Factors affecting validity of mortgage of future property

By Deepti Mohan, Vidhii Partners
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Mortgages over immoveable property are arguably one of the most important and effective forms of security in any financial transaction. More often than not, and especially in cases of home loans, mortgages are created over properties which are yet to be constructed and delivered. It is therefore crucial to understand the nature of mortgages over future properties.

The legal provisions

Section 5 of the Transfer of Property Act, 1882, defines transfer of property as an act by which a living person conveys property, in present or in future, to one or more other living persons. Mortgage is defined under section 58 of the act as a transfer of interest in specific immoveable property to secure the repayment of money advanced.

The term transfer in section 58 would bear the meaning assigned to it under section 5. It is pertinent to note that in Jugalkishore Saraf v Raw Cotton Co Ltd, the Supreme Court clarified that the term “in present or in future” in section 5 qualifies the act of conveyance and not “property”.

Earlier judgments

Some high courts have held that mortgages over future properties can be validly created. These judgments were based on certain English decisions which recognized the equitable principle of treating as done that which ought to be done.

The English decisions consistently held that while one cannot assign what is not in existence, one can contract to assign future property, and when it comes into existence, equity, treating as done that which ought to be done, fastens upon that property, thereby making the contract to assign a complete assignment.

Supreme Court clarifies

The Supreme Court basically ended the debate over transfer of future property in the Jugalkishore Saraf case (1955), which dealt with assignment of a future decree. The court held that under the act, there can be no transfer of property which is not in existence at the date of transfer.

Deepti Mohan Partner Vidhii Partners
Deepti Mohan
Partner
Vidhii Partners

On the question of the equitable principle and its effect on a prior written agreement, the court held that an intended transferee can enforce a contract for the transfer of future property when the property comes into existence. However, the legal title in the property passes only when the transferor voluntarily executes a transfer deed, or is compelled to do so by a decree for specific performance. The transfer of title is brought about not by the prior agreement for transfer but by the subsequent transfer deed.

To obviate the delay and expense involved in such a transfer, equity intervenes and places the parties in the position that they were intended to be placed by the prior agreement, without requiring the intended transferee to seek a decree for specific performance.

According to the Supreme Court, this transfer is brought about by operation of equity and not by the prior agreement and therefore the after-acquired property is not transferred by the earlier agreement in writing and the title does not relate back to the previous agreement and convert it into a transfer deed.

Applying this principle, an instrument for the mortgage of future property is not converted into a mortgage deed once the property comes into existence but remains an enforceable agreement, since under the act a mortgage can be created only by way of a registered instrument and not by operation of law.

The full bench of Madras High Court in the case of Chief Controlling Revenue Authority v Sudarsanam Picture (1967) added a new dimension to the law by holding that a non-existent property cannot be a “specified property” as used in the definition of mortgage. According to the court, any future or non-existent property cannot be regarded as certain and defined before it exists. Instead, it is nothing but hope and expectation to produce property as specified.

Further clarity required

Based on the above, it is clear that a mortgage or transfer of non-existent property operates as a contract to be performed in the future which may be specifically enforced as soon as the property comes into existence, but it does not operate as a mortgage or transfer.

The question that remains to be answered is whether this principle would apply in cases of equitable mortgage, where deposit of title deeds is sufficient to create a valid mortgage and where no written agreement is required.

Once the property comes into existence, would the continued deposit of title deeds itself act as creation of the mortgage or would constructive delivery of title deeds be required?

Deepti Mohan is a partner of Vidhii Partners and can be reached at deepti.mohan@vidhiipartners.com.

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