Authors: Faryal Mehmood, Iqra Tanveer, Hina Shahzadi, Syeda Sakina Iraqi, Fazila Nawaz and Fatima Idrees
CHAPTER I
1. INTRODUCTION
Mortgage is a transfer of an interest in immovable property in order to securing the payment of money advanced, an existing or future debt which may give rise to a pecuniary liability. If a
person wants to obtain loan either from any individual or finical institution
or bank. He can go to that person or bank and can get loan by giving a property
as a security to that lender. The person who mortgages the property is called
mortgagor and the person who receives the property is known as mortgagee.[1]
2.
Historical Background
Ancient roots of mortgage were
developed from the English land law in the middle Ages Among the early races of
men, loans or favors on properties, must have been by way of pledge rather than
by means of a mortgage. Pledge is creating charge over a movable property and
mortgage is a charge over immovable property. Hypothecation also emerged which
is an agreement, where in a person borrows money from bank by collateralizing
an asset without transferring title and possession.[2]
First record of a mortgage is found in the sacred writings. The notion of
mortgaging lands had origin from the Jews and them the idea of a mortgage passed
to the Greeks and Romans, and from them implant upon the Common Law of England.
After few cases of mortgage, right developed such as equitable right of
redemption.. On default, the mortgagee would seek a court order giving the
mortgagor a fixed time perhaps six months or a year within we should pay debt,
under court decree. In 1882, mortgage law was codified in Transfer
of Property Act.[3]
CHAPTER II
3.
MORTGAGE LAW IN TRANSFER OF
PROPERTY ACT, 1882
3.1.
Types of Mortgages
3.1.1.
Simple Mortgage
This is where without delivering
possession of mortgaged property, the mortgager binds himself personally to pay
the mortgage money and agree by expressly or impliedly that in the event of his
failing to pay according to his contract.
3.1.2.
Mortgage by Conditional Sale
In
which appears to be sale with a condition that the property sold would be
transferred back to original owner on repayment of loan.
3.1.3.
Usufructuary Mortgage
Where
the mortgager delivers the possession and right to enjoy an income of and right
to enjoy an income and from the property to the mortgagee. If mortgager is not
in a position to give immediate possession, it is sufficient if he gives
immediate possession.
3.1.4.
English Mortgage
The ownership of property is transferred to the mortgager on one condition that mortgage will transfer ownership on repayment of loan, and the title deeds are transferred to mortgage. [4]
4.
RIGHT AND LIABILITIES OF
MORTGAGOR
4.1.
Right to Redeem
According to
Section 60 of Transfer of Property Act, mortgagor has the right to redeem the
property. The right
to redeem the property further awards three rights to the mortgagor:
·
Right to end
mortgage deed
·
Right to
transfer mortgaged property to his name
·
To take back property
in case of transfer of possession[5]
In case of Noakes and Co. v.
Rice where a covenant was signed in mortgage deed binding Rice to only sell
products of Noakes and Co in its premises. Court held that such a condition is
a clog on right of redemption and thus void.[6]
4.2.
Right to Transfer Property to
Third Person
Section 60A help the
mortgagor to pay off the mortgagee by taking a loan from a third person on the
same security and allows him to transfer his property to third person.
4.3.
Right to Make Copies of
Documents
Section 60B provides that mortgagor
have the right to ask mortgagee for making the copies of documents of the
mortgaged property in his possession. This right is available to the mortgagor
only as long as his right to redeem exists.[7]
4.4.
Right to Accession
Section 63 of transfer of
property Act deals with the right of mortgagor, according to this right
mortgagor is entitled to any accession to his property which is in the custody
of mortgagee.
4.5.
Right to Improvement
Section 63A of transfer of
property Act provides that mortgagor has a right to improvement made on his
property during its possession by mortgagee in absence of any contract to
contrary.
4.6.
Right to Renewed Lease
The mortgaged property is under lease, and the mortgagee during
possession of the mortgaged property gets renewal of the lease, then the
mortgagor obtain right over benefits of new lease on redemption.[8]
4.7.
Right to Lent Property
According to section 65-A
Mortgagor has the right to lease out the mortgaged property while he is in lawful possession of that property with realization of some
conditions.[9]
4.8.
Liabilities of Mortgagor
Section 65 provides
for certain implied contracts which make mortgagor responsible for certain
actions in absence of contract to contrary.
4.8.1.
