Report No. 178
2. Section 58(c) of the Transfer of Property Act, 1882 mortgage by conditional sale:
It has been brought to the notice of the Commission that in several cases, persons entering into a "mortgage by conditional sale" are put to serious problems. Under such a mortgage, the person who borrows money from another, under a mortgage , executes an ostensible sale deed and an agreement of reconveyance, but the intention of the parties is that it is to be treated as a mortgage.
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. 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 Sec.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.
In a mortgage it is obvious that the full consideration is never paid. But when, in law, the transaction when it is covered by two deeds is treated not as a mortgage but as a sale, the purchaser gets the property for half the price or even less and the original owner is unable to get back the property by way of redemption. The Commission proposes to examine and remedy the situation.
Under Section 58(c) of the Transfer of Property Act, it is stated as follows:
"Section 58(c): Mortgage by conditional sale: where the mortgager ostensibly sells the mortgage propert.-
on a condition that on default of payment of the mortgage 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 a mortgage by conditional sale and the mortgage, a mortgage 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."
As already stated, the proviso was introduced in 1929 into the statute and has been the source of considerable injustice to unwary mortgagors.
One would think that the best solution could be to straightaway drop the proviso. In fact, the West Bengal legislature incorporated Section 37A into the Bengal Money Lenders Act to say that "in the case of any loan secured by a mortgage and the mortgager 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.
But the question is whether there can be any other remedy to enable the original owner to get back his property.
Before going into the question, it is necessary to notice that in law, it does not follow that if the stipulation for reconveyance is embodied in the same document, the transfer is necessarily a mortgage (see Pandit Chunchun Jha v. Sheik Ebadat Ali AIR 1954 S.C. 345). The Supreme Court held that the party who claims the deed to be a mortgage, must discharge the burden by establishing that a mortgage was intended and not a sale. Thereafter, it would be open to the other side to show that it was intended to be a sale and not a mortgage.
But where the sale and reconveyance are embodied in separate documents, proviso to Section 58(c) states that the transaction cannot be a mortgage by conditional sale. Further, oral evidence would also remain 17 prohibited under Section 92 of the Evidence Act to show that the transaction was intended to be a mortgage by conditional sale.
We shall now consider what remedies can be provided by amendment of the Law.
Where the sale and reconveyance are contained in different documents, though the plea of mortgage is thus ruled out altogether, the original seller can get back the property by seeking specific performance of the reconveyance agreement if he complies with the conditions referred to in section 58(c) within the time stipulated. Such a case does not present any difficulty.
The difficulty arises only in a case where the original seller has not been able, may be for good reasons, to comply with the said conditions within the time stipulated. Does the principle that time is not the essence of the contract in the case of contracts relating to immoveable property have any bearing on this question?
Section 55 of the Contract Act states that "when a party to a contract promises to do a certain thing at or before a specified time, or certain things at or before specified times, and fails to do any such thing at or before the specified time, the contract, or so much of it as has not been performed, becomes voidable at the option of the promisee, if the intention of the parties was that time shall be of the essence of the contract."
True, so far as contracts of sale of immovable property are concerned it is settled by the decision of the Privy Council in Jamshedji v. Burjorji: AIR 1915 PC 83 that there is a presumption that time is not the essence of the contract. But, this is a rebuttable presumption and it is always open to a party to say that there were circumstances in existence at the time the contract which was entered into which make it clear that the intention of the parties was that time should be the essence of the contract.
Take a case of a contract of sale of immovable property where an owner has fixed up the marriage of his daughter and proposes to sell the property and use the consideration for the marriage expenditure and where the purchaser agrees to pay the consideration well before the date of marriage. In such a case, the said fact may be prima facie evidence that the date fixed for payment of consideration was the essence of the contract.
But the law, so far as contracts of reconveyance are concerned is different. It has been held by the Federal Court, following the English law, that in such contracts, the conditions stipulated for getting back the property are in the nature of a concession granted to the seller by the purchaser and that if the conditions are not performed within the time stipulated, the concession lapses. In other words, time is always the essence in contracts of reconveyance relating to immovable property (see Shanmugham Pillai v. Annalakshmi Ammal: AIR 1950 F.C. 38) and Caltex (India) Ltd. v. Bhagwan Devi (AIR 1969 S.C. 405) and Bismilla Begun v. Rehnitullah Khan (1998(2) SCC 226).
Therefore, the legal position is that where the sale and reconveyance are in separate documents and the original seller is not able to comply with the conditions specified in Section 58(c) for seeking reconveyance, the 'concession' lapses and the right to obtain reconveyance comes to an end. The principle that time stipulations are not normally the essence in contracts relating to immovable property, does not apply.
In the case of an ordinary agreement of sale (i.e. other than revonveyance agreements), the dates fixed for payment of consideration etc. are, in law, not the essence of the contract, the agreement continues to be in force, and therefore parties could issue notices making time essence of contract. It is only in cases where there is default even by the date so fixed under the notice that, the agreement will come to an end. But that is not the position in the case of agreements of reconveyance where the contract to reconvey simply lapses because of the default.
If, therefore, by default in conforming to the conditions, the contract for reconveyance itself ceases to exist, there is no question of seeking specific performance of such a contract of reconveyance nor any question of issuing a notice making time essence of the contract nor of filing a suit for specific performance within 3 years from the date of refusal to perform the contract or within three years of any stipulated date. Once the contract of reconveyance ceases to be in existence, the question of filing a suit within the time prescribed in Article 54 of the Limitation Act, 1963 for seeking 20 specific performance, does not, therefore, arise. (see Pattay Gounder v. P.L. Bapuswami)(AIR 1961 Mad 276).
It is these legal principles that have to be kept in mind before proposing any remedy other than dropping the proviso in Section 58(c).
First, we have to make a provision that the concession regarding reconveyance does not lapse due to non-performance of the conditions before the stipulated date or dates by the seller, where the sale and reconveyance are covered by separate documents. Next, we have to make a provision giving time to the seller to pay up or deposit in a court, the consideration, if need be, with interest from the date of default, to get back the property.
It is, therefore, proposed to add a further proviso in section 58(c) that where the sale and reconveyance are in separate documents, the default in complying with the conditions stipulated for reconveyance will not ipso facto put an end to the contract of reconveyance and that the right to seek reconveyance can still be exercised. It is also proposed to provide that if the consideration is paid back within three years from the date stipulated in the condition, together with interest on the amount of consideration at 12% per annum, computed from the date fixed for payment, till the date of payment, the seller could seek reconveyance.
The Commission is of the view that a second proviso be added below section 58(c) as follows:
"Provided further that where the condition is embodied in a document other than the one which effects or purports to effect the sale, the concession granted in favour of the seller by the purchaser for obtaining a re-conveyance of the property, shall be deemed to have not lapsed on account of non performance of the condition by the date stipulated, and if the seller pays to the buyer or deposits in a court, the consideration referred to in the sale-deed within three years of the date stipulated in the condition, together with interest at twelve percent. computed from the said date up to the date of payment or deposit, as the case may be, he shall be entitled to re-conveyance of the property."