The following question of seminal importance was referred to a three-Judge Bench of the Supreme Court in Syndicate Bank v. APIIC, (2021) 3 SCC 736 : (SCC p. 738, para 1)
“Whether a property can be equitably mortgaged by depositing documents which may not be title deeds or registered document of title.”
The Supreme Court did not feel inclined to decide this question since it could decide the case on a narrower issue, and the mortgage of the allotment letter in the facts of that case was enforced on the principle of estoppel.
Had the Supreme Court gone into the above said question it would have found support in Hill Properties Ltd. v. Union Bank of India1, wherein the right of ownership of a flat was purchased by R-5 therein by becoming a shareholder of the housing company which was providing the flat, to the extent of the value of the flat. The share certificate by virtue of which R-5 was allotted the flat was pledged with the Bank to create a mortgage, in the absence of any registered conveyance of the flat in question : facts which are almost identical to the facts of Syndicate Bank case. In Hill Properties case it was held that what the said share certificate, which is the equivalent of an allotment letter, creates a “species of property” or “species of interest” which can validly be mortgaged by deposit of such document with the Bank. The Supreme Court in Hill Properties case followed Himmatlal Shah2, in holding that this “species of property” or “species of interest” in the flat, is freely transferable/alienable i.e. can be sold, gifted, bequeathed, inherited, mortgaged, etc. It was held that this “species of property” includes both an independent right over the flat itself, and an undivided interest over the common areas and facilities (see paras 12, 13, 15 and 16 of Hill Properties).
The abovesaid question formulated by the Supreme Court involves several legal aspects which require consideration, which, it is respectfully submitted, involve a number of propositions which are required to be demonstrated and established. These are as follows:
(2) Nemo dat quod non habet i.e. no one can give what he does not have : no one can transfer a property right or interest in property that he does not have, is one of the bedrock principles of Property Law. The principle of nemo dat quod non habet finds statutory recognition, for instance in Sections 7, 8 and 48 TPA.
(3) If one can only transfer property which one has, then it follows that a person who has merely an allotment letter (or similar document) in respect of some immovable property but which is not a registered document of title, must hold some kind of proprietary interest, some “species of interest” in the immovable property concerned, so as to be in a position to create a mortgage in respect thereof. This is true as any kind of mortgage must necessarily involve a “transfer of an interest in immovable property”.
(4) Thus, it is only if the holder of the allotment letter or similar document (not being a registered instrument of title) has some interest in the immovable property that he would be in a position to transfer some interest in the immovable property so as to create a mortgage.
(5) Normally an allotment letter is equivalent to or is accompanied by a contract for sale of immovable property i.e. a contract that a sale of such property shall take place on terms settled between the parties.
(6) Hence, the first question that arises is : What is the nature of interest in immovable property that the holder of an allotment letter or contract for sale in respect thereof holds? It will be demonstrated that an allotment letter or contract for sale creates a constructive trust in respect of the immovable property which is the subject-matter of the contract for sale, with the seller as constructive trustee holding the legal title for the benefit of the buyer : with the buyer as the beneficiary or cestui que trust of such constructive trust which arises by operation of law. That is to say, the buyer under a contract for sale holds an equitable estate in the immovable property in question which mirrors the legal estate held by the seller. This equitable estate subsists so long as the contract for sale in question remains specifically enforceable. Once a proper sale deed is registered in accordance with law, and only then, the legal and equitable estates merge and stand transferred to the buyer absolutely, and the buyer becomes the holder of the full legal estate of the seller in the immovable property concerned.
(7) The legal proposition that a buyer under a contract for sale (not being a registered instrument of title) holds an equitable estate in the immovable property which is the subject-matter of the contract for sale, is not free from controversy, as there are conflicting judgments of the Supreme Court on this issue.
