New Bombay is not in consonance with the provisions of Section 58 (e) of Transfer of Property Act and, in my opinion, such financial institutions/ banks may face technical legal problem, if matter goes to litigation. It would, therefore, expedient on the part of the State Government to notify the Town of New Bombay for the purpose of creation of equitable mortgage as per the provisions of Section 58 (e) of the Transfer of the Property Act at the earliest.

As regards the creation of an equitable mortgage, it is not legally essential that the property, offered as security, should be located in a notified town. The legal requirement is that the title deeds should be deposited with the lender in a notified town irrespective of the location of the property. As per the judicial guidance pronouncements, the title deeds accepted even an un-notified town but kept at the notified town, the equitable mortgage has come into being and the transaction is legally valid.

There is another practice in vogue that many financial institutions obtain a Memorandum or the Letter of Deposit of Title Deeds from the borrowers as an additional proof of the creation of mortgage. Under the said provisions of the Transfer of Property Act, such a Memorandum or the letter is not a pre-requisite and not legally required. In the State of Maharashtra, if such a Memorandum or the letter or anything in writing about the deposit of title deeds is obtained at any stage, such a Memorandum or letter or writing attracts stamp duty as per the provisions of Article 6 of the Bombay Stamp Act at the rate as prescribed from time to time. Some of the States have followed the example of Maharashtra and in some of the states, it is still obtained on a plain paper. However, in the state of Tamil Nadu, such a Memorandum has, recently, been made compulsorily registerable, which, in my opinion, does away with the distinction between a registered mortgage and equitable mortgage and thereby also sacrificing the traditionally available convenience of creating security by way of equitable mortgage.

It may be clarified that wherever such Memorandum or letter is insisted upon, it is obtained at a later date subsequent to the deposit of title deeds (creation of equitable mortgage) to distinguish it from a simply registered mortgage and if it is taken on the same day, it may attract stamp duty and registration as per the provisions of law in care of other types of mortgages.