Report No. 70
Liabilities of Mortgagee In Possession
74.1. Section 76-Introductory.-
The liabilities of a mortgagee in possession are set out in section 76 in nine clauses, of which the first four constitute positive obligations, the fifth constitutes a negative obligation not to commit waste, and the next four primarily pertain to matters of account. These liabilities have counterparts in some of the analogous provisions in the statute law of India. Thus, clause (a) has a counter part in section 15 of the Indian Trusts Act and section 158 of the Contract Act. Clause (g) has a counterpart in section 19 of the Trusts Act and in section 213 of the Contract Act. To some of the clauses (b), (d), (g) and (h), an exception is provided by section 77. We shall deal with the text of each clause separately.
74.2. Section 76(a).-
The case-law on clause (a) of section 76 reveals a certain amount of fluctuation of views on the question whether a mortgagee can create a lease whose term may extend beyond the duration of the mortgage and, if so, whether this is also the position in regard to agricultural land. Clause (a) provides that the mortgagee must manage the property as a person of ordinary prudence would manage it if it were his own. How far does this empower the creation of a lease which may extend beyond the duration of the mortgage? In our opinion, the true position in law is as follows:
(1) The general rule is that a person cannot confer a title better than he himself has. On this general rule, a limited owner would not be able to create an interest in the property which might enure beyond the termination of his own interest.
(2) In the case of a mortgage, however, section 76, clause (a), by expressly requiring a mortgagee to manage the property as a person of ordinary prudence would manage it if it were his own, impliedly creates an exception to the above rule. If the lease is of such a character and duration that a prudent owner of property would enter into it in the usual course of management of his own property, then the lease would be binding on the mortgagor, even though the mortgage has been redeemed.
(3) The fact that the land is non-agricultural does not necessarily make a difference. The key test is that of prudent owner of property. Where, in the circumstances, a lease of a house for a long period is prudent, it would be permissible.
74.3. Case law.-
It would be tedious to summarise here1 the various decisions of the Supreme Court and High Courts in this context. The important decision have been collected by Mulla and other writers.
The gist of those decisions, as properly understood, is as stated above. To some extent, obscurity or controversy on the subject has arisen because dicta from time to time pronounced by the Supreme Court or the High Courts are read divorced from the context, or because that is believed to be the general rule is applied in disregard of exceptional circumstances.
Widely framed propositions, such as, that a lease created by the mortgagee beyond the term of the mortgage will determine on redemption-sometimes relying on section 111(c), Transfer of Property Act-or that a mortgagor landlord is not bound to recognise a lease granted by the mortgagee beyond the limits of the obligation created by the mortgage, if read divorced from the context would give an incorrect idea of the total picture.
The statement of the position made by Mulla2 appears to be substantially in conformity with the judicial decisions, properly read. While it is unlikely that a prudent manager would create a lease for a period longer than the mortgage, yet if it can be shown in any given case that such a lease is prudent, it would bind the mortgagor even after redemption, and even though the lessee acquires thereunder rights of a permanent or quasi-permanent nature.
1. For selected cases, see Appendix to this chapter.
2. Mulla, (1973), pp. 558, 559.
74.4. Section 76(a)-Application to Agricultural land.-
Some cases1 hold that where the land is not agricultural, a tenancy created by the mortgagee does not survive the termination of the mortgagee's interest (unless agreed to by the mortgagor). On the other hand, the view has been taken2 that clause (a) extends not only to agricultural lands, but also to urban property.
1. Kamlakar v. Gulam, AIR 1963 Born 42.
2. Thakur Madhavji v. Meghaji, AIR Guj 37.
74.5. It was held in a Full Bench decision1 of the Allahabad High Court that the general rule, that a lease executed by a mortgagee in possession would come to an end and the rights of the person holding under the same would get extinguished on the redemption of the mortgage, is subject to one conception contained in section 76(a), which applies not only to agricultural land but also to urban immovable property.
Hence, if during the subsistence of the mortgage, the mortgagee, acting as a man of ordinary prudence lets out the mortgaged premises and enters into a bona fide transaction in connection therewith, the rights of such a person admitted to tenancy would not get automatically extinguished on redemption of the mortgage. The person so let in, would be entitled to continue in occupation of the premises as a tenant of the mortgagor after redemption.
