Security Over Immovable Property

  1. INTRODUCTION-

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest, 2002 defines in S. 2(zf) security interest as “‘security interest’ means, title and interest of any kind whatsoever upon property, created in favour of any secured creditor and includes any mortgage, charge, hypothecation, assignment other than those specified in section 31[1]. In addition, a security interest can be said to arise from a transaction intended as security; a right in rem; created by a grant or declaration, not by reservation; if fixed, or specific, implies a restriction on the debtor’s dominion over the asset; cannot be taken by creditor over his own obligation”.[2] Therefore, a security interest can be defined as an interest in a property that secures its payment of money or the performance of a pecuniary obligation.[3]

To understand security over immovable assets, it becomes essential to understand what is meant by ‘immovable property’. Sir Dinshaw Mulla in his treatise ‘Mulla’s The Transfer of Property Act[4] has taken into account the landmark Madras High Court judgment of Sukry Kurdepa v. Goondakull Negireddi[5] to explain what is meant by an immovable property. In that case, the Hon’ble Judge, while distinguishing between movable property and immovable property held, “Movability may be defined to be a capacity in a thing of suffering alteration of the relation of place immovability in capacity for such alteration. If, however a thing cannot change its place without injury to the quality by virtue of which it is, what it is, it is immovable. Certain things such as a piece of land are in all circumstances immovable. Others such as trees attached to the ground are, so long as they are so attached immovable; when the severance has been affected they become moveable.”[6] This definition has been upheld in various subsequent judgments and finds mention in most treatises on Transfer of Property Act, 1882.

The most common form of security granted over immovable property is a mortgage. This is principally by way of an English mortgage (where the mortgaged property is transferred absolutely to the lender and will be transferred back to the borrower on discharge of the debt) or mortgage by way of deposit of title deeds (equitable mortgage). The choice between English mortgage and an equitable mortgage depends on stamp duty considerations in the state where the property is situated and where the security documents are being executed.

Through the course of this paper, the author will present a detailed picture of the definition of immovable property and thus will present a detailed account of different types of mortgages and charge, simultaneously explaining the difference the two. In conclusion, the author will draw relations between all the above mentioned concepts, presenting a holistic picture of the concept of security over immovable property. 

  1. CONCEPT OF IMMOVABLE PROPERTY AND ITS VARIOUS COMPONENTS-

The statutory definition of ‘immovable property’ is laid down in S. 3(26) of General Clauses Act, 1897. It has been defined to include“… land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth.”[7]This definition is not exhaustive, and includes primarily three things that qualify as immovable property; namely – (i) land; (ii) benefits arising out of land; and (iii) things attached to the earth or permanently fastened to anything that is permanently attached to the earth.[8] Another statutory definition, that aids the understanding of immovable property is the one given in Registration Act, 1908, as “immovable property includes land, building, hereditary allowances, right to ways, lights, ferries, fisheries or any other benefit to arise out of land, and things attached to the earth or permanently fastened to anything which is attached to the earth but not standing timber, growing crops nor grass.”[9]

Real estate in India includes land, buildings, flats, offices, other developments on land and other immovable property. The term ‘immovable property’ is defined in several statutes in India, the relevant ones being as follows: (i) The Transfer of Property Act, 1882 uses a non-exhaustive definition and defines ‘Immovable Property’ as property other than standing timber, growing crops or grass. (ii) The Registration Act, 1908 uses an inclusive definition and defines ‘Immovable Property’ to include land, building, hereditary allowances, rights to ways, lights, ferries, fisheries or any other benefit to arise out of land, and things attached to the earth or permanently fastened to anything which is attached to the earth but not standing timber, growing crops nor grass.

Under Indian law, the two permissible forms of security interest that can be created over immovable property are mortgage and charge. Transfer of Property Act, 1882, being the primary act that deals with immovable property, covers both mortgage and charge. S. 58 of Transfer of Property Act, 1882 envisages six different kinds of mortgage. Security interest, as defined under S. 2(zf) of SARFAESI Act, may cover the following two things which shall be explained in detail under further portions of the paper:

(i) Mortgage: Where the principal money secured is Indian Rupees 100 or more, a mortgage other than a mortgage by deposit of title deeds can be effected only by a registered instrument signed by the mortgagor and attested by at least two witnesses. Of the six forms of mortgages explained above, the most frequently used types of mortgages are English mortgage and mortgage by deposit of title deeds.[10] In an English mortgage, an indenture of mortgage is executed between the parties setting out the rights and obligations of each party whereas a mortgage by deposit of title deeds, as the name suggests, requires only the act of depositing the title deeds and a memorandum of entry recording the deposit being executed. It is pertinent to note, however, that for all practical purposes, creation of security interest over land classified as agricultural land in India is highly restricted other than for the purpose of agricultural loans.[11] All mortgages, other than a mortgage by deposit of title-deeds, are to be compulsorily registered with the Sub Registrar of Assurances in whose subdistrict the whole or some portion of the mortgaged property is situated, within 5 a period of 4 months from the date of execution of the document creating the mortgage. Nonconformity with the registration requirements results in the document not affecting any immovable property comprised therein and being inadmissible in evidence. As set out in the beginning, stamp duty is payable as per the provisions of the stamp act applicable to the state where the document is executed. Hence, if several properties situated in multiple states are mortgaged by way of one instrument, then the document is recommended to be executed and according stamp duty be paid in the state wherein the courts to which jurisdiction has been granted under the document are situated or where highest stamp duty is payable.[12]