(8) To establish this proposition, it is necessary to bring out clearly the true nature and hallmarks of property from relevant statutory provisions and case law i.e. What is unique to proprietary relationships which distinguishes them from all other kinds of legal relationships? Once these unique hallmarks of proprietary character have been demonstrated, the next question that arises is : Do the rights in respect of immovable property created by a contract for sale in respect thereof, exhibit these unique hallmarks of proprietary relationships, so as to qualify as being proprietary rights?
(9) It will be demonstrated that there are two kinds of property : legal estates and interests, and, equitable estates and interests. Legal estates are unique in that they exhibit a complete or total in rem character without exception i.e. they bind the whole world or third parties or subsequent transferees without exception regardless of notice, knowledge or consent. There are no exceptions whatsoever to the binding effect and the in rem nature of legal property rights. Equitable estates mirror legal estates, but exhibit a near complete in rem character i.e. with an exception : equitable estates bind the whole world or third parties or subsequent transferees except bona fide transferees for consideration without notice of the prior equitable proprietary interests.
(10) Normally and in most circumstances equitable estates exist only in tandem with the legal estate which they mirror, and this is almost always coterminous with the existence of a trust which is the archetypical splitting of a proprietary interest into a legal estate held by the trustee, and, the beneficial interest thereunder i.e. the equitable estate held by the cestui que trust or beneficiary of the trust. The trust could be an express trust created vide a trust deed, or the trust could arise by operation of law in situations in which the law (vide statutory provisions or case law) recognises the creation and subsistence of such trusts, called resulting and constructive trusts.
(11) It will be demonstrated through an extensive survey of case law and statutory provisions that the “species of interest” held by a buyer under a contract for sale (not amounting to a registered instrument of title) exhibits this near total in rem character which is the hallmark of equitable interests in property. That, thus the buyer under a contract for sale holds not merely contractual rights with respect to the immovable property which is the subject-matter of the contract for sale, but also holds an equitable estate therein which exhibits the required near total in rem proprietary character of equitable estates and interests in property.
(12) The equitable estate under a contract for sale is a manifestation of the equitable principle that equity deems as done that which ought to have been done. Such equitable estate by providing a mortgageable interest for raising funds through mortgage loans, provides a critical via media to pull oneself up by one’s own bootstraps as it were, to finance the capital starved vast majority of the populace of this Nation : those who do not already own enough property to be able to raise the funds they require to build homes for young families and finance new businesses.
(13) It will also be demonstrated that the result that the buyer under a contract for sale holds an equitable estate in the immovable property concerned, is equally bootstrapped with significant statutory safeguards to ensure that the regime of registration and stamp duty is not undermined in any way. This becomes evident when the entire regime of Property Law in India is examined as a whole i.e. when related provisions of TPA are read with the relevant provisions of the remaining Property Law statutes such as the Trusts Act, 1882, the Specific Relief Act, 1963, the Registration Act, 1908 and the Central and State Stamp Acts. These safeguards are based on the core principles of equity : he who seeks equity must do equity, and he who seeks equity must come to the court with clean hands. It will be demonstrated that the courts have sufficient power and discretion to refuse to extend the benefit of the equitable estate under a contract for sale to unscrupulous persons who seek to evade the regime of registration and stamp duty.
(14) The next question that arises is : Whether the equitable estate so held by a buyer under a contract for sale is transferable so that an interest can be transferred therefrom to the mortgagee to create a mortgage. It will be demonstrated that the interest under a contract for sale being freely transferable subject only to the terms of the contract itself, an interest can certainly be transferred from the equitable estate held by the buyer under the contract for sale, to the mortgagee to create a mortgage of the equitable estate.
(15) The next issue that arises is : What is the exact nature of the mortgage that is created when the buyer under a contract for sale deposits the contract for sale itself or allotment letter with the mortgagee?
(16) Before this question can be answered it is respectfully submitted that this issue is bedevilled by much confusion in the terminology that is used. It will be demonstrated that the ordinary usage of the term “equitable mortgage” in legal and financial parlance in modern day India is erroneous as these words are used to describe even the case when registered documents of title i.e. documents evidencing legal estates in property, are deposited with the mortgagee. This error seems to be an error of history which continues from the legal regime which subsisted in British India prior to the enactment of TPA in 1882.