Section 76(a) appears to be based on the hypothesis that in case a mortgage had not been executed and the mortgagor as owner had remained in possession, he would have also similarly let out the premises and, therefore, if instead of the mortgagor, the mortgagee, who came in his place did the same, it would be considered as binding on the mortgagor as well. We respectfully agree with the law as laid down by the Allahabad High Court. We do not think that the matter could be suitably dealt with by amendment.
1. Tajammal Kesari v. Mir Khan, AIR 1974 All 234 (FB).
74.6. Section 76(b).-
Under section 76, clause (b), it is the mortgagee's duty when in possession to use his best endeavours to collect the rents and profits thereof. This becomes relevant where the mortgagee himself is in possession. In such a case, the matter would have been dealt with by a contract between the parties by adjustment of rent towards interest or in other agreed manner. An important consequence of clause (b) which affects third person is that the tenant is bound to pay rent only to the mortgagee in the case of a usufructuary mortgage.
It has been specifically held by the Madras High Court that a letter of attornment is not necessary1. In the Madras case,2 it was held that where the usufructuary mortgagee intimated the fact of mortgage to the tenant and demanded payment of the rent, but the tenant did not pay the rent, it would constitute wilful default, rendering the tenant liable to eviction within the meaning of the Madras Buildings (Lease and Rent Control) Act, 1960. It was specifically held that in view of section 76(b) and section 109, attornment is not necessary to complete the title of the usufructuary mortgagee. We have no further comments on this clause.
1. Ezhumatai v. Padmawati, (1971) 2 MU 121.
2. (1971) 2 Nip 121 (122).
74.7. Section 76(c).-
Under section 76(c), it is the liability of the mortgagor, in the absence of a contract to the contrary, to pay, out of the income of the property, the Government revenue or other charges of a public nature and all rent accruing due in respect thereof during such possession and any arrears of rent in default of payment of which the property may be summarily sold. Ghose1 has criticised the drafting of a part of this clause, namely, the closing words of the clause "any arrears of rent in default of payment of which the property may be summarily sold". He says that they show inadvertence oh the part of the draftsman, because the mortgagee would, on the present wording, be bound to pay arrears of rent due at the time of taking possession. Apparently, he regards this as anomalous.
1. Chose Law of Mortgage in India, (1902), p. 868.
74.8. Conflict of view.-
There seems to be a conflict of views on the point mentioned above. It has been assumed that the mortgagee should pay arrears of rent due after the mortgage. But a contrary view has been taken in many cases.1 If this is the law, the question to be considered is whether it ought not to be changed. There are two alternatives open. Either it could be provided that the liability regarding arrears is only for rent accruing due during possession, or it could be provided that even past arrears must be paid.
The first course would be meaningless. The amendment made in 1929 would seem to support the construction that even past arrears must be paid by the mortgagee. As to arrears becoming due during his tenure as mortgagee, the words "and all rent, accruing due during such possession" already cover the case.2
1. 52 IC 902, cited in the commentary.
2. Priyanath v. Mrutunjoy, AIR 1956 Ori 61.
74.9. Recommendation as to section 76(c).-
In our opinion, it may be just and fair1 to provide that the arrears may be arrears even for the past. Here the clause is concerned only with the prevention of a summary sale. But the mortgagee must have a right to recover them from the mortgagor. In fact, section 72(b) already gives him such a right. But the matter may be made more clear by making clause (c) of section 76 subject to section 72(b). The amendment seems to be necessary to do justice to both the parties.
1. For further case law, see-
AIR 1938 Pat 196;
AIR 1925 All 189;
AIR 1919 Cal 309.
74.10. Section 76(c)-Recommendation.-
Where the mortgagee himself allows the rent to fall into arrears, it is just and fair that he should bear the liability. Sometimes, the intention may be that the land may be put up for sale, and the mortgagee may himself become the purchaser of it. This possibility is recognised by section 90 [illustration (c)] of the Indian Trust Act, 1882, which reads as follows:
"(c) A mortgages land to B, who enters into possession. B allows the Government revenue to fall into arrear with a view to the land being put up for sale and his becoming himself the purchaser of it. The land is accordingly sold to B. Subject to the repayment of the amount due on the mortgage and of the expenses properly incurred as mortgagee, B holds the land for the benefit of A."
Having regard to these considerations, we recommend that it should be provided in section 76(c) that
(i) arrears of rent (towards the end) relate to the pre-mortgage period, but
(ii) this should not affect the provisions of section 72(b).