Clog on Redemption once a mortgagee always a mortgagee
Equity, in simple terms, embodies the concept of fairness. In medieval England, it became evident that Common Law fell short in providing justice to the common people in certain gray areas. To address this, Chancellors were appointed in special courts to dispense fairness and justice beyond the confines of the law.
Equity is a tool used in Common Law to refine legal precision and achieve justice. These specialized courts were known as Courts of Equity.
Mortgage and the Equitable Right to Redemption
In a mortgage arrangement, the property owner generates two interests: one is the creditor’s interest in the property, which is specific and fixed, and the other is the residual interest that can only be determined by subtracting the creditor’s interest from the property’s value.
The core aspect of this division of interests is the presence of the right to repurchase the property without any encumbrances by repaying the loan. This right is referred to as the equitable right to redeem. The concept of the right of redemption can be traced back to Roman law, and it has been rightly asserted that “Redemption is purely a creature of courts of equity.”
Section 60 of the Transfer of Property Act, 1882 grants the mortgagee the right of redemption. This right becomes active only after the principal amount is repaid. However, it is limited in the sense that it only exists until the mortgagee decides to foreclose the property, concluding the mortgage contract when the debtor exercises their right to redeem by repaying the loan.
This statutory right, as provided by the Transfer of Property Act, can only be removed through compliance with established legal procedures. Therefore, any attempt to obstruct this right is considered void as it acts as a hindrance to the principle of equity of redemption.
Clog on Redemption
In the case of Stanley v. Wilde, Lindley M.R. provided a foundational explanation of the doctrine:
The underlying principle is as follows: a mortgage involves the transfer of land or the assignment of personal property as collateral to secure the repayment of a debt or the fulfillment of some other obligation. The core concept of a mortgage is that the security can be reclaimed upon the payment or discharge of the debt or obligation, regardless of any contrary provisions. In my view, this represents the legal framework.
Any provision added to hinder the right of redemption upon payment or fulfillment of the debt or obligation for which the security was given is what constitutes a hindrance or restriction on the equity of redemption and is therefore invalid. Consequently, it can be deduced that the principle ‘once a mortgagee always a mortgagee’ .
The maxim “once a mortgagee always a mortgagee” means that no covenant can alter the fundamental character of the mortgage as agreed upon by the parties in a way that prevents the mortgagor from reclaiming their property upon payment of the principal and associated interests.
Basis of the Doctrine
The basis of this doctrine rests on the principles of equity, justice, and good conscience, and it extends to areas where the law may not explicitly apply. Upon careful examination of mortgage arrangements, it becomes clear that mortgagors often enter into such agreements due to financial difficulties.
The law acknowledges the ability of the more dominant party to include clauses that serve their personal interests by creating obstacles to the right of property redemption. These obstacles are therefore invalidated by the courts to enable the mortgagor to regain their property. In the case of U. Nilan v. Kannayyan (Deceased) Through Lrs., the doctrine’s philosophy was explained as follows:
Hardships faced by one individual should not be an opportunity for others to benefit. When a person, facing severe financial difficulties, has borrowed a loan and used their property as collateral, the lender should not exploit this situation. The Court’s intent is to safeguard the individual in distress from being taken advantage of. This is the guiding principle that the Court adheres to when permitting the person to reclaim their properties by complying with the deposit requirement as outlined in Order 34 Rule 5 of the Civil Procedure Code (C.P.C.).
Determining what constitutes a “clog” on the right of redemption doesn’t have fixed qualifying circumstances; it relies on the facts and circumstances of each case. There are instances where covenants have been considered as clogs on this right.
Long Term Mortgages
In cases of usufructuary mortgages, long-term mortgages, such as those extending for 95 or 100 years, might appear to be clogs. However, the Supreme Court has ruled that merely the extended period doesn’t necessarily amount to a clog; there must be an element of undue advantage or fraud to categorize it as such.
Vadilal Chhaganlal v. Gokaldas Mansukh
In Vadilal Chhaganlal v. Gokaldas Mansukh, a mortgage agreement stated that it would remain in effect for 99 years, and the mortgagee could construct structures on the property without any cost limit. The Supreme Court found that this effectively prevented the mortgagor from repaying the principal, interest, and construction expenses, deeming these conditions as clogs on the mortgagee’s right of redemption.
