Report No. 70
54.51. Rents and profits.-
Next is the question of profits. The mortgagor in a usufructuary mortgage authorises the mortgagee to receive the rents and profits1-
(a) in lieu of interest, or
(b) in payment of the mortgage-money, or
(c) party in lieu of interest,2 or
(d) partly in payment of the mortgage money.
It is not, therefore, necessary for the validity of a usufructuary mortgage that some amount should remain outstanding as principal. Where, however, the rents and profits are not to be taken in lieu of interest or principal, the mortgage is not a usufructuary one.3
1. AIR 1938 All 565 (566).
2. The word now is "or" instead of "and".
3. AIR 1923 Mad 71 (72) (DB).
The right to retain possession until the debt is repaid is of the essence of the usufructuary mortgage. A mere provision for adjustment of the profits towards the payment of the early interest, with the balance if any to be adjusted towards part payment of the principal, does not constitute a usufructuary mortgage, if there is no stipulation in terms that the mortgagee is to remain in possession until payment of the mortgage money.1 Thus, the mortgagor must part with one of the incidents of ownership, namely, the right to possession.2
The kind of usufructuary mortgage in which the profits are enjoyed by the creditor wholly in lieu of interest is the most common one. The borrower practically says to the creditor, "you lent the money and I the land; if either of us wants that which he has lent, he shall restore that which was lent to him."3
This closely resembles what is known as a Welsh mortgage in its incidents.4
1. Hikmatulla v. Imam Ali, 1890 ILR 12 All 203.
2. Chose Law of Mortgage in India, (1902), p. 127.
3. Vanneri v. Patanattia, (1865) 2 Mad HCR 382.
4. Ghose Law of Mortgage in India, (1902), p. 127.
54.53. Personal liability.-
In an usufructuary mortgage where the mortgagee takes possession of the property on the undertaking that he shall repay himself out of the rents and profits, the mortgagor undertakes no personal liability. This was laid down long before the Act, in 1850.1 Of, course, there is nothing to prevent the insertion of a covenant for personal liability. Such covenants, however, do create complications when the question of proper remedy arises. We shall advert to this aspect later.
1. Jhanne Bibi, (Sadar Diwani) of 1850 (Cal) 44, cited in Ghose Law of Mortgage in India, (1902), p. 127.
54.54. Zuri peshgee leases.-
Commentaries on the Act, while discussing usufructuary mortgages, often deal with "Zuri peshgee" mortgages. Peshgee of course, means advance of money or payment before hand or on account, and the word "zar" or "zur" originally meant gold money. The compound word now means "payment in advance, a deposit or engagement to advance money, a bonus or premium of a lease, and an advance of money upon the farm of the revenue; money lent on a usufructuary mortgage.1
It would appear that the practice of entering into peshgee leases is attributable to the desire to evade the laws against usury, or the religious mandates against the charging of interest. In England also, such transactions were resorted to, for avoiding usury.2 Although the law against usury has now been revised and does not survive in the rigid form in which it was previously in existence, yet a problem of the nature mentioned above does arise.
However, it is not always easy to distinguish between a pure lease and a mortgage masquerading as a lease. Here again, as in the case of a mortgage by conditional sale, the intention of the parties must be looked into. Once there is a debt with the security of land for its repayment, then the arrangement is a mortgage, by whatever name the transaction is called. It would not be practicable to enumerate the various tests applied in practice, since these tests would neither be exhaustive nor could they be conclusive.
Every case of lease with advance of money is not necessarily a mortgage. It must arise out of the relationship of debtor and creditor and the transaction must be intended to constitute a security. This problem is not peculiar to transactions in India, because it would appear from a very early article in the Harvard Law Review3 that the problem arose in the last century in the United States also, the general view being that the key to the situation may be found in the economic relations of the parties.
If the owner of the land is in the weaker situation as between the two, the transaction will be a mortgage; but if the cultivation of land promises to be a better investment, the capitalist will naturally prefer this form of investment.
1. Wilson Glossary, p. 565, col. 1.
2. Ghose Law of Mortgage in India, (1902), p. 131.
3. (1896), Vol. 2, Harvard Law Review 36.
54.55. Implied object.-
The words "or expressly or by implication binds himself to deliver possession" which occur in section 58(d), were inserted by the amending Act of 1929 to negative the view that the absence of actual delivery of possession, the mortgage was not a usufructuary one. If the mortgagee, as so defined, does not get possession from the mortgagor he may sue for possession,1 or for damages for breach of contract to give possession,2 or for recovery of the mor tgage-money.3
Of course, the mortgagee is not obliged to take possession. If he chooses to forego the benefit, it would have no effect on the recovery of the debt as between the mortgagee and the mortgagor. But when he permits the mortgagor to receive the rents and profits, he exposes himself to the risk of claims of the subsequent incumbrances.
1. AIR 1942 Oudh 172 (174).
2. AIR 1964 Mad 201 (202).
3. Section 68(d), AIR 1919 Mad 1164 (1165).
54.56. Effect of covenant to pay.-
Section 58(d) is silent on the question whether a covenant to pay prevents a mortgage from being a usufructuary mortgage. Because of this want of clear provision in the section, there has arisen a controversy on the question whether the existence of a covenant to pay with or without an express power to sell, changes the character of a usufructuary mortgage so as to enable the mortgagee to sue for sale. It seems to be the view of the Allahabad,1 Bombay2 and Lahore3 High Courts that the existence of such a covenant does not change the character of a mortgage.