(ii) Charge: Under Indian law, where immovable property of one person is by act of parties or operation of law made security for the payment of money to another and the transaction does not amount to a mortgage, the latter person is said to have a charge on the property. No particular form of words is required to create a charge. There must however be a clear intention to give property as security for payment of money. A charge is effected in a manner similar to that of a simple mortgage, as given above. In order to be enforceable, a charge document is also required to be appropriately stamped and registered with the Sub Registrar of Assurances as explained above.[13]

In India, all kinds of assets, whether tangible or intangible can be used as security, right from immovable property to intellectual property rights. However, the most common types of security in banking transactions include a mortgage over immovable property, pledge of shares, hypothecation of or a floating charge over movable assets and/or book debts, personal guarantees by individual promoters or corporate guarantees from parent promoter companies or group entities. It is pertinent to note, however, that in most cases, due to foreign exchange management laws of India, creation of security interest by a person resident in India in favour of a person resident outside India requires the prior approval of the Reserve Bank of India.

  1. Mortgage– Mortgages are the most common form of security interest created over immovable property. A mortgage is defined as a transfer of an interest in specific immovable property as security for the repayment of money advanced or to be advanced by way of a loan, an existing or a future debt, or the performance of an engagement which may give rise to a pecuniary liability.[14] Six types of mortgages are recognised in India namely:
  • Simple mortgage– Under this form of mortgage, the mortgagor does not deliver possession of the mortgaged property and binds itself to pay the amounts secured by the mortgage, failing which the mortgagee shall have the right to cause the mortgaged property to be sold and apply the proceeds towards payment of the debt owed.[15]
  • Mortgage by conditional sale– Under this form of mortgage, the mortgagor ostensibly sells the mortgaged property to the mortgagee with a condition that the mortgaged property shall be returned to the mortgagor and the sale will cease to have effect on payment by the mortgagor of the amounts secured by the mortgage. In the event that the mortgagor defaults in paying the amounts secured by the mortgage, the sale of the mortgaged property will become absolute.[16]
  • Usufructuary mortgage– Under this form of mortgage, the mortgagor delivers possession of the mortgaged property to the mortgagee authorising the mortgagee to retain such possession until payment of the amounts secured by the mortgage and to receive the rents and profits accruing from the mortgaged property or any part of such rents and/or profits and to appropriate the same in lieu of interest and/or in payment of the amounts secured by the mortgage.[17]
  • English mortgage– Under this form of mortgage, the mortgagor binds himself to repay the amounts secured by the mortgage on a certain date and transfers the mortgaged property absolutely (though with an intent to create mortgage) to the mortgagee subject to a proviso that the mortgagee will re-transfer it to the mortgagor upon payment of the amounts secured by the mortgage.[18]
  • Mortgage by deposit of title-deeds (also known as equitable mortgage)– Under this form of mortgage, a mortgagor deposits documents of title to immovable property with the mortgagee, with the intent to create a security thereon. A mortgage by deposit of title deeds can be created only in the towns of Kolkata, Chennai or Mumbai or any other town or city which has been so notified by the government.[19]
  • Anomalous mortgage– Anomalous mortgage is a mortgage that does not fall within any of the five classes enumerated above. Anomalous mortgages take innumerable forms moulded either by custom or the caprice of the creditor – some are combinations of the simple form, others are customary mortgages prevalent in a particular district.[20]CONCLUSION-

A trend is observed among lenders in opting for stronger and more effective security.[21] This is because the more effective the security the lender has, the higher are the chances of the lender recovering his loan amounts. Further, in case of insolvency of company, the secured creditor is in a better position than an unsecured creditor, since he is able to recover the proceeds of the sale of the asset security it possesses. The other benefit of having a security is that, in cases where the security can be enforced outside the courts, the lenders get a slight leeway in controlling the affairs of the company. Further, the fear of losing a secured asset, which would impair the functioning of the borrower, makes the borrower more likely to repay the borrowed sum.[22] However, it is not only in the interest of the lenders to opt for secured transaction. Borrowers see it as an opportunity to get credit at cheaper rates, since the addition of collateral, usually ensures that loans are available at lower interest rates. Therefore, it is clear from the above discussion that a study of security interest has become increasingly important in today’s world, making its complete understanding a must for effective functioning of related sectors.

[1] S. 2(zf), The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest, 2002

[2] Gerard McCormack, Secured Credit under English and American Law, Cambridge University Press

[3] Article 1(37), Uniform Commercial Code

[4] Sir Dinshaw Fardunji Mulla, The Transfer of Property Act, Lexis Nexis Butterworths (G. C. Bharuka ed., 2006)

[5] (1871) 6 Mad. H.C. 71

[6]Supra Note 4

[7] S. 3(26), General Clauses Act, 1897

[8] Supra note 10

[9] S. 2(6), Registration Act, 1908

[10] Sir Dinshaw Fardunji Mulla, The Transfer of Property Act, Lexis Nexis Butterworths (G. C. Bharuka ed., 2006)

[11] Ibid.

[12] Ibid.

[13] Ibid.

[14] Rashbehary Ghose, Law of Mortgage, Kamal Law House  (S. P. Sengupta ed., 2006)

[15] Ibid.

[16] Ibid.

[17] Ibid.

[18] Ibid.

[19] Ibid.

[20] Ibid.

[21] Gerard McCormack, Secured Credit under English and American Law, Cambridge University Press

[22]Ibid.

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