Mortgage by deposit of title deeds
Borrowers depositing the title documents with the lender will not be able to sell or mortgage the property till the loan is paid
Amortgage by deposit of original title documents of a property is quite common in India. Such a mortgage is also known as an equitable mortgage. To create a valid equitable mortgage, it is sufficient if the borrower deposits original title deeds of the mortgaged property with the lender. However, there is no presumption in law that by the mere act of depositing title deeds with another, the transaction will amount to a mortgage. The act of depositing title deeds with another will amount to a mortgage only if the parties intended to create a mortgage. Thus in disputes over such transactions, the courts first ascertain the intention of the parties.
The documents deposited serve as security on the loan amount advanced by the lender. When the borrower hands over the original title documents of his property, he or she literally pledges it to the lender. During the subsistence of the mortgage, he or she will be unable to enter into transactions (such as further sale or mortgage) that may potentially jeopardise the interest or defeat the rights of the lender.
When the lender has possession of the original title documents, it also becomes easier for him to lay claim of charge on the mortgaged property. If the borrower defaults on re-payment of the loan, the lender has the right to cause the mortgaged property to be sold through legal process. After sale of the property, the lender can then recover the borrower’s unpaid debts from the sale proceeds.
Before entering into an equitable mortgage transaction, the lender must conduct a thorough due diligence of the property. This is important to ascertain the prospective borrower’s nature and extent of ownership in the property and whether or not he is legally entitled to create mortgage on it. It also helps to check whether or not the prospective borrower has created any prior charge or encumbrance on the property.
One should understand that no writing is necessary to create a mortgage by deposit of title deeds.
Such a mortgage is complete by delivery of title documents with an intention to create security thereon. When the debtor deposits the title deeds with the creditor, with the intent to create a security, the law implies a contract between the parties to create a mortgage.