On the other hand, the view taken in Assam,4 Calcutta5 and Madras6-7 is that such a covenant renders the mortgage an anomalous one. The controversy is of practical importance, because when the transaction is a usufructuary mortgage, then section 67 does not confer a right on the mortgagee to bring the property to sale. Mulla8 has taken the view that if the covenant does not import a right of sale, even then a personal covenant makes it an anomalous mortgage, and that if it imports a right of sale, it would be an anomalous mortgage as per amending Act of 1929.
1. Kanhaiya Prasad v. Hemidan, AIR 1938 All 418 (420, 421) (FB).
2. Krishna v. Hari, (1908) 10 Born LR 615 (617).
3. Sheikh Mohammad Abdullah v. Mohammad Yasin, AIR 1933 Lab 151.
4. Rahimuddin v. Nayan Chand, AIR 1950 Assam 18.
5. Akbar Ali v. Mafijuddin, AIR 1942 Cal 55 (58).
6. Ramrakhamal v. Subaratnam, AIR 1953 Mad 13 (14).
7. Kangaiya Gurukal v. Kalimuthu Annavi, 1904 ILR 27 Mad 526 (FB).
8. Mulla, (1973), p. 387.
54.57. Recommendation as to section 58(d).-
It appears to us that whatever be the theoretical position, it is, in the scheme of the classification of mortgages as given in section 58, desirable that this controversy should be resolved.
54.58. Conflict as to sale.-
A perusal of the judicial decisions would seem to show that there is a straight and direct conflict between the two views, which would now require legislative action. On the Allahabad, Bombay and Lahore view, the mere fact that there is a personal covenant does not create a right of sale on mere failure to pay the mortgage money. On the Assam, Calcutta and Madras view, where a mortgage is a usufructuary mortgage and has a covenant to pay the mortgage debt, then the mortgagee has a right to sue for sale.
The Calcutta view is based on the reasoning that the mortgage would no longer be a usufructuary mortgage if there is a personal covenant to pay. The Calcutta case itself was under the Bengal Tenancy Act, 1885, section 26G(5), but it involved the construction of section 58(d) of the Transfer of Property Act. The Madras view has been consistently to the effect that if there is a personal covenant, the mortgagee has a right to sue for sale, in the case of a usufructuary mortgage. But none of the Madras rulings, with respect, assigns any reasons for the conclusion at which the High Court arrived.
In the Madras Full Bench case,1 it was held that where there was a promise by the mortgagor to pay on the date named, the mortgagee was entitled to a decree of mortgage-money under section 68(a), and to a decree for sale under section 67. This was a usufructuary mortgage, and the suit was for recovery of the amount due both personally from the mortgagor and by sale of the mortgaged property. Noting that the mortgage was a combination of a simple and usufructuary mortgage, the court held that the right to cause the mortgaged property to be sold in default of payment was implied within the meaning of section 58(b).
As late as 1962,2 this view has been followed in Madras.
1. Kangaiya Gurukal v. Kalimuthu Annavi, 1904 ILR 27 Mad 526 (FB) (Benson, Bhashyam Iyengar, Russell, JJ.).
2. AIR 1962 Mad 308.
54.59. Need for amendment.-
Since the Act does not contemplate the existence of a mortgage which falls within more than one category, it is, so far as possible, desirable that the remedies of possession and sale should be clearly dealt with. Practical considerations seem to justify an amendment to the Act-say, by adding an Explanation-that where the mortgagor binds himself personally to pay the mortgage money,1 and also delivers possession or expressly or by implication binds himself to deliver possession of the mortgage property to the mortgagee and authorities the mortgagee to retain such possession as provided in section 58(d), the mortgage should be deemed to be an anomalous mortgage.
It will then follow that if a right of sale is expressly given, that remedy will be available to the usufructuary mortgagee, but not otherwise.2
We recommend that the section should be so amended.
1. Compare the language of section 58(a)-Simple Mortgage.
2. Section 67.
54.60. Section 53(e), English mortgage.-
The fourth class of mortgages is defined in the Act in section 58(e), which deals with an English mortgage, where the mortgagor binds himself to repay the mortgage money on certain date, and transfers the mortgaged property absolutely to the mortgagee, but subject to a proviso that he will re-transfer it to the mortgagor upon payment of the mortgage-money as agreed, the transaction is called an English mortgage.
It has been pointed out that the type of mortgage usually prevalent in England does not, speaking ordinarily, contain a personal covenant and in that sense the expression "English" in this definition is not quite appropriate. The legislature seems to have employed this expression on the basis that transfer of the property to the mortgagee with the specified proviso is of the essence of a mortgage as understood in England, at least before the Law of Property Act, 1925.
Grant of an estate in fee with the condition that if the mortgagor shall repay the mortgagee the specified amount on a certain date, then the mortgagee shall reconvey the estate to the mortgagor, was the usual form of a mortgage deed in England. It is this position that is reflected, to some extent, in the definition of "English mortgage".