Mortgage Created By Deposit Of Title Deeds Prevails Over Equitable Mortgage Created By Deposit Of Agreement To Sell : Supreme Court

The Supreme Court has held that a mortgage created by the deposit of an unregistered agreement to sell will be subservient to a mortgage which was created by the deposit of title deeds.This is because an agreement of sale does not by itself create any interest in or charge on any property as per Section 54 of the Transfer of Property Act, 1882, as explained by the judgments in Suraj Lamps and Shakeel Ahmed v. Syed Akhlaq Hussain.The Court agreed that the deposit of an incomplete title deed can create a mortgage, which is 'equitable' in nature. However, such an 'equitable mortgage' will be inferior to a 'legal mortgage' created by the deposit of proper title deeds.A bench of Justices JB Pardiwala and R Mahadevan heard the case that arose from a mortgage dispute between the Cosmos Co-operative Bank Ltd. (Appellant) and the Central Bank of India (Respondent No.1). The Central Bank of India issued a loan in 1989 based on the deposit of agreement to sell the flat, and Cosmos Bank provided a loan in 1998 based on share certificate with respect to the flat.The primary legal issue was which bank had the first charge over the mortgaged property.The Debt Recovery Tribunal (DRT) initially ruled in favor of the Central Bank, holding that its mortgage was prior in time. The Debt Recovery Appellate Tribunal (DRAT) and the Bombay High Court upheld this decision prompting the Cosmos to appeal to the Supreme Court, challenging the validity of Central Bank's mortgage.Overturning the impugned findings, the judgment authored by Justice Pardiwala held that since the borrowers secured a loan from the Appellant by depositing the share certificate of the flats—equivalent to the deposit of title deeds—thereby creating a charge over the property, it constituted a legal mortgage. As a result, this mortgage took precedence over the loan granted by Respondent No.1, the Central Bank of India, which was based on an unregistered sale deed without the deposit of title deeds.Equitable mortgage will not bind third partiesAfter explaining the concept of 'equitable mortgage' and mortgage by deposit of title deeds as per Section 58(e) of the TP Act, the judgment stated the the equitable mortgage operates only in personem and will not bind other parties."where 'equitable mortgages' have been created based on deposit of part-deeds or documents purporting title or evincing intention of parties to create an interest, all such deposits will be a valid mortgage in equity and the charge that might have been created prior in time will assume priority over any subsequent charges or mortgagors. However, since such a mortgage is an 'equitable mortgage' any rights flowing from such mortgages are only of personal character and only rights in personam and as such will not operate against any strangers or subsequent incumbrancers unaware of such equitable mortgage.The Court referred to Section 78 of the TP Act, which says that if due to the negligence of a mortgagee, another person has been induced to advance money on the security of the mortgaged property, then the prior mortgage will be postponed to the subsequent mortgage.Here, the respondent advanced loan on the basis of an unregistered agreement to sell; no document of equitable mortgage was created and no public notice regarding it was issued."In such a scenario, the equitable charge of the respondent no. 1 bank herein is liable to be postponed to the charge created in favour of the appellant bank herein in terms of Section 78 of the Act, 1882, and the impugned order of the High Court is liable to be set-aside on this ground alone," the Court stated.Legal mortgage would defeat equitable mortgageThe judgment stated further :"We may clarify that deposit of part-deeds of title would not constitute a mortgage in terms of Section 58 sub-section (e) of the Act, 1882 unlike English Law, because under the latter such deposit is only an equitable mortgage and thus, the strict rigidities may not be imposed or insisted upon whereas in India mortgage by deposit of title deeds is a legal mortgage which in effect would defeat any equitable mortgage, and thus, the requirement to deposit all title deeds would have to mandatorily be required except those deeds which despite best of efforts of the mortgagee could not have been deposited or known to be outstanding."Explaining the difference between the equitable mortgage and legal mortgage and why the legal mortgage prevails over the equitable mortgage, the Court observed: “The very basis for creation of an 'equitable mortgage' is the intention of parties alone, and as such any action or remedy can be directed only against the parties so involved. This is because, unlike a legal mortgage where a 'charge' is created directly on the property itself and the title or any proprietary interest therein is transferred to the lender thereby becoming a right enforceable in rem in respect to the property, in case of an 'equitable mortgage' no such charge is said to have been...

Mortgage Created By Deposit Of Title Deeds Prevails Over Equitable Mortgage Created By Deposit Of Agreement To Sell : Supreme Court

Yash Mittal

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