(17) Prior to the enactment of TPA, like in England at that time, in pre-TPA British India the normal and prevalent manner in which mortgages were entered into was that at law the mortgagor transferred absolutely the legal title of the immovable property which was to serve as the security interest to the mortgagee, with a right of reconveyance to the mortgagor upon repayment of the borrowed amount with interest by a certain date. Thus, at law the mortgagor retained only a limited right to recover his legal title upon repayment. However, in equity the mortgagor was still considered the owner of immovable property, though subject to the mortgage. This continued ownership of immovable property by the mortgagor in equity was recognised as an equitable interest in the immovable property concerned and was known as the “equity of redemption”, despite the legal title having been transferred to the mortgagee. Thus, the equity of redemption was an equitable estate in the mortgaged property. Thus, for instance if a subsequent transferee purchased the legal title of the mortgaged property from the mortgagee (the mortgagee holding such title absolutely at law) without notice of the mortgagor’s equity of redemption and for good consideration, the equitable estate of the mortgagor would stand extinguished.
(18) It is for this reason that the interest in the immovable property that was retained by the mortgagor in England at that time and pre-TPA British India was called the “equity of redemption”, because that is exactly what it was : a proprietary interest but only in equity which exhibited a near total in rem character, in that it bound the whole world or third parties, but with the significant exception of subsequent transferees of the mortgaged property for good consideration without notice of the mortgagor’s equity of redemption. Thus, the equity of redemption, like all equitable estates was defeasible by such transferees.
(19) In pre-TPA British India and in England at that time, mortgages could be created in equity as well.3 This would be particularly so if the mortgagor did not want to transfer the legal estate absolutely to the mortgagee, but yet wanted to take out a mortgage loan. Mortgages so created in equity were correctly called “equitable mortgages” and were often accompanied by the deposit of the registered documents of title with the mortgagee. This was done as a precaution, in order to prevent a transfer of the legal estate by the mortgagor to the detriment of the mortgagee. Thus, mortgages in equity accompanied by deposit of documents of title with the mortgagee became quite prevalent in British India and came to be known by the moniker of “equitable mortgages”. Since such mortgages truly were only mortgages in equity, even though documents of legal title may have been deposited with the mortgagee, it was correct to call them “equitable mortgages”.
(20) Upon the enactment of the TPA in 1882 (alongwith the Contract Act, 1872, the Specific Relief Act, 1877, the Trusts Act, 1882 and the Easements Act, 1882, and Registration Acts and Stamp Acts of various years already being in existence) the new regime of Property Law in British India became complete.
(21) One of the major innovations ushered in by TPA was that so long as the technical requirements specified in Section 59 TPA for the creation of mortgages were satisfied, in all mortgages so created, the mortgagor retains a legal estate now correctly called the “right of redemption” and the mortgagee obtains a legal estate : an “interest in specific immovable property” called the “mortgagee’s interest”. After the enactment of TPA it is no longer necessary for the mortgagor to transfer the legal title absolutely to the mortgagee to create a valid mortgage at law.4
(22) Section 60 TPA explains the nature and the contours of the right of redemption of the mortgagor in all kinds of mortgages defined in Section 58 TPA, and provides that the right of redemption can only be extinguished in two cases : either by the act of the mortgagor and mortgagee, or, by a decree of court. Thus, the right of redemption of the mortgagor can no longer be unilaterally extinguished in the same way as the equity of redemption could be extinguished by a subsequent transfer of the mortgaged property from the mortgagee for consideration, where the subsequent transferee could show that he had no notice of the prior mortgage or equity of redemption (see para 18, above).
(23) The right of redemption of the mortgagor, conferred for the first time by the TPA is a full-fledged legal estate which exhibits the total in rem nature of legal estates and binds the whole world or third parties without exception : no number of subsequent transfers of the mortgaged property can extinguish the right of redemption, regardless of the notice, knowledge or consent of the subsequent transferees. So long as the right of redemption is not extinguished by an act of the mortgagor and mortgagee, or, by a decree of court, every subsequent transferee would be bound by the mortgagor’s right of redemption without exception.