Duty to Defend Title
Mortgagor is bound
to defend the title of mortgaged property or enable mortgagee to do so same if
he has possession of property.
4.8.2.
Duty to Pay Public Charges
Mortgagor is
bound to pay all public charges over property if mortgagee is not in possession
of property.
4.8.3.
Duty to Direct Rent to
Mortgagee
When mortgage
is a lease then mortgagor is bound to pay rent reserved by lease, perform
conditions of lease and observe contracts binding on lessee and is bound to indemnify
mortgagee in case of default in this regard.[10]
5.
RIGHT AND LIABILITIES OF
MORTGAGEE
5.1.
Right to Foreclosure or Sale
According
to Sec 67, at any time after the mortgage money has been due and before the
decree of redemption of the mortgaged property or the mortgage money has been
paid, the mortgagee has the right to obtain court decree to debar mortgagor
permanently from redeeming property or decree to sale the same.
5.2.
Right to Sue for Mortgage
Money
According
the Sec 68, the mortgagee has a right to sue for the mortgage-money in the
following cases:
a) Where
the mortgagor bind himself for the same repayment;
b) When
the seized property is destroyed wholly or in part without the fault of any
party;
c) When
a mortgagee is deprived of all or part of security by misconduct of mortgagor;
d) Where the mortgagor fails to give possession
of property to mortgagee.[11]
5.3.
Right to Accession
According
to Sec 70, if after the due date of the mortgage any accession is made to the
mortgaged property, the mortgagee will be entitled to that for the purpose of
securing his loan.
5.4.
Right to Spend Money
Sec
72 deals with the right of mortgagee in possession to spend money when it is
necessary to do so in circumstances like:
a) Preservation
of property seized from destruction, sale or forfeiture;
b) To
defend the title of the mortgagor's property;
c) For
making his own title thereto good against the mortgagor.[12]
5.5.
Liabilities of Mortgagee
According
to Sec 76, when during the continuance of the mortgage, the mortgagee takes
possession of the mortgaged property, he is bound by the following duties:
a) The
mortgagee has a duty to manage the property as an ordinary prudence person.
b) Duty of mortgagee to collect rents and profits
of the property to this best endeavor.
c) The
mortgagee has a duty to make necessary repairs of the mortgaged property.
d) The
mortgagee has a duty not to commit any act which may destroy or injure the
property permanently.
e) It’s
a duty of the mortgagee to apply for insurance money in reinstating the
property or in the reduction of the mortgage-money if he receives such money in
respect of the mortgaged-property.
f) He
must keep proper, accurate accounts of all sums received and spent by him as a
mortgagee.[13]
In
case of Panchanan Sharma v. Basudeo Prasad Jaganani, the SC gave a decision
based on the specific language of Section 76 (c) of the Transfer of Property
Act that the mortgagee was bound to pay the land's income and so on such basis
he could not claim that the mortgagor had lost his right to redemption.[14]
6.
DOCTRINE REGULATING MORTGAGE
LAW
6.1.
Priority
Section
48 deal with how the conflicting rights created over a particular property can
be resolved on the basis of the Doctrine of Priority.[15] Section 48
doesn’t protect or reserve, in favor of a subsequent transferee, even though he
has no knowledge of the previous transfer. In Nandkishore v. Harjarilal, the
High Court of Madhya Pradesh held that “a transfer cannot prejudice the right
of the transferee by any subsequent dealing with the property”.[16]
6.2.
Marshalling Securities
Section
81 provides for the doctrine of marshalling securities which allows a second
mortgagee whose debt has not been paid from the sale of mortgaged property to
access the proceeds of sale of another property mortgaged by the same debtor to
first mortgagee, even though the second mortgagee has primary right over that
property. It protects the second mortgagee from decision of first mortgage to
sell common mortgaged property in presence of other property.[17]
6.2.1.
Essentials of Marshalling
Securities
·
Common Debtor
·
Distinct property
·
No Prejudice to rights
of prior Mortgagee[18]
6.3.
Contribution
Section
82 maintains that when more than one mortgagors are there with distinct shares
in property mortgaged, each share shall contribute ratable towards the
mortgaged debt. Moreover, in case where single mortgagor has mortgaged property
to and then mortgages same with another property for another debt. Both
properties contribute to debt ratably after deduction of value of debt from the
first mortgaged property in absence of contrary contract.[19]
6.3.1.
Limitation of Contribution
Contribution
rules do not apply on the property which is liable under section 81 to the
claim of the subsequent mortgagee.
