The term “mortgage” is derived from a French phrase that was used in medieval Britain and meant “death pledge,” which refers to a pledge that expires (dies) when the debt is paid off or the property is seized through foreclosure. From 1190 onward, the concept of a mortgage originated in England and spread throughout the western world. A mortgage is a loan used to buy or keep up a house, land, or another piece of real estate. The borrower agrees to make periodic payments to the lender, usually in the form of a series of regular installments split into principal and interest. The property then acts as security for the loan. According to Section 58(a) of The Transfer of Property Act, 1882 mortgage is defined as, “A mortgage is the transfer of an interest in specific immoveable 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. The transferor is called a mortgagor, the transferee a mortgagee; the principal money and interest of which payment is secured for the time being are called the mortgage-money, and the instrument (if any) by which the transfer is effected is called a mortgage-deed.” This section also defines the types of mortgages: Simple mortgage, Mortgage by conditional sale, Usufructuary mortgage, English mortgage, Mortgage by deposit of sale deed, and Anomalous mortgage. However, this article mainly focuses on what is a usufructuary mortgage and how it works.
- ‘Usufruct’ what does this term mean?
After understanding the meaning of a mortgage, it is important to know what usufruct and usufructuary mean. Usus and fructus property rights are combined to form a usufruct. Usus denotes the right to use something directly without causing harm or alteration, while Fructus denotes the right to reap the benefits of the property being used—that is, to make money off the real estate by renting it out, selling the crops it produces, charging visitors to enter it, or doing something similar. A usufruct is a legal privilege granted to an individual or entity that grants the short-term right to use and profit from another person’s property. The person who holds the property by usufruct is known as a usufructuary. A usufructuary does not have complete ownership of the property, which is the right to sell demolish, consume or transfer ownership to another person, and rather the possession of the property is transferred.
1.1 Definition as per the Transfer of Property Act,1882
Section 58(d) defines usufructuary mortgage as, “Where the mortgagor delivers possession 1 or expressly or by implication binds himself to deliver possession of the mortgaged property to the mortgagee, and authorizes him to retain such possession until payment of the mortgage-money, and to receive the rents and profits accruing from the property 2 or any part of such rents and profits and to appropriate the same in lieu of interest, or in payment of the mortgage-money, or partly in lieu of interest 3 or partly in payment of the mortgage-money, the transaction is called an usufructuary mortgage and the mortgagee an usufructuary mortgagee.”
1.2 Characteristics of a Usufructuary Mortgage
a) Until the mortgage is fully repaid, the mortgagee has the right to use the property.
b) The right to sell the mortgaged property does not belong to the mortgagee.
c) The payment has no expiration date.
d) There is no personal liability for the mortgagor.
e) The mortgagor’s stated or implied promise to deliver such possession or delivery of possession of the mortgaged property.
1.3 Usufructuary mortgagor’s right to reclaim possession
Section 62 of TPA, 1882 states the right of usufructuary mortgagor to recover possession. This section states that once the entire mortgage amount has been paid/recovered by/to the mortgagee, the mortgagor has the right to reclaim possession of the property along with the mortgage deed and other related documents. The mortgagee can recover his mortgage-money in two ways: a) he pays himself from the rents or profits (when such amount is paid) from the property, or b) he pays himself only a part from such rents or profits when the term (if any) for repayment of the mortgage-money has expired, and the mortgagor pays or tenders the mortgage-money or the balance thereof to the mortgagee or deposits it in Court.
1.4 Example of how a Usufructuary Mortgage works?
With the help of an example, the question of how a usufructuary mortgage works can be understood well. Suppose, Mr. Karan, a businessman, lacks the funding to launch a new venture. He has three apartments in Mumbai. In order to meet his capital needs, he approaches Mr. Arjun, a lender, and borrows 25 lakh rupees from him in exchange for 2 of his flats. Mr. Arjun can then receive monthly rent in place of paying the borrowed amount on a monthly basis. Mr. Arjun only has temporary possession of the property under the terms of this agreement; he does not own it, and he is not permitted to change, modify, sell, or engage in any other action that might affect Mr. Karan’s ownership. Once the debt is paid back, Mr. Karan regains the right to possession.
1.5 Judgments related to Usufructuary Mortgage
a) Regarding the return of mortgage money
In the case of Prithi Nath Singh v. Suraj Ahir (AIR 1963 SCR 1041), the court of law recognizes that upon repayment of the money, the mortgagor’s liability to the mortgagee ends. In other words, the mortgage is terminated. The transfer of property possession is made as a security for the debt incurred. It is only a legal right that such possession is transferred back to the mortgagor when the debt ceases to exist.
b) Regarding the improvement of the mortgaged property
In Ram Asray v. Hiralal (AIR 1949 All 681), a building was mortgaged in favor of the mortgagee, who had the right to possession of it. The mortgagee completely demolished the old building and constructed a new one in its place without seeking permission or authority from the mortgagor. The additional income generated by the new building was claimed by the mortgagor. The court determined that it is an improvement to the property rather than an accession. Because it occurred at the expense of the mortgagee, and such expenses are not recoverable from the mortgagor under current law, the mortgagor cannot claim such benefit.
c) Regarding limitation period on usufructuary mortgage
In the case of Ram Dattan (Dead) by LRs vs Devi Ram and others, the appellants filed a special leave appeal with the Supreme Court, seeking a declaration of the mortgagee’s ownership over the mortgaged property because 45 years had passed since the mortgage was entered into between the parties. The Supreme Court reaffirmed the law established in previous decisions and dismissed the appeal, stating that there is no limitation in the case of a usufructuary mortgage and that the mortgagee is not entitled to any declaration simply because a certain amount of time has elapsed from the date of the mortgage.
The Usufructuary Mortgage system has several advantages, including the ability for the mortgagor to obtain the required sum of money for an immediate need without transferring property. The mortgagee also enjoys possession, rent, and profits from the mortgagor’s specified property, creating a win-win situation for both parties. However, if the mortgagor is unable to repay the mortgage money, the mortgagee retains possession of the land for an indefinite period of time, which is disastrous for the mortgagor if he is reliant on the mortgaged land.
- Prithi Nath Singh v. Suraj Ahir AIR 1041 (SCR 1963)
- Ram Asray v. Hiralal AIR 681 (All 1949)
- Ram Rattan (Dead) by LRs vs. Devi Ram (Civil Appeal no. 1541 of 2011)
- See Rachel Raju Alice, Usufructuary Mortgage, lawessential.com (Nov 30, 2021) https://lawessential.com/all-blogs/f/usufructuary-mortgage (Last visited Sept.7, 2022)
- See Sai Manoj Reddy, Is there a limitation period for usufructuary mortgages, blog.ipleaders.in (Nov 7, 2021) https://blog.ipleaders.in/is-there-a-limitation-period-for-usufructuary-mortgages/ (Last visited Sept.8, 2022)
- See Shivani. K, An Analysis of the Existing Law on Usufructuary Mortgage in India, studocu.com (June,2022) https://www.studocu.com/in/document/tamil-nadu-dr-ambedkar-law-university/property-law/usufructuary-mortgage/29128468
(Last visited Sept.8, 2022)
- The Transfer of Property Act, 1882, Acts of Parliament, 1882 (India)
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