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Charge in Transfer of Property Act

Charge in Property Law
Charge in Property Law


Section 100, Transfer of Property Act (TPA) Provides

‘‘Where immovable property of one person is 

(a) by act of parties or operation of law, 

(b) made security for the payment of money to another, and the transaction does not amount to a mortgage, the latter person is said to have a ‘charge’ on the property. 

All the provisions which apply to a simple mortgage shall, so far as/may be, apply to such charge.

Nothing in this section applies to the charge of a trustee on the trust-property for expenses properly incurred in the execution of his trust.

Moreover (save as otherwise expressly provided by any law for the time being in force) no charge can be enforced against any property in the hands of a person to whom such property is transferred for consideration and without notice of the charge.” 

In certain instances, a mortgage of an immovable property may not actually occur in the traditional sense of transferring any interest in the property to the transferee. Nonetheless, a person may still possess the right to recover a debt from that property.

This right is referred to as a ‘charge’, with the individual entitled to it being termed a charge holder. Such a right is enforceable through a lawsuit aimed at selling the property to realize the money secured against it.

A charge does not necessarily need to be documented in writing, as established in Abdul Jabbar v Venkata Sastri (AIR 1969 SC 1147).

No specific wording is required to create a charge; what matters is a clear intention to use the property as security for the payment of money at present, as highlighted in J & K (Bombory) Pvt. Ltd. v New Kaiser I-Hind Spg. & Wvg. Ltd. (AIR 1970 SC 1041).

There is no transfer of property to the other party to constitute a mortgage. For instance, if a husband designates a specific property for his wife to utilize for her maintenance, it does not entail a transfer of interest in the property to the wife; instead, it constitutes a ‘charge’, as the payment is to be sourced from that particular property.

Requisites of a Charge

  • A charge, by its nature, does not involve the transfer of any interest in the immovable property. It necessitates the explicit specification of the property, which serves as security for the payment of money. A precise and unambiguous delineation of the property is essential for the establishment of a charge; otherwise, it renders the charge void due to uncertainty.

  • The wording utilized to create a charge holds no significance; technical terms are not obligatory, as highlighted in Nathan v Durga Das (AIR 1931 All 62). A charge must be directed towards a particular individual expressly identified by name.

  • While a charge can be formed orally, if it is established through a written instrument, registration is mandatory, except in cases where it is created by a will or the secured amount is less than one hundred rupees.

  • A charge cannot be established based on a future contingency, as ruled in Mohani v Puma Shashi (AIR 1932 Cal. 451). Thus, a charge instituted by an individual on an uncertain share, which one of their heirs may inherit, is deemed invalid as a charge (Matlub Hasan v Kalawati, AIR 1933 AU 934).

  • However, a charge on future property remains valid and becomes effective when such property materializes. Additionally, a charge can be assigned.

  • Generally, a charge cannot be fragmented by distributing liability among different parties (Har Charan Lal v Agra Municipal Board, AIR 1952 AU 315).

Exceptions to Sec. 100

The section outlines exceptions not to the definition of ‘charge’, but rather to the rights of a chargee.

It stipulates that a trustee, despite holding a charge on trust property for incurred expenses, cannot pursue a lawsuit for the sale of said property to recover the expenses, as doing so would jeopardize the integrity of the trust estate.

Instead, the trustee is limited to seeking reimbursement directly or deducting expenses from the trust property's income, with a provision against disposing of the property without settling the expenses first (refer to Sec. 32 of the Indian Trusts Act).

Consequently, a trustee possesses a charge on both the income and the corpus of the trust estate for all appropriately expended funds in fulfilling trust obligations, with this charge taking precedence over beneficiary claims.

Upon ceasing to be a trustee or losing possession of the trust property, the trustee can enforce the charge through a sale. Furthermore, Sec. 100 introduces another exception regarding the enforceability scope of a charge.

It states that no charge can be enforced against any property held by a transferee who acquired it for consideration without notice of the charge.

