What Is Usufructuary Mortgage?
Unusual as it may sound to those who have newly ventured into the complex world of home finance (we say sound in an absolute literary sense), usufructuary mortgages have been quite popular in India, especially the rural parts, since the mid-19th century. In their time of need, which might arise due to a natural calamity (drought, flood, etc.) or a family emergency (weddings, funerals or life-threatening diseases), farmers would go for pledging their land to get cash from anyone willing to oblige. Such has been the spread of this practice that they were recognised by the law during the latter part of that century – Section 58 (a) the Transfer of Property Act, 1882, deals with mortgages and Clauses B to G define their various types, including usufructuary mortgage, known as Bhog-Bandhak Hrin in Hindi.
Since, the practice seems to have gained further ground in rural India through non-banking institutions.
According to a research paper by Clive Laurence George Bell and of the University of Heidelberg, Germany, that was published last year, usufructuary mortgage contracting is an oft-used medium of borrowing in India that involved borrowing large sums to meet contingencies. The findings of the research are based on a survey of 279 households in Odisha over the period of 2000-2013.
In urban India, however, banks stay wary of engaging in usufructuary mortgage products since these involve a great deal of management on their part.
Before we proceed to decode this category of a mortgage, it would be ideal to understand what constitutes a mortgage in legal parlance.
What constitutes mortgage?
Borrowing money from someone is taking debt, but when interest in land is pledged to the lender to secure this debt, it takes the form of a mortgage. In case of home loans, the buyer’s property acts as the security, and by virtue of that home loans also fall in the category of mortgage.
According to the Oxford Dictionary, a mortgage is "a legal agreement by which a bank or similar organisation lends you money to buy a house, etc., and you pay the money back over a particular number of years".
Delivering a judgment in Santley versus Wilde (1899), English Judge Nathaniel Lindley defined a mortgage as “a conveyance on land or an assignment of chattels as a security for the payment of a debt or the discharge of some other obligation for which it is given”.
In his The Law of Mortgages in India, Rashbehary Ghosh writes that a mortgage may be viewed in two aspects.
“In the first place, it is a promise by the debtor to repay the loan, and, as such, it is a contract which creates a personal obligation. Secondly, it is also a conveyance, since it passes to the creditor a real right in the property pledged to him. However, the right created in the land is only an accessory right, intended merely to secure the due payment of the debt," reads the book.
What constitutes usufructuary mortgage?
The Transfer of Property Act talks about five types of mortgage. Usufructuary mortgage is one of them. According to the Merriam-Webster Dictionary, usufructuary means “one having the use or enjoyment of something”. By connecting the meaning of the two terms, mortgage and usufructuary, it is clear that the lender gets to enjoy certain rights over the security i.e. land.
According to the Act, in a usufructuary mortgage, the borrower gives possession of the mortgaged property to the lender, and authorises him to retain such possession until payment of the mortgage money. The title deed of the property, on the other hand, remains in possession of the borrower.
If a farmer mortgages his agricultural land, the lender would have the right on the produce as long as it remains in his possession. The income thus earned is understood to be the recovery money for the lender. Similarly, if someone mortgages a property, the monthly rent the building earns would belong to the lender till the period the mortgage is paid off.
Do note here that this payment the lender receives through the rents and profits accruing from the property is part of the payment plans. It is important to note here that under such an arrangement, the lender has no right to sell or foreclose the property, and they are liable to return possession as soon as the payment has been made. After the mortgage money is paid either through rent of otherwise, the borrower has the right to recover possession of the property.
Under the law, such a mortgage must also be registered by payment of stamp duty. The stamp duty charges vary from state to state, and are equal to the property registration charge.
When does the borrower claim possession of his property?
Since part of the borrowed money is paid through the income of the possessed property, this begs a question. When does the borrower get the right to possess the property? Can that happen as soon as the mortgage is paid? Or, do they have to wait till a specific period?
The Supreme Court in 2014 ruled that the right of a usufructuary borrower to recover possession of the property starts when mortgage money is paid out of rents and profits or partly out of rents and profits and partly by payment or deposit, and not merely on the expiry of 30 years – which is when a loan typically expires – from the date of mortgage.
“While in case of any other mortgage, right to redeem is covered under Section 60 (of the Transfer of Property Act), in case of usufructuary mortgage, right to recover possession is dealt with under Section 62, and commences on payment of mortgage money out of the usufructs or partly out of the usufructs and partly on payment or deposit by the mortgagor. This distinction in a usufructuary mortgage and any other mortgage is clearly borne out from provisions of Sections 58, 60 and 62 of the Act read with Article 61 of the Schedule to the Limitation Act,” the court said.
What is behind usufructuary mortgages popularity in rural India?
Bell’s research paper offers a clear answer to that.
“The usufruct mortgage oﬀers some clear advantages over other forms of contracts in risky environments when insurance and credit markets are very imperfect, if at all present,” Bell writes. Due to lose proximity, lenders in village also know the prospects of getting into a deal like that, something on which banks and financial institutions will have to invest a bomb if they decided to know.
Except in an emergency situation, however, getting into such a deal could be detrimental to the profits of both parties. As Bell says, the advantages of usufruct mortgage are “double-edged in some respects”.
“When mortgaging out a parcel of land, the borrower obtains a goodly sum to deal with an immediate need and can choose when to repay the loan. But, future events may well turn out so adversely that he never does so. For his part, the lender enjoys the user rights until the loan is repaid in full, an action over whose timing he has no control. But, there is always the possibility – and hope – that the borrower will eventually decide that repayment will be simply too painful and agree to a transfer of ownership, perhaps with the inducement of an additional payment,” he writes in his concluding note.