Under the English Law, the two primary ways for creating an ‘equitable mortgage’ is either (i) by deposit of the original title deeds to the subject property with the lender or where the original title deeds are retained by the borrower then (ii) by way of a memorandum of understanding or an agreement simpliciter recording the intention of the parties to create a charge over the subject property.
The High Court of Chancery in Robberts v. Croft reported in 44 E.R. 887 and a catena of other decisions have held that “[…] It is not necessary, to create an equitable mortgage, that all the title deeds, or even all the material title deeds, should be deposited. It is sufficient if the deeds deposited are material evidence of title.”
In fact, the English Courts have gone to the extent of saying that the title deeds are not the only documents a deposit of which may create an equitable charge upon the subject property, and that even a promissory note or an agreement for purchase of the subject property can create an equitable mortgage. [See; Ex parte Warner, reported in [1812] 19 Ves Jr 202; Lacon v. Allen reported in [1856] 3 Drew. 579]. Samuel Miller in The Law of Equitable Mortgages explained the aforesaid with a illustration that take a case where the owner has lost an important deed or where the deeds which have been deposited while purporting title to the property contain no reference to any other material deeds, or a situation where there exists no possible way for the lender to ascertain whether any other deeds or documents are actually outstanding, should the lender be deprived of the benefit of the deposit of the other documents even if the intention of parties to create a mortgage is clear?
In his opinion, the principle underlying the doctrine of ‘equitable mortgages’ is premised to mitigate these very hardships or technicalities that often emerge in transactions of such nature from coming in the way of creation and enforcement of mortgages. He added, to hold otherwise, would be nothing but an unfaithful dilution of the doctrine of equitable mortgages and by extension the concept of ‘equity’ based justice. This is because for deciding a question of an equitable mortgage, the court is not required to look for deposit of a valid legal title, because no passing or transfer of title is involved in the first place in equitable mortgage unlike a legal mortgage, rather what the courts look for is a transaction in the nature of a contract whereby the interests of the borrower embraced in the subject property may be later subjected and made liable for the debt.
Even though, the High Court of Chancery speaking through Lord Eldon in the case of In Re: Rice reported in [1819] 36 E.R. 632 argued against the idea of extending the doctrine of ‘equitable mortgage’ to instances of deposit of ‘part-deeds’ to discourage the act of scrupulous borrowers of obtaining loans from multiple creditors by dividing and depositing different deeds with each of them, the position under the English Law has continued to remain the same i.e., part deposits of title would be sufficient to create an equitable mortgage and that there is neither any requirement that the mortgagee or the lender should be required to acquire every title deed, nor is there any requirement that the documents so deposited show a good title to the vested property. [See; Robberts (supra).
What is required is that the deeds or documents so deposited materially evinces the intention of the parties to create a charge over the subject property and the mortgagor assures itself that he has acquired all available titles or documents.
The Court of Chancery speaking through Lord Eldon in Knight v. Knight reported in (1840) 3 Beav 148 held that “equity looks to the intent rather than the form”.
Thus, where ‘equitable mortgages’ have been created based on deposit of part-deeds or documents purporting title or evincing intention of parties to create an interest, all such deposits will be a valid mortgage in equity and the charge that might have been created prior in time will assume priority over any subsequent charges or mortgagors. However, since such a mortgage is an ‘equitable mortgage’ any rights flowing from such mortgages are only of personal character and only rights in personam and as such will not operate against any strangers or subsequent incumbrancers unaware of such equitable mortgage.
This stems from the rule that equity acts only in personam. The very basis for creation of an ‘equitable mortgage’ is the intention of parties alone, and as such any action or remedy can be directed only against the parties so involved. This is because, unlike a legal mortgage where a ‘charge’ is created directly on the property itself and the title or any proprietary interest therein is transferred to the lender thereby becoming a right enforceable in rem in respect to the property, in case of an ‘equitable mortgage’ no such charge is said to have been formally created on the property nor any transfer or conveyance of interest has said to occur.
Rather on the contrary, the de jure title or ownership continues to vest with the original borrower and only the documents thereof is ordinarily retained by the lender and as such the right of the lender in such a situation is being enforced through the party having title over the said property alone i.e., the borrower and thus is only a right in personam. Edgar N. Durfee in The Lien or Equitable Theory of the Mortgage explaining the aforesaid stated that, in cases of equitable mortgage in the absence of any ‘conveyance’ or creation of ‘charge’, the money so advanced against the subject property is only in the form of a personal debt and hence a right in personam at best and the right of the lender to apportion or appropriate the subject property for repayment of loan only a right to take such an action rather than a right in the property itself.
‘Equitable Mortgage’ being a right in personam will not affect successive incumbrances and will not be enforceable against successive mortgagees if the creation of such equitable charge was no disclosed to them. This is particularly because, ‘equitable mortgages’ are construed as ‘incomplete mort-gages’ (as no actual charge is created nor any conveyance of title has taken place) and thus no person can be permitted to derive any advantage from any incomplete title who has on his own volition not done everything requisite to complete its title.
If a first mortgagee voluntarily either leaves the title deeds with the mortgagor, or voluntarily accepts part-deeds and fails to either secure the rest or assure himself of any outstanding deeds or documents, then the charge of such first mortgagee must be postponed to any and all subsequent mortgagees, without notice of the charge of first mortgagee, because he due to his own gross negligence enabled the subsequent incumbrances. Thus, even if multiple equitable mortgages are created, the first charge will have priority, unless in case of fraud or gross negligence, or a voluntary, distinct, and unjustifiable concurrence, on the part of the first mortgagee in either (i) retaining the remaining deeds or (ii) failure to take steps in putting everyone to notice, more particularly the subsequent incumbrancers about the first equitable mortgage. Where the first mortgagor has made bond fide inquiry for them and received a reasonable excuse for their non-delivery, he shall not be postponed to a subsequent equitable mortgage that may be created.
Reference
The Cosmos Co. Operative Bank Ltd Versus Central Bank of India & Ors. (2025)