In essence, a charge can only be enforced against a transferee with notice of it or against a gratuitous transferee.

This exception underscores a significant disparity between a charge and a mortgage. While a mortgage can be enforced against the mortgaged property in the hands of any transferee, regardless of notice, a charge can only be enforced against a transferee who had notice of it or who received the property without providing consideration.

In simpler terms, a bona fide purchaser for value without notice of the charge cannot be compelled to fulfill the charge (see Akhoy v Corporation of Calcutta, 1915, 42 Cal 625).

For instance, if A conveys his entire property to his son with a stipulation that the son must allocate a specified monthly amount for the daughter's maintenance, this amount constitutes a charge in favor of the daughter.

If the son sells the property to a third party, the daughter can enforce her right against the third party only if they had notice of the charge. Without such notice, the daughter cannot enforce the charge against the third party.

Charge by Act of Parties

A charge can arise through the actions of parties, such as when property is pledged for the support or education of another, or through legal mandates.

When established by the parties' actions, a charge can be created through a living arrangement or a testamentary disposition.

For instance, a written declaration stating, "I willingly allocate an annual allowance of Rs. 100 in perpetuity from the profits of the mentioned village for the benefit of my eldest brother," effectively creates a valid charge.

Similarly, a will devising immovable properties and instructing the devisee to settle certain debts of the testator using these properties establishes a charge on them for those debts.

Likewise, a provision in a partition deed stipulating that a joint family debt should be proportionally discharged by each sharer, and that any defaulting sharer's portion becomes charged in favor of the sharer who overpays, constitutes a valid charge (Sesha Ayyar v Srinivasa, AIR 1921 Mad 715).

Charge by Operation of Law

Charges by operation of law are based upon the consideration of duty or implied intention on the part of the owner of the property to make it answerable for a specific claim. A charge created by a decree of a competent court is created by operation of law.

Instances of charges created by operation of law:

  1. Arrears of government revenue such as municipal taxes are a paramount charge on the land.

  2. A vendor’s charge for unpaid purchase-money [Sec. 55(4)]; or the charge of buyer for advances made by him [Sec. 55(6)]. 

  3. A party entitled to claim contribution under Sec. 82 also acquires a charge in respect thereof

  4. A compromise decree creates a charge on an immovable property [Dattatraja Mote v Anand Datar (1974) 2 SCC 799]

  5. A Hindu widow’s charge on the family property for her maintenance, if created by a decree (Sec. 39)

The creation of charge by operation of a statute (Estate Duty Act) does not create an interest in the property (RM. Arunachalam v LT. Commr.y Madras AIR 1997 SC 2905). A security bond to the court will not operate as a mortgage nor create a charge as the court is not a juridical person, but the security bond creates an encumbrance.

Enforcement of a Charge

A charge is enforced through a sale, and if it imposes a personal obligation, the charge holder is entitled to a personal decree (Ahmedabad Municipality v Haji Abdul, AIR 1971 SC 1201).

When an individual purchases a portion of a property knowing that it is subject to a charge, they are responsible for the entire amount. If two properties are encumbered by a charge and one is relieved of its obligation, the charge holder can recover the entire sum from the remaining property. A charge created by a decree can only be enforced through a legal action.

Extinguishment of Charge

Under Sec. 100, all the rules which apply to a simple mortgage also apply to a charge. So, a charge can be extinguished by an act of parties i.e. 

(i) by a release by the chargee of the debt or security; or 

(ii) by novation, or 

(iii) by merger. 

Distinction between Charge and Mortgage

Under English law, when a mortgage lacks certain formalities, the transaction might still be recognized as an equitable charge. For instance, a mortgage that fails due to improper attestation or lack of registration could be reclassified as a 'charge.'

However, this equitable principle cannot be applied in India due to statutory provisions that distinguish a charge as a separate form of security from a mortgage.

In Indian law, a charge arises only when there is a clear intention to create it; it is not automatically established as a result of a failed mortgage.

