Know The Law | Distinction Between 'Equitable Mortgage' And 'Legal Mortgage' : Supreme Court Explains

The Supreme Court recently explained the distinction between a legal mortgage and an equitable mortgage.

The Court explained that a legal mortgage (in this case, mortgage by deposit of title deeds) is created when property rights are transferred to the mortgagee (lender), granting the mortgagee an enforceable right over the property in case of default. In contrast, an equitable mortgage is considered an incomplete mortgage, as it does not involve the transfer of property rights but is instead based solely on the parties' intention to create a mortgage.

The bench comprising Justices JB Pardiwala and R Mahadevan clarified the distinction between the two while deciding a case where the key issue was determining which mortgage had priority over another.

Briefly put, there were two mortgagees (banks) in this case who granted loans to the borrowers for flat purchases. The Central Bank of India (respondent no. 1) granted a loan based on an unregistered agreement of sale, which was deposited as security. Whereas, the Cosmos Co-operative Bank (appellant) granted a loan to the borrowers after the borrowers deposited their share certificate (equivalent to title deeds) with the Appellant as the security towards the loan.

Being aggrieved by the High Court's decision to grant Respondent No.1's equitable mortgage priority over the Appellant's legal mortgage prompted the Appellant to appeal to the Supreme Court.

The Appellant challenged the High Court's decision on the premise that an equitable mortgage can't be prioritized over the legal mortgage and would always be inferior to the legal mortgage.

Moreover, the Appellant challenged the validity of an equitable mortgage, arguing that an unregistered agreement of sale does not create a valid mortgage because it doesn't transfer the title to the mortgagee when the mortgagor itself lacks good title over the property.

Thus, the Court considered whether the High Court erred in prioritizing the equitable mortgage over the legal mortgage solely because the equitable mortgage was created early.

Overturning the High Court's decision, the judgment authored by Justice Pardiwala held that the High Court erred in prioritizing the equitable mortgage over the legal mortgage. The Court emphasized that the timing of creation does not automatically grant priority to an equitable mortgage over a legal mortgage. Unlike an equitable mortgage, which does not transfer proprietary interest or create a direct charge on the property, a legal mortgage is established through the deposit of title deeds, securing a legally enforceable charge over the mortgaged property.

What is an Equitable Mortgage?

Here, the mortgage to the Central Bank was made by deposit of an agreement to sell. Since an agreement to sell does not create any title over the property, it was an incomplete title deed. However, since there was an intention to create mortgage, the Court regarded it as "equitable mortgage."

“where under the law no mortgage or charge is said to have been created over a property i.e., no conveyance of a right or interest over the subject property has been effected, yet if the intention of parties to create a mortgage is clear, equity would demand that such intention is not only respected but given some effect to and the said property be deemed to have been mortgaged so as to enable the lender to assert its rights over the same, it is known as an 'equitable mortgage'.”, the court answered.

The court clarified that, unlike a legal mortgage which binds third parties, an equitable mortgage operates in personam and does not bind other parties.

“Thus, where 'equitable mortgages' have been created based on deposit of part-deeds or documents purporting title or evincing intention of parties to create an interest, all such deposits will be a valid mortgage in equity and the charge that might have been created prior in time will assume priority over any subsequent charges or mortgagors. However, since such a mortgage is an 'equitable mortgage' any rights flowing from such mortgages are only of personal character and only rights in personam and as such will not operate against any strangers or subsequent incumbrancers unaware of such equitable mortgage. This stems from the rule that equity acts only in personam. The very basis for creation of an 'equitable mortgage' is the intention of parties alone, and as such any action or remedy can be directed only against the parties so involved. This is because, unlike a legal mortgage where a 'charge' is created directly on the property itself and the title or any proprietary interest therein is transferred to the lender thereby becoming a right enforceable in rem in respect to the property, in case of an 'equitable mortgage' no such charge is said to have been formally created on the property nor any transfer or conveyance of interest has said to occur. Rather on the contrary, the de jure title or ownership continues to vest with the original borrower and only the documents thereof is ordinarily retained by the lender and as such the right of the lender in such a situation is being enforced through the party having title over the said property alone i.e., the borrower and thus is only a right in personam.”, the court reasoned.

What Is Legal Mortgage?

A legal mortgage creates a charge by conveying a proprietary interest to the lender, typically through a mortgage deed or deed of charge. Mortgage by deposit of title deeds is recognized under Indian law as a legal mortgage as per Section 58(f) of the Transfer of Property Act, 1882

The Court held that actual delivery of the proprietary interest is not essential, even if ownership or possession remains with the mortgagor, the mortgagee retains enforceable rights, including possession, foreclosure, or sale in case of default.

“A 'legal mortgage' entails creation of a charge by way of conveyance of a proprietary interest over the property or security in favour of the lender in accordance with the formalities set out under the Law of Property Act, 1925 (as out under Section 58(f) of TPA). This is typically effectuated through execution of a deed of charge or a mortgage deed simpliciter. While such conveyance need not involve transfer of the title or ownership in itself nor is the conveyance required to be physical or actual and may be symbolic in nature where borrower or mortgagor continues to retain possession or even title of the mortgaged property; however, the de jure effect of such conveyance must be in the nature of vesting the lender with an enforceable right to take possession, to foreclose or to sell the property in the event of default. Thus, the legal effect of the deed of charge or mortgage must convey certain enforceable rights in favour of the lender or mortgagor over the mortgaged property even though the title or ownership may not be transferred.”, the court observed.

Also From Judgment: Mortgage Created By Deposit Of Title Deeds Prevails Over Equitable Mortgage Created By Deposit Of Agreement To Sell : Supreme Court

Case Title: The Cosmos Co-operative Bank Ltd. v. Central Bank of India & Ors.

Citation : 2025 LiveLaw (SC) 226 

Click here to read/download the judgment