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Right of Foreclosure

Modern mortgage law has its roots in both Roman law and in Anglo-Saxon English law. Laws in the area of redemption, however, arose from the changes in the English laws during the early seventeenth century. Before these changes mortgage was effectively a fee simple (Full interest) subject to a condition subsequent.

In early mortgage transactions, mortgagors, as security for loans from the mortgagees, deliver the property to the mortgagees subject to the condition that if the mortgagors repaid the debt by a certain day, mortgagors would have the right to re-enter the land and revest themselves of their former estate.

A condition that the mortgage will return the title upon full performance by the mortgagor gradually displaced the condition of title passing to the mortgagee. But if the amount is not paid by the Law Day the mortgagee's estate in the property became absolute[1].

The strict enforcement of this rule of law led to harsh consequences when the mortgagor lost his entire estate if, for any reason, he failed to make payment on final day. The English court came to the aid of the mortgagor and at first gave relief to the defaulting mortgagor only on a special showing of some ground for equity jurisdiction such as fraud, accident, or mistake.

Later they allowed mortgagors to redeem their land from mortgagees if the mortgagors tendered the principal and interest within a reasonable time after Law Day. Courts referred to this right to late redemption as the mortgagor's equity of redemption.

This right of redemption in turn proved unfair to mortgagees who, despite a mortgagor's default, could never be certain that the mortgagor would not sue in equity to redeem. In fairness to the mortgagee, the court of equity developed the right of foreclosure. The earliest form of foreclosure allowed the mortgagee to bring a suit whereby the court would issue an order requiring the mortgagor to pay the full debt with interest and costs within a certain period of time. Courts would forever bar the mortgagor's interest in land if he failed to comply with the order[2].

Conditions for Foreclosure

The right to foreclosure occurs only when the loan is due and there are certain conditions which needs to be fulfilled for claiming the right of foreclosure which includes:
  • The loan amount has become due for payment.
  • There are no contrary conditions attached in the mortgage deed i.e., any fixed time for repayment etc.
  • The right cannot be claimed until the mortgagor has got a decree of redemption of the mortgaged property from the court.
  • The mortgagor has not repaid the loan amount.
    The mortgagor can however pay off his debt when due in the following ways:
    • By tendering payment of the mortgage money directly to mortgagee
    • By filing a suit for redemption
    • By depositing the amount in court
  • The right cannot be exercised when there was a mortgage of public works like canal, railway etc.
  • A trustee or legal representative of mortgagee cannot file a suit for foreclosure but for sale only.

However, in case where the mortgage fails to redeem the property, the mortgagee doesn't become directly the owner of the property and in order to proceed for the recovery of the amount the mortgagee has to file a suit within the limitation period or 12 years[3] .

Foreclosure in Different types of Mortgages

The Transfer of Property defines six different types of mortgages and right to foreclosure is however not available in all types of mortgages.

There are only certain provisions which contains the provision of right to mortgage:
  1. Simple mortgage:
    In this type of mortgage the mortgagee doesn't get the actual possession of the property therefore he cannot exercise the right of foreclosure.
     
  2. Mortgage by conditional sale:
    In this type of mortgage the mortgagee can bar the mortgagor from exercising his right of redemption by filing the suit for Foreclosure.
     
  3. Usufructuary mortgage:
    In this mortgage the mortgagee retains the possession of the mortgaged property as long as the mortgagor repays the money, Thus the right of foreclosure is not available in this case[4].
     
  4. English mortgage:
    In this mortgage there is absolute transfer therefore neither the suit for foreclosure nor sale can be instituted.
     
  5. Mortgage by deposit of title deed:
    Here also as in simple mortgage the right to sue for sale is available.
     
  6. Anomalous mortgage:
    In this mortgage it depends upon the terms of the mortgage and therefore foreclosure right can also be present if the conditions of the mortgage are such.

Law Commission Recommendation

The right of foreclosure is only available in the mortgage by conditional sale and sometimes according to the terms of the anomalous mortgage. So, the most important question to be considered is whether the right of foreclosure should be retained at the present day. This right is also the violation of the doctrine which has evolved overed the time that once a mortgage always a mortgage. This right can easily be replaced by the right to sale.

Also, if decree of foreclosure is passed then, mortgagor loses his property without receiving anything from the mortgaged property which he might have received out of the proceeds of the sale of the property. On the other hand, if the right to foreclosure is abolished and the mortgaged property is sold, then after satisfying the mortgage money due to the mortgagee, a portion of the sale proceeds may be available to the mortgagor[5].

Conclusion:
After the analysis of mortgage, the rights of both the parties in the contract of mortgage i.e. mortgagee and mortgagor, and the rights available to the mortgagor, with special focus on right to foreclosure as a right of mortgagee in case the mortgagor defaults in payment of the loan borrowed. It can simply be concluded that a mortgage is simply a transfer of an interest by the owner in his specific immovable property, as a security for advancement of a credit/loan.

The person who gives security and takes the loan is known as Mortgagor, and the person who advances the loan on credit is known as mortgagee. The Right to foreclosure under TOPA provides rights to the mortgagee as per the requirement which makes it more transparent for the mortgagee to recover debts from the principal debtor or Mortgagor .

Mortgagor's main right is the right of redemption whereas the mortgagee relies heavily on right of foreclosure and sale. Both these rights are for protecting their party from risk and exploitation. However, the right of redemption provides a greater amount of protection than a right to sale or foreclosure.

The redemption right is an absolute right to the mortgagor, Even when a suit for redemption has been rejected previously, it would not deprive the mortgagor of his right to redeem by filing a second suit for redemption. On the other hand, the right to foreclosure clearly states that the if there is an agreement or contract stating that the mortgagee's right to foreclosure or sale shall be waived off, then it would be correct in law to deprive the mortgagee of this right.

The foreclosure can be avoided by the mortgagor if he uses the option of reinstatement, short refinance, and special forbearance. The mortgagee however cannot directly claim the right of foreclosure; he has to obtain a decree from the court after the default in payment from the side of mortgagor arises. In addition, the mortgagor also has a right to redemption by availing which he can avoid the foreclosure .

End-Notes:
  1. Catherine A. Gnatek, The New Mortgage Foreclosure Law: Redemption and Reinstatment, 1989 U. ILL. L. REV. 471 (1989)
  2. IBID
  3. Mhadagonda Ramgonda Patil v. Shripal Balwant Rainade (1988) 3 SCC 298
  4. Achaldas Durgaji Oswal v. Ramvilas Gangabesan Heda AIR 2003 SC 1017
  5. Law Commission of India - Report No. 70 (August, 1977) The Transfer of Property Act, 1882

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