The phrase "and the transaction does not amount to a mortgage" in Sec. 100 indicates that if the arrangement established by the instrument does not constitute a mortgagor-mortgagee relationship, yet immovable property serves as security for debt repayment, a charge is created on the property.

This phrase does not imply that if a transaction appears to be a mortgage but fails due to technical defects in execution or non-compliance with legal formalities, it is automatically transformed into a charge.

Thus, the fundamental distinction between a mortgage and a charge lies in the fact that while a charge grants the right to payment from a specific fund or property, a mortgage entails the transfer of an interest in specific immovable property.

For a more comprehensive examination of the differences between a charge and a mortgage, refer to the 'Mortgage' chapter.

Distinction between Charge and Lien

The differentiation between a 'charge' and a 'lien' is significant:

  1. Creation: A 'charge' can be established through the actions of parties or by legal mandate, while a 'lien' arises solely by operation of law.

  2. Scope: A 'charge' is applicable only to immovable property, whereas a 'lien' can attach to both movable and immovable property.

  3. Satisfaction of Claims: A 'charge-holder' can settle their claim by selling the property subject to the charge, whereas a 'lien-holder' can satisfy their claim either through private sale or by retaining possession of the property.

  4. Nature: A 'charge' does not involve possession of the property; it is not possessory in nature. Conversely, a 'lien' is inherently possessory, as it involves retaining possession of the property until the claim is satisfied. 

Understanding these distinctions is crucial for navigating the legal intricacies surrounding property rights and obligations.

Doctrine of Merger

The Doctrine of Merger holds that when two estates in the same property become unified in one person, a merger ensues, with the smaller interest being absorbed into the larger one.

Both a mortgage and a charge can be extinguished through merger, which occurs either by combining a lower and a higher security or by merging a lesser estate with a greater one.

For instance, a debt merges into the judgment obtained regarding it, as the judgment represents a higher security. Similarly, an equitable mortgage converts into a formal legal mortgage upon execution.

However, merger does not occur if the remedies for the two securities are not fully aligned. For example, a promissory note does not merge into a mortgage for the same debt.

Therefore, even after obtaining a judgment on the promissory note, the mortgage remains unaffected, and legal action can still be pursued under it. Additionally, the doctrine of merger does not apply when a lease is followed by a mortgage to the lessee.

A mortgage divides the interest in the mortgaged property between the mortgagor and the mortgagee. If these interests combine and vest in one party, a merger occurs, extinguishing the mortgage.

This is either because the lesser estate is absorbed by the greater one or because a person cannot owe debt to oneself. 

Merger in a mortgage can happen in three ways: 

(1) the mortgagee acquiring the equity of redemption, 

(2) the mortgagor redeeming the mortgage, or 

(3) the purchaser of the equity of redemption redeeming the mortgage. However, for merger to occur, it must be intended; otherwise, the mortgage remains valid and active.

No Merger in case of Subsequent Encumbrance (Sec. 101)

“Any mortgagee of, or person having a charge upon, immovable property, or any transferee from such mortgagee or charge-holder, may purchase or otherwise acquire the rights in the property of the mortgagor or owner (as the case may be), without thereby causing the mortgage or charge to be merged as between himself and any subsequent mortgagee of, or person having a subsequent charge upon, the same property.

No such subsequent mortgagee, or, charge-holder shall be entitled to foreclose or sell such property without redeeming the prior mortgage or charge.” 

Section 101 explicitly abolished the 'doctrine of merger'. Its purpose is to preserve a charge. Whether a charge is deemed extinguished or retained for the benefit of a person hinges on intention.

When an estate owner settles charges on their estate for which they are not personally liable, the determination of whether these charges are extinguished or maintained for their benefit rests on intention.

Any contract seeking to strip a prior mortgagee of their charge upon acquiring the property through a sale must be unequivocal (Madan Mohan v Nand Raw, AIR 1943 All 156).

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