Difference Between Mortgage By Conditional Sale And Sale With An Option To Repurchase

The difference between Mortgage by Conditional Sale and Sale with option to repurchase continues to be a vexed question despite being answered by several Courts. Both the deeds are seldom expressed in identical terms. The most rudimentary exercise is perusal of the document in its entirety, analysis of the same where the language used is express and clear. However considering the old nature of documents executed by rustics, scribed by men who lacked the legal acumen which invariably has resulted in defective drafting. Due to the absence of precision and legal sharpness, such documents are usually shredded with ambiguities and obscurities, thereby making the need to further probe and examine the extrinsic facts and circumstances of the case.

Definition as per Section 58(c) of Transfer of Property Act:

Mortgage by conditional sale:

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.^[1]

Thus in a mortgage by conditional sale the mortgagor sells the mortgaged property to the mortgagee on a condition that if the mortgagor fails to pay the mortgage money on a certain date then the sale shall become absolute. But, if the payment is made by the terms agreed, then the sale shall become void. This is a type of mortgage where there is an ostensible sale which gets converted into an absolute sale if the ostensible seller is unable to repay the loan. Ostensible Sale is a scenario where the property appears to be sold outright, but it is fundamentally a security for the loan.

Amendment Act 20 of 1929:

An individual who borrows money from another, executes an ostensible Sale Deed with a clause relating to reconveyance, upon payment of the borrowed amount or an eventuality where the Sale becomes absolute in case of default in payment of the borrowed amount. The document in essence is a Mortgage Deed as the intention of the parties is that, it is to be treated as a mortgage. Such deeds are essentially Mortgage Deed couched in the form of Sale Deed, with certain conditions attached, falls within the ambit of Section 58(c) of the Transfer of Property Act, 1882. A major amendment to Section 58(c) was brought forth by way of a proviso to the said section during the year 1929. As per the said amendment, if the sale and agreement to repurchase are embodied in separate documents, then the transaction cannot be a mortgage irrespective of whether both the documents are, contemporaneously executed or not.

As per the said amendment, only when the agreement of reconveyance forms part of the Mortgage Deed, will the transaction be treated as a mortgage, otherwise not. But the converse does not hold good, that is, the mere fact that there is only one document does not necessarily mean that it must be a mortgage and cannot be a sale. Under the proviso to Section 58(c) inserted by the legislature in 1929, only when the agreement of reconveyance is contained in the deed of ostensible sale, is the transaction treated as a mortgage.^[2]

Several owners who are under financial pressure fall into a trap when the two documents are obtained separately by the purchaser. In that event, because of the proviso to Section 58(c), there is no mortgage in the eye of the Law and hence no right of redemption. There is only a right to obtain a reconveyance. The proviso was introduced in 1929 into the statute and has been a source of considerable injustice to unscrupulous and unwary mortgagors.

Case Law Analysis:

In Vithal Tukaram Kadam & Anr., Vs. Vamanrao Sawalaram Bhosale & Ors.,^[3] it was held that an ostensible sale with transfer of possession and ownership, but containing a clause for reconveyance in accordance with Section 58(c) of the Act, will clothe the agreement as a mortgage by conditional sale. The execution of a separate agreement for reconveyance, either contemporaneously or subsequently, shall militate against the agreement being mortgage by conditional sale. There must exist a debtor and creditor relationship. The valuation of the property and the transaction value along with the duration of time for reconveyance are important considerations to decide the nature of the agreement. There will have to be a cumulative consideration of these factors along with the recitals in the agreement, intention of the parties, coupled with other attendant circumstances, considered in a holistic manner.

The Hon'ble Supreme Court in Srinivasaiah Vs. H.R.Channabasappa & Ors.,^[4] held that the document in that case was mortgage with conditional sale as defined under Section 58 (c) of the T.P. Act for the following reasons:

1. The plaintiff was the owner of the suit land.

2. Second, the parties concluded the transaction in question by executing one document (Ex.P-1).

3. Third, the document (Ex.P-1) is styled as a "Deed of Conditional Sale"

4. Fourth, it contains a condition that defendant No.1 will be allowed to remain in possession of the suit property for 5 years and enjoy the fruits of the land and that during this period, the plaintiff will be entitled to get the suit property re-conveyed in his name on paying Rs.1500/- by getting the sale deed executed in his name and obtain possession of the suit land from defendant No.1.

5. Fifth, the plaintiff offered to pay Rs.1500/- to defendant No.1 with a request to resale the land to him.

In a “mortgage by conditional sale”, the transfer is made as a security to a loan taken by the mortgagor-owner; whereas in a “sale with a condition to repurchase”, the sale is made by the vendor-owner reserving with himself a right to repurchase it within a stipulated time. A sale with a condition of retransfer is not a mortgage since the relationship of debtor and creditor does not exist and there is no debt for which the transfer is made as a security. Whether the document is a “mortgage by conditional sale” or “sale with a condition to repurchase” is to be ascertained from the intention of the parties. It is trite law that the intention of the parties should be gathered from the recitals of the document itself.^[5]

In Nana Tukaram Jaikar Vs. Sonabai Madhav Saindate^[6], the Court held that in a sale coupled with an agreement to reconvey there was no relation of debtor and creditor nor was the price charged upon the property conveyed, but the sale was subject to an obligation to retransfer the property within the period specified. Hence, the deed indicated that it was a sale with a condition to repurchase and not a mortgage with condition to sell.

