Under the English Law, broadly there are two kinds of mortgages; (i) a legal mortgage and (ii) an equitable mortgage. A ‘legal mortgage’ entails creation of a charge by way of conveyance of a proprietary interest over the property or security in favour of the lender in accordance with the formalities set out under the Law of Property Act, 1925. This is typically effectuated through execution of a deed of charge or a mortgage deed simpliciter.
While such conveyance need not involve transfer of the title or ownership in itself nor is the conveyance required to be physical or actual and may be symbolic in nature where the borrower or mortgagor continues to retain possession or even title of the mortgaged property; however, the de jure effect of such conveyance must be in the nature of vesting the lender with an enforceable right to take possession, to foreclose or to sell the property in the event of default. Thus, the legal effect of the deed of charge or mortgage must convey certain enforceable rights in favour of the lender or mortgagor over the mortgaged property even though the title or ownership may not be transferred.
However, there may be instances where the parties agree to mortgage a property as security, but no formal charge or conveyance of any proprietary interest in the said property has taken place, still the same may be recognized as a mortgage. This is popularly understood as an ‘equitable mortgage’ where although under the law the formalities required for creating a legal charge or mortgage over a property are patently absent, yet the said property would be in equity deemed to have been mortgaged and as such may be apportioned or appropriated by the lender on the strength of mere intention of the parties to create a mortgage.
In other words, where under the law no mortgage or charge is said to have been created over a property i.e., no conveyance of a right or interest over the subject property has been effected, yet if the intention of parties to create a mortgage is clear, equity would demand that such intention is not only respected but given some effect to and the said property be deemed to have been mortgaged so as to enable the lender to assert its rights over the same, it is known as an ‘equitable mortgage’.
The Origin of Equitable Mortgage
The concept or doctrine of ‘equitable mortgage’ owes its origin to the English case of Russel v. Russel reported in [1783] 28 E.R. 1121 wherein the High Court of Chancery speaking through Lord Thurlow held that where there is delivery of title by the borrower to the lender for the purpose of availing a loan, although such deposit may not constitute a valid mortgage, but the courts in granting specific performance to the lender to create a security or lien over the property would effectively be “supplying the legal formalities necessary to create nothing but a mortgage though one in equity”. He explained that the court in permitting the lender to create a security over the property on the strength of the title deeds lying with it is not per se performance of a contract but rather its execution and hence for all purposes would be a mortgage inter se the borrower and the lender in equity. He lastly elaborated that the further grant of relief to execute such a contract which is not a valid mortgage but nevertheless being converted into one is grounded on it being already being a contract part performed. [See; J.B. White & Tudor in Equitable Mortgage and Leading Cases in Equity, 9th Ed. (Sweet & Maxwell (1928)]
Thus, the underlying distinction between a legal mortgage and an equitable mortgage under the English Law is that in the former, there is conveyance or transfer of some proprietary interest in the mortgaged property in accordance with the statute or law whereas in the latter the formalities required for a legal mortgage are not fully satisfied, but the parties’ intentions to create a mortgage are clear as result of which it is deemed as a mortgage.
The rationale behind the existence of the concept of an ‘equitable mortgage’ was elaborated upon by Sir William Holdsworth in A History of English Law. He explained that the evolution of equitable mortgage is based on the principle that a mortgage at its core is essentially nothing more than a ‘security’. It is not intended as a mechanism of transferring either ownership or any vested interest in the strict sense but rather only a means for providing a security.
He elaborated how ‘equitable mortgages’ of today’s time is a reflection of the practicalities of the then mercantile system of the time where due to the commercial exigencies and need for quick financial arrangements led the community to resort to the informal practice of extending loans and creating security by mere deposit of titles or a promissory note to repay solely on a ‘mutual understanding’ between the parties, without any actual agreement or memorandum and without following the cumbersome formalities of any transfer of conveyance of proprietary rights as required under a traditional or legal mortgage.
Maxim of ‘Quod fieri debuit pro facto censetur’
The aforesaid may be better understood through the well-known maxim of ‘Quod fieri debuit pro facto censetur’ which means that ‘what ought to have been done is considered as done’. Edward Henry Turner Snell in his book on The Principles of Equity explained that the role of equity in law is only one i.e. to rectify the injustice arising out of the rigidities of the law, to intervene and ensure that substantive justice prevails over mere formalities or hyper technicalities, even when strict legal requirements have not been met. Snell articulated that equity operates as a “court of conscience” tempering the harshness of the law and fulfilling its enduring mission to deliver fairness and justice where the rigid application of legal rules would otherwise result in inequity.
In the context of mortgages, take a situation where there is no express document or deed to evince that a charge was created over the subject property and the parties at the time of availing the loan merely agreed that they would create a mortgage in the event of default. In the eyes of law, it would be said that no mortgage has been created whatsoever, yet the understanding between the parties to later create a mortgage at the time whilst advancing the loan shows the ab initio intention to create a charge and treat the subject property as a security or a collateral for the sum so advanced.
Under the general principle of law, the recourse that would ordinarily be available to the lender in the aforesaid situation would be to seek specific performance of the said agreement (oral or written) to create a mortgage on the strength that there has been part performance of the agreement i.e., loan has been advanced and thus, charge should now be permitted to be created, and thereafter proceed to exercise its rights after the said mortgage is created. But a “court of conscience” would instead of subjecting the lender to the rigmarole of the law, will directly give effect to the true sum and substance of the intention of the parties and thereby give to the very agreement itself the effect of creating a mortgage in ‘equity’ and enable the lender to exercise its rights as he would be entitled to if the agreement had been performed.
Thus, where a borrower willingly parts away with any title deed or a document or a promissory note or an undertaking in respect of a property by depositing it with the lender for the purpose of availing any credit facility and upon such deposit, the loan is so advanced by the lender, fairness, good conscience and justice or in other words ‘equity’ would demand that some meaningful significance be given to such act or conduct of the parties, as generally such act of depositing documents against loans is more often than not for no other purpose but to create a mortgage. Thus, a “court of conscience” would give effect to the intention of the parties in the form of an ‘equitable mortgage’ even if there is no formal agreement or a shred of document expressly providing that such deposit is for the purpose of creating a charge OR if the documents so deposited do not necessarily have the effect of transferring or conveyancing any title or interest in the subject property to the lender.
Reference
The Cosmos Co. Operative Bank Ltd Versus Central Bank of India & Ors. (2025)