Subsequent Mortgage Of Property

The present article mainly focuses on the right of mortgagor to re mortgage the property already mortgaged and the consequences of such actions. The article also sheds light on the position of the first mortgagee in case a property is remortgaged by the mortgagor at the same time.

DIFFERENCE BETWEEN CHARGE AND MORTGAGE

Mortgage implies to a form of charge in which the interest in an immovable property is transferred. Under section 2(16) of the Companies Act, 2013 'charge means an interest or lien created on the property or assets of a company or any of its undertakings or both as security and includes a mortgage.' ^[1]

Sr No	Mortgage	Charge
1	Mortgage is transfer of interest in a specific immovable property.	Charge is use of an asset as a security in case the buyer defaults on repayment
2	Mortgage is right in rem (against the whole world).	Charge is just ad rem (right to a thing)
3	Mortgage can be only created by act of parties.	Charge can be created by act of parties or operation of law.
4	Mortgage implies existence of a debt.	Charge always does not imply existence of a debt.
5	A mortgage is good against subsequent transferees and may be enforced against a bona fide purchaser for value with or without notice.	A charge is good only against subsequent transferee with notice.

REMORTGAGE

The TPA does not invalidate any kind of subsequent remortgage in whatsoever manner. Hence in a situation where a property has been re mortgaged by a mortgagor to a subsequent mortgagee, it stands valid in the eyes of law. No Indian law invalidates such action and thus it is a fair assumption to consider such action to be a valid one.

Pari passu principle and Second Mortgage

The Latin term 'Pari Passu' means equal footing. This term when referred to in connection with the mortgage of a property implies that in case of a second mortgage on the same property, with the consent of the 'mortgagees' it is considered that the creditors are on the same footing. This principle is referred to in cases where a subsequent charge is created on the same property with the consent of the first mortgagee.

The primary difference between creation of a subsequent charge on the same property under the pari passu principle and re mortgaging the property by the mortgagor at the same time is 'consent'. In cases where the subsequent charge is created, as mentioned above is subject to consent of prior mortgagee.^[2]

For example -

Mr. X wishes to purchase a property for Rs. 10 lakhs in a suburb. He approaches bank ABC for a loan of Rs. 40 lakhs (80% of the value of the property). In exchange, the property to be purchased is mortgaged in favour of Bank ABC.

Now, subsequently after 3-4 years, if Mr. X wishes to borrow another Rs. 5 lakhs for the maintenance of the property, he can opt for a second loan. So he can mortgage the same property with another bank to borrow the amount needed. The second bank therefore takes a second mortgage loan on its books.

Doctrine of priority

The doctrine of priority kicks in where there are discrepancies pertaining to the availing the mortgaged property by the mortgagee. It is a well considered doctrine which says that 'First in time is first in law' which has been covered under Section 48 of the TPA.^[3]

The Supreme Court in the case of ICICI Bank Ltd v SIDCO Leathers Ltd and ors^[4], held that,

"In terms of Section 48 of the Transfer of Property Act, claim of the first charge holder shall prevail over the second charge holder and in case the debts are due to both, the first charge holder and the second charge holder are to be realised from the property belonging to the mortgagor, the first charge holder shall be repaid first"

Thus, from the judgment it is evident that under the doctrine of priority, the charge by the mortgagee prevails over the charge of the second.

SUGGESTIONS

The suggestions after an extensive research are -

1. Covenant

The presence of covenant in the first mortgage is of primary importance. The covenant should specifically deal with re mortgaging of the property at the same time and that it should be subject to consent of the first mortgagee. The presence of this covenant shall relieve both mortgagor and mortgagee of any legal discrepancies whatsoever pertaining to the same.

2. Due Diligence

Proper due diligence and financial check shall be conducted by the mortgagee and the list of charges on that property should be disclosed in the process. Also, it is equally important that the mortgagor discloses any details pertaining to the property.

The author on the basis of the material mentioned above infers that the in case of a subsequent mortgage by the mortgagor of the same property, due to the absence of any law invalidating the same stands valid in the eyes of law. Also, according to the Supreme Court judgment quoted above, the first mortgagee (first in time) shall be given priority under the doctrine of priority. However, it is advisable in circumstances where there is second mortgage on the property, the creditors should be on an equal footing and the distribution should be pre-decided subject to consent of first mortgage.