The Hon'ble Madras High Court encountered a similar issue to determine whether a document which was titled as 'conditional sale' was a Mortgage by Conditional Sale or Sale Deed with condition to repurchase in the case of Balasubramaniyam Vs. Paneer Selvam & Ors.^[7] The Court elaborately dealt with the landmark judgements in this regard and concluded that the document in dispute was an ostensible sale with a condition to repurchase upon payment of the loan amount with all conditions incorporated in the same document, thereby makes it clearly fall within the definition of section 58(c). Further the transaction was seen as a security for the debt and relationship of creditor-debtor existed between the parties.

Stark Distinction between the Mortgage by Conditional Sale - Sale with an option to repurchase:

1. The distinction between the Mortgage by Conditional Sale and Sale is that in the former there exists a relationship of debtor and creditor, while in the latter there is no such relationship.^[8]

2. In conditional sale the transfer is seen as a security for the debt, while in a regular Sale there is no such postulate.

3. The clause relating to repurchase should form part of the Mortgage Deed and any separate execution of repurchase agreement shall militate against the agreement being mortgage by conditional sale. While such a prerequisite does not apply for a Sale Deed with an option to repurchase, as the name itself suggests that the option to repurchase shall form part of the very document.

4. In the former the actual value of the property is substantially high than the sale consideration stated in the document. The amount quoted as sale consideration is essentially the amount borrowed which includes principal plus interest, which would inevitably be much less than the actual sale price of the property. While the amount stated as sale consideration in the latter would be the actual reflection of the market value of the property.

5. Words such as 'repay', 'return', 'subject to condition' and such other terms, would normally suggest that the sale is not a real sale but an ostensible one.^[9] The language used is indicative of the intention of the parties that the transaction is one of mortgage. While the latter relates to a regular sale deed with a clause which pertains to 'repurchase'.

6. In the former, the debt subsists and the right of redemption continues, whereas in the latter, ownership is fully transferred with only a contractual right to repurchase.^[10]

The Legislature has made a clear cut classification and excluded transactions embodied in more than one document from the category of mortgages. Therefore as per the amendment, in order to claim benefit under Section 58(c) the mortgage necessarily has to be executed as a single document comprising of all necessary concomitants as prescribed under the section and the repurchase clause should form part of the Mortgage deed which is a crucial determining factor.

This amendment jeopardizes the right of innocent mortgagors who have executed two documents - one a mortgage and another an agreement containing a clause relating to repurchase, without knowing its legal repercussions. Due to their urge to satisfy their financial needs, the borrowers enter into such agreements. Infact, in order to protect the rights of such mortgagors, the West Bengal legislature incorporated Section 37A into the Bengal Money Lenders Act which has effectively dropped the proviso to Section 58(c). Section 37A reads as follows: "in the case of any loan secured by a mortgage and the mortgagor ostensibly sells the mortgaged property on any of the conditions specified in sub clause (c) of Section 58 of the Transfer of Property Act, then, notwithstanding anything contained in the proviso to Section 58(c), the transaction shall always be deemed to be a mortgage by conditional sale, even if the transaction is effected by two separate deeds" viz., the ostensible sale deed and the agreement of reconveyance.

In the case of Atul Chandra Das Vs. Rabindranath Bhattacharya^[11] the issue of inconsistency between State Act (Section 37A of Bengal Money Lenders Act) and Central Act (Section 58(c) of Transfer of Property) was raised. However the Apex Court opined that in view of the assent given by the President for incorporation of Section 37A, the matter fell under Article 254(2) of the Constitution of India. Therefore, despite the inconsistency, it was held that Section 37A of the State Act will prevail over Section 58(c) in the State of West Bengal.

It is the intention of the parties that shall be the decisive factor in deciding whether a document falls within the ambit of Section 58(c) or not. There is no strait jacket formula, but the above aspects should be considered in tune with the imponderable variables that apply to the facts of each case. The intention of the parties shall be deduced from the documents or in case of ambiguous documents then from the surrounding facts and circumstances of the case. Oral evidence of intention is not admissible in interpreting the covenants of the deed but evidence to explain or even to contradict the recitals as distinguished from the terms of the documents may ofcourse be given. Evidence of contemporaneous conduct is always admissible as a surrounding circumstance, but evidence as to subsequent conduct of the parties is inadmissible.

1. Inserted by Act 20 of 1929 ↑

2. Chunchun Jha Vs. Sheikh Ebadat Ali & Anr.,( 1954 AIR 345) ↑

3. 2017 Livelaw (SC) 840 ↑

4. 2017 5 SCALE 306 ↑

5. Dharmaji Shankar Shinde Vs. Rajaram Sripad Joshi (2019) 6 SCALE 682 ↑

6. AIR 1982 Bom 437 ↑

7. 2022 SCC Online Mad 9440 ↑

8. P.L. Bapuswami v. N. Pattay Gounder AIR 1966 SC 902 ↑

9. Vithal Tukaram Kadam Vs. Vamanrao Sawalaram Bhosale, 2017 INSC 721 ↑

10. Patel Hasanbhai Alibhai Aadambhai Vs. Patel Jayeshkumar Ishwarbhai & Ors., 2026 (GUJHC) 13084 ↑

11. 2019 INSC 463 ↑

    Author is an Advocate practicing at Madras High Court. Views are personal.