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 mortgage by conditional sale and how it works.
Mortgage by Conditional Sale and its Essential Elements
Section 58 (c) of Transfer of Property Act, 1882 defines the Mortgage by Conditional Sale. It states that, “Where, the mortgagor ostensibly sells the mortgaged property— on condition that on default of payment of the mortgage-money on a certain date the sale shall become absolute, or on condition that on such payment being made the sale shall become void, or on condition that on such payment being made the buyer shall transfer the property to the seller, the transaction is called mortgage by conditional sale and the mortgagee a mortgagee by conditional sale. Provided that no such transaction shall be deemed to be a mortgage, unless the condition is embodied in the document which effects or purports to effect the sale. The following are the essential components of such a sale:
a) The mortgaged property is ostensibly sold by the mortgagor.
b) This sale is subject to a condition.
c) The sale will become absolute if payment is not received by a specified date.
d) If payment is made, the sale is null and void.
e) If payment is made, the buyer returns the property to the seller.
f) The condition must appear in the same document.
It should be noted, however, that no such transaction will be considered a mortgage if no condition is mentioned in the same document that will affect the sale.
Condition to be included in the same deed
In the case of a mortgage by conditional sale, the condition must be embodied in the same document that effects or purports to effect the sale. That doesn’t necessarily imply that if the provision for reconveyance is included in the same document, the transaction is a mortgage. The proviso to section 58 (c) of the amending act of 1929 added this clause.
It states that any deed that intends to effect a sale is only a mortgage by conditional sale if it meets the aforementioned requirements. This change is not retroactive. Following this provision, the condition of repurchase must be included in the same document that provides for ostensible sale for order for the transaction to be treated as a mortgage by conditional sale rather than a sale itself.
In Pandit Chunchun Jha v. Sheikh Ibadat Ali (1954), the Supreme Court held that the proviso to section 58(c) makes it specific and clear that if the condition for repurchase is not embodied in the same document, the transaction is not considered a mortgage.
In Sunil v. Aghor (1987), three separate documents—a sale deed, a deed of reconveyance, and a lease deed—were executed as part of the same transaction, but the sale deed did not contain the clause designating the sale as the mortgage. In this instance, the Guwahati High Court ruled that the transaction was not similar to a mortgage by conditional sale. In the same document, it further supported the terms affecting the sale as a mortgage.
Mortgage by Conditional Sale with a Repurchase Condition
A sale that includes a repurchase clause and a mortgage are fundamentally distinct from one another. It is assumed that there is a mortgage when the repurchase condition is included in the same document as the sale, but there cannot be a mortgage when the sale and the repurchase agreement are included in separate documents.
Although these concepts seem similar, they have been thoroughly differentiated as follows:
a) In a mortgage by conditional sale, there must be necessary that there be a debt between the mortgagor and the mortgagee, or the debtor or creditor. A sale with a repurchase clause, however, does not involve any such speculative debt. The debtor and the creditor are not comparable to a seller and a buyer.
b) A mortgage by conditional sale merely transfers a portion of the property’s interest, making it a partial interest transfer. Sale with the condition to repurchase is the transfer of the entire interest in the property, with the exception of the personal right to repurchase, which will expire if not exercised within the prescribed time frame.
In the case of Patel Ravjibhai Bhulabhai v. Rahemanbhai M. Shaikh (2016), X executed a deed in favour of Y in 1960 that was described in the documents as a conditional sale for 10,000 rupees; if the payment was made by X within five years, Y would give the property back; and if the period expired before the full payment is made by X, X forfeits all rights to the property. The Supreme Court considered the situation and came to the conclusion that X and Y were in a debtor and creditor relationship, and that the deed was actually a mortgage with a conditional sale.
The Remedy Available for the Mortgagee
The mortgagee can only be compensated by foreclosure rather than sale, which requires a court order. Only when the mortgagor fails to make the required payment on time and the sale becomes final can the mortgagee file a decree for foreclosure in accordance with Section 67 of the TPA, Rules 2 and 3 of Order 34, and CPC.
A conditional sale mortgage is a type of mortgage in which an ostensible sale occurs and is later converted into an absolute sale due to the seller’s inability to repay the loan. The provisions have been amended over time to provide that both the document for sale and the document for reconveyance occur in the same document. There have been numerous instances where a mortgage by conditional sale and real sale have been confused, and the court has also issued rules and interpretations to clear up those misunderstandings. Regardless of various intertwined pertinent concepts, the practice of mortgaging property has been prevalent in India for a long time, not only in India but also in other parts of the world under different names, and it can be asserted categorically that the practice of mortgage by conditional sale will continue to thrive in the future.
- Pandit Chunchun Jha v. Sheikh Ibadat Ali AIR 354 (SC 1954)
- Patel Ravjibhai Bhulabhai v. Rahemanbhai M. Shaikh AIR 2146 (SC 2016)
- Sunil v. Aghor AIR 39 (Gau 1989)
- See Paridhi Goel, Understanding different types of mortgage under the Transfer of Property Act, 1882, blog.ipleaders.in (July 13, 2021) https://blog.ipleaders.in/understanding-different-types-mortgage-transfer-property-act-1882/#Mortgage_by_Conditional_Sale_Section_58c (Last visited Sept.25, 2022)
- See Stuti, Judicial Study On Mortgage By Conditional Sale, legalserviceindia.com https://www.legalserviceindia.com/legal/article-6222-judicial-study-on-mortgage-by-conditional-sale.html (Last visited Sept.25, 2022)
- The Transfer of Property Act, 1882, Acts of Parliament, 1882 (India)
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