Registration of Equitable Mortgage: The Lenders’ Conundrum

Charge over immovable property such as land and buildings by way of mortgage forms a significant part of the security package in debt financing transactions. Mortgage of immovable property involves the transfer of an interest in immovable property to a lender as security for the due repayment of the loan. The Transfer of Property Act, 1882 (“TPA”) and the Registration Act, 1908 (the “Registration Act”) are the primary legislations that govern the creation and registration of mortgage. TPA provides a legal framework for different types of mortgages and their characteristics. Out of all the types of mortgages defined under Section 58 of TPA, ‘english mortgage (registered mortgage)’ and ‘mortgage by deposit of title deeds (equitable mortgage)’ are common forms of mortgage security in debt financing by banks, NBFCs (Non-Banking Financial Company) and financial institutions.

In the case of english mortgages, registration is mandatory to establish lenders’ legal right to the security and protection of their interest in case of a default by the borrower under the financing documents. Section 59 of TPA provides that any mortgage, except mortgage by deposit of title deeds, where the principal amount secured is above rupees one hundred shall be effected only by a registered instrument signed by the mortgagor and attested by at least two witnesses. Accordingly, as per TPA, the instrument creating english mortgage (registered mortgage) is a compulsorily registerable instrument, however, there is no express provision with respect to the registration of an equitable mortgage.  

Further, Section 17 of the Registration Act enumerates the documents/instruments which are compulsorily registrable with the office of the concerned sub-registrar and as per sub-clause (b) of clause 1 under Section 17 of the Registration Act, any instrument which creates rights and liabilities in any immovable property must be registered. In practical parlance in debt financing transactions involving equitable mortgage by deposit of title deeds, the mortgagor submits the title deeds of the property to the lender, with the intention to create a mortgage, which is evidenced by way of an undertaking provided by the mortgagor. Further, the lender may record such submission of title deeds by way of a memorandum of entry (MOE). The Supreme Court in State of Haryana v Navir Singh has distinctly identified that the mortgagor’s act of depositing the title deeds with the lender is enough to create an equitable mortgage as envisaged under Section 58(f) of the Transfer of Property Act. The Apex Court has further laid down that the execution of MOE and undertaking is not obligatory in nature as MOE and undertaking are mere pieces of evidence or recordings of the act of submission of title deeds by the mortgagor and not an ‘instrument’ to create a mortgage, hence equitable mortgage by way of deposit of title deeds is not required to be registered. 

Regardless of the coherent interpretation laid down by the Judiciary, lenders in India face several challenges when it comes to registration requirements of equitable mortgages. It may be noted that the registration of deeds and documents is the subject of a concurrent list as per entry 6 under Schedule VII of the Constitution of India, allowing states and the centre to legislate on the subject of registration of mortgages which has led to several states including Maharashtra, Madhya Pradesh and Gujarat among others, making it mandatory to notify the office of concerned sub-registrar by way of ‘notice of intimation’ (NOI) as per Section 89B of the Registration Act, 1908 (applicable to such states), about the creation of mortgage by deposit of title deeds, whereas most of the other states like Delhi, Haryana and Karnataka among others, do not have any specific provision with respect to registration of notice of intimation for creation of equitable mortgage. These varying state-level regulations regarding NOI pose a great conundrum for the lenders as the regulations/rules and the filing processes differ from state to state. Moreover, in many states the updates with regard to the same are not readily available in the public domain, thereby making it difficult to understand the state-specific regulations regarding the stamping requirements and registration of equitable mortgage/provision of NOI, thereby leading to non-compliance in many debt financing cases. Further the said non-compliance of prevailing state regulations/guidelines with respect to registration of equitable mortgage/provision of NOI, as may be applicable, poses a great threat to the lenders at the time of enforcement of security interest in case the default is committed by the Borrower under the terms and conditions of financing documents executed with the Lenders.

State regulations/guidelines, regarding the registration of equitable mortgage/provision of NOI, are of paramount importance in debt financing transactions, especially from the perspective of enforcement of security by the lenders in case of Borrowers’ default. In light of the above, it is pertinent to state that the powers conferred by the Constitution of India to all the states and the centre to legislate on the subject matter regarding the registration of mortgages have brought about a wave of multiple and varying regulations in the States. Further, the lack of updations by the States on their websites and other platforms available in public domains creates confusion as regards the legal position of the particular State in respect of the subject concerned. In view of the foregoing, the Centre may guide the States regarding the streamlining of the processes and requirements in relation to the stamp duty and registration/provision of NOI for equitable mortgages and may further recommend the states to publish the rules/regulations/guidelines pertaining to the foregoing on appropriate public platforms/state websites for the public view. The State level of clarity, as regards the foregoing, shall assist the banks and other lending institutions in making an informed decision regarding the mortgage security and will prevent the lapses that otherwise occur at the time of security enforcement due to deficit payment of stamp duty or non-registration of an equitable mortgage if the state mandates the same.

Amit Prakash is a Partner and Kumar Aditya Bhardwaj is an Associate at Imperial Law Offices (I Law).