(24) Most crucially, the TPA vide Section 58(f) created the legal estate of “mortgage by deposit of title deeds” when the mortgage was created by the deposit of registered instruments of title with the mortgagee in a notified town. Section 96 TPA clarifies that a “mortgage by deposit of title deeds” operates exactly as a simple mortgage defined in Section 58(b) TPA, thus making it amply clear that a “mortgage by deposit of title deeds” operates exactly like all other mortgages at law specified in Section 58 TPA, and that such mortgages no longer take effect only in equity, which was the case in the pre-TPA era.
(25) It will thus be demonstrated that after the coming into effect of TPA it is erroneous to refer to a mortgage created by deposit of registered instruments of title i.e. documents evidencing legal estates in property, with the mortgagee in a notified town, as an “equitable mortgage”, as it is no longer a mortgage only in equity, but creates full-fledged legal estates both in the mortgagor and mortgagee which display total or complete in rem character to bind the whole world or third parties without exception. Further, that it is equally erroneous to refer to the “right of redemption” (a legal estate) which is retained by the mortgagor under a mortgage by deposit of title deeds or any other mortgage properly created in terms of TPA, as the “equity of redemption”.
(26) Thus, the deposit of registered instruments of title i.e. documents evidencing legal estates in property, creates a legal mortgage called “mortgage by deposit of title deeds”. However, what the buyer under an allotment letter or contract for sale holds is an equitable estate and not a legal estate (see paras 6 to 11, above). Applying the principle of nemo dat quod non habet i.e. that no one can transfer a property right or interest in property that he does not have, the holder of an equitable estate i.e. the buyer under the contract for sale or allotment letter, can at best transfer an equitable estate.
(27) Thus, it will be demonstrated that when the buyer under a contract for sale (not being a registered instrument of title) deposits the allotment letter or contract for sale with the mortgagee in a notified town, he does indeed create an “equitable mortgage”, since only a mortgage in equity can be created as the transferor holds only an equitable estate : nemo dat quod non habet.
(28) Thus, it is respectfully submitted, the answer to the question formulated by the Court in Syndicate Bank case5 could be as follows : that immovable property can be equitably mortgaged by depositing documents which may not be title deeds or registered documents of title, since the buyer under a contract for sale or allotment letter holds only an equitable estate which can be equitably mortgaged by deposit of the allotment letter or contract for sale with the mortgagee in a notified town.
— These propositions are proposed to be substantiated with statutory and case law analysis in several forthcoming papers in the SCC Journal Section.
*The article has been published with kind permission of SCC Online cited as (2021) 3 SCC J-25
† M.A. (Cantab). Associate Editor, Supreme Court Cases. Formerly Visiting Professor of Law at Dr RML National Law University, Lucknow from 2011-2016. The author taught Property Law I and Property Law II full time at RML National Law School for five academic years. The author is grateful to all his students of all the batches at RML National Law School for having provoked the inquiries that have led to this paper and to the forthcoming papers on the issues delineated in this paper. The author is deeply grateful to Prof. Balraj Chauhan, the Creator of many law schools, for his vision and foresight in having given the author full freedom to teach Property Law, to enable students to acquire a working practical understanding of this complex and extremely important area of law.
3 This legal position obtains currently in India and England as well : mortgages can be created in equity.
4 Even though the forms in which a conditional sale mortgage as defined in Section 58(c) TPA and an English mortgage as defined in Section 58(e) TPA are supposed to be created appear to suggest the pre-TPA formula of absolute conveyance of the legal title with right of reconveyance to create these mortgages, the so called absolute conveyance in both sub-sections is only ostensible in nature, and if the stipulated conditions are strictly satisfied, the mortgagor never parts with the absolute title in mortgages created under Section 58(c) or Section 58(e) TPA.