Ramkhilawan Dilrakhan Ahwashi v. Mullo
In Ramkhilawan Dilrakhan Ahwashi v. Mullo, a covenant that required payment of the principal after 80 years and only in the month of Baisakh was challenged as a clog. The Trial Court dismissed the case, but in Balbhaddar Prasad v. Dhanpat Dayal, a mortgage for 50 years worth ₹9000 was deemed irredeemable due to excessively oppressive contract terms.
Condition of Sale of Property
A covenant stipulating that a mortgaged property will be sold if not redeemed within a fixed time is a clog. However, if there’s a separate agreement where the mortgagor executes a sale deed independently in favor of the mortgagee, such a sale deed is valid.
Meharban Khan v. Makhna
In Meharban Khan v. Makhna, a mortgage agreement stated that if the mortgagor failed to pay, the property would be permanently sold to the mortgagee. The Court ruled that both conditions constituted clogs and that upon full payment, the property must be returned without any encumbrance.
This principle also applies when default leads to foreclosure of the property, and such conditions can be added after the initial mortgage agreement.
Kuddi Lal v. Aisha Jehan Begam
In Kuddi Lal v. Aisha Jehan Begam, the plaintiff-mortgagor could only redeem the property by paying from their pocket, not through transferring the property. The Court held that this was a clog on redemption because it restricted the mortgagor’s ability to alienate the property.
Penalty in Case of Default
While it is reasonable to impose a penalty for mortgagor default, in some cases, it may be considered unreasonable and punitive. For instance, a penalty is deemed unreasonable if compound interest is charged when the original interest was already high or if the increased rate of interest applies from the time of the agreement’s formation. High interest rates alone don’t make a condition a clog on redemption, unless there’s evidence of undue influence.
Collateral Benefit to Mortgagor
A mortgagor can obtain a collateral benefit during the mortgage’s existence, which is valid, or after redemption, which is not always valid.
Noakes & Co. v. Rice
In Noakes & Co. v. Rice, a mortgage agreement allowed the mortgagee to buy beer exclusively from the mortgagor during the mortgage’s existence but not beyond redemption. The property must be returned without any ties.
Kreglinger v. New Patagonia Meat and Cold Storage Co. Ltd.
In Kreglinger v. New Patagonia Meat and Cold Storage Co. Ltd., the mortgage included an agreement to sell sheepskins exclusively to the mortgagee. The House of Lords held that such a provision didn’t constitute a clog if it wasn’t unconscionable, a penalty on the right of redemption, or contrary to the right of redemption. This case highlighted the importance of the terms being fair and reasonable, upholding the parties’ freedom to contract.
This principle from Kreglinger’s case was endorsed in re Cuban Land and Development Co., where a provision allowing debenture-holders to share in the remaining profits upon the company’s winding up was not considered a penalty on the right of redemption.
It has also been accepted by Indian courts. For example, a provision permitting the mortgagee to remain in possession of the property through permanent tenancy was considered a clog because it extended beyond the redemption period.
Subsequent Agreement to Postpone Redemption
A subsequent agreement that obstructs the mortgagee by imposing a personal obligation is seen as a clog on the right of redemption. This is because, unless the agreement forms a charge on the property, the mortgagee isn’t responsible for any amount arising from their personal obligation, except the mortgage amount.
Sheo Shankar v. Parma
In Sheo Shankar v. Parma, a provision in a simple mortgage prevented the mortgagor from redeeming the property until a separate amount was paid, and it was held to be void as a clog.
Hari v. Vishnu
In Hari v. Vishnu, where two transactions were combined into one mortgage, the provision was not considered a clog. The value of the deed played a role in this determination.
The concept of what constitutes a clog on the right of redemption isn’t fixed but must be assessed on a case-by-case basis, considering various factors. While the doctrine has faced criticism as an anachronism by some, it continues to be applied by Indian courts, particularly in cases where there is significant inequality between the parties. The discretion of the judiciary is crucial in determining when the application of this doctrine is appropriate.