6.4.
Subrogation
Subrogation
is a right of a person, after
paying off his liabilities, to be the place of the creditor. Subrogation takes
place only by redemption by
persons other than mortgagor who are authorized to do so under section 91.
Right of Subrogation is described in Section 92 of the Transfer of Property
Act, 1882. The doctrine of subrogation is also based on the principles of good
conscience, equity and justice. The principle of the doctrine is that the party
who pays off a mortgage gets all the rights of the mortgagee. In order to
obtain rights under subrogation, person has to essentially redeem the property
fully.[20]
CHAPTER III
7. MORTGAGE
IN ISLAM
Islamic
mortgage contract derive its validity from the general Islamic contracts
mentioned in Quran. It has not being explicitly mentioned in the primary
sources of shariah. The general principles and rules concerning contracts are
informed by Quran. Contracts which follow those principles are valid and same
are applicable on contracts of mortgage in Islamic finance.[21]
8. PRINCIPLES
OF ISLAMIC MORTGAGE
Objective
of Islamic economic system is to stimulate social justice, equality and better
property rights. The Islamic concept asserts that money cannot be made from
money, it is only a medium of exchange. Therefore, Shariah has made riba and
gharar prohibited in every contract. Riba is unjustified increase of capital in
loans or sales and gharar is prohibited for extreme uncertainty in risk of
losing or earning the capital.[22]
In Quran Allah prohibits such as; “Allah
will deprive Riba of all blessing, but will give increase for deeds of charity;
for He loved not creatures ungrateful and wicked.”[23]
8.1.
Equity Contracts
8.1.1.
Mudarabah
An agreement made between a party
where one person provides the capital and the other invests it in an activity.
Profit is distributed according to the pre-determined ratio, yet loss is borne
solely by the provider of capital.
8.1.2.
Musharakah
This is a financing partnership where parties
provide capital for a project. Profit is shared on pre-agreed ratio but loss on
the basis of equity participation.[24]
8.2. Debt
Contracts
8.2.1. Murabaha
It’s a contract between a financial
institute and it client for sale of a good at a price that includes profit
margin agreed by both parties. Good are sold with a mark-up and repayments
usually in installments are fixed in the contract.
8.2.2. Ijarah
It is a leasing contract in which a
financial institute buys and lease out equipments that are required by clients
for a rental fee. Duration of lease and rental fee is decided in advance and
ownership remains with the financial institute.[25]
8.2.3. Ijarah wa
Igtina
It
is similar to ijarah, except that there is a commitment by the client to buy
the equipment at the end of rental period on any price decided by the financial
institute, with rental fee previously paid.
8.2.4. Musharaka wa
Iqtina
It
implies diminishing partnership. The bank and the customer, in mortgage
contract, agree to enter into a partnership and share the same property by two
contracts: Ijara contract and Musharaka for specific period. Client pays two
kinds of instalments, one to increase the client’s share in the ownership and
the other as a rent for the bank’s share. This diminishes the share of the bank
and eventually client owns all the property at the end of specified period.[26]
CHAPTER IV
9.
CONCLUSION
It is concluded that in general term the concept of contract is
same in both legal systems; English law and Islamic Law. What differentiate
both is the subject matter of the contract. Islamic contract should not deal
with harmful items such as interest, drugs, alcohol, pork, pornography and
gambling etc. Islam does not explicitly define mortgage rules but conventional
mortgage system can be analyzed on basis of general rules given by Shariat.
Riba is prohibited but in conventional mortgage system there are is no
avoidance of such which can be seen in sections of Transfer of property Act,
1882.
Section 58 includes principle money as well as interest in
mortgage-money
Section 58(d) allows mortgagee to use benefit of property in lieu
of interest
Section 63 binds mortgagor to pay cost of accession as well as interest accruing over it at rate decided for interest over principle sum or in its absence at rat of 9%.
The crucial point of difference
between the Islamic and the conventional English mortgage contract is
prohibition of Riba (interest), which is not acceptable in Islamic contracts,
including mortgage, under any circumstances. 3. The Qur’an does not mention
mortgage directly, but the mortgage contract has its roots in the Qur’an within
the general theory of the contract. 4. One of the notable differences between
the English conventional mortgage contract and the Islamic mortgage contract is
that the client under the Islamic mortgage contract can repay the entire sum to
the bank at any time before the end of the agreed period without any penalty.
This is not allowed under the conventional mortgage.
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