Sardar Khan & Co | Mortgage Law Services - Pakistan

Transfer of Interest

The primary requirement for a mortgage is the actual transfer of an interest in real estate. Without this transfer, no mortgage exists. A simple promise or agreement to transfer property in the future does not create a mortgage.

For instance, if a borrower promises not to sell a specific property until a loan is settled, that is merely a restriction on their ability to sell. It does not transfer an interest and, therefore, does not qualify as a mortgage.

While the mortgagee holds an interest in the property as security, the mortgagor maintains the vital right to reclaim (redeem) the property as long as that interest exists.

The Deed of Trust

A deed of trust involves the borrower handing over property to a trustee to secure a debt. In many jurisdictions, this acts as a lien on the title rather than a full transfer of ownership. It differs from a standard mortgage because the trustee can often sell the property through a non-judicial process if the borrower defaults, though court-ordered foreclosures are also possible.

According to the Transfer of Property Act, 1882, Pakistan recognizes six primary types of mortgages:

Simple Mortgage Law

In this setup, the mortgagor does not hand over physical possession of the property. Instead, they personally promise to pay back the loan. They agree that if they fail to pay, the mortgagee has the legal right to sell the property and use the money to cover the debt. Key features include:

• The borrower accepts personal responsibility for the debt;
• The property stays with the borrower;
• There is no immediate foreclosure;
• The lender cannot sell the property without a court order; and
• The document must be registered, regardless of the loan amount.

In the Punjab region, registration is not mandatory if the value is under Rs. 100, as the Transfer of Property Act does not apply there, and the Registration Act only mandates it for values of Rs. 100 or higher.

Lenders in a simple mortgage have two choices:

1. Sue for the money directly; or
2. Sue to sell the mortgaged property.

If a contract allows a lender to take possession upon a missed payment, it is no longer a simple mortgage. It becomes an “anomalous” mortgage, mixing simple and usufructuary traits.

Mortgage by Conditional Sale

This occurs when a borrower appears to sell the property to the lender on certain conditions:

• If the loan isn’t paid by a specific date, the sale becomes final and absolute; or
• If the money is paid back, the sale becomes void; or
• Once paid, the buyer must return the property to the seller.

This is only legally considered a mortgage if these conditions are written directly into the sale document.

In this type:

• The property is “ostensibly” sold;
• The lender becomes the full owner only if the borrower defaults;
• There is usually no personal liability for the borrower;
• The lender’s fix is foreclosure, not just a sale; and
• Registration is required for values of Rs. 100 or more.

Usufructuary Mortgage

In this arrangement, the borrower hands over possession of the property to the lender. The lender is authorized to keep the property until the debt is paid. During this time, the lender collects rent or profits from the property and uses that money to cover the interest or the principal loan amount.

English Mortgage

Here, the borrower promises to pay back the loan by a specific date and fully transfers the property to the lender. However, the agreement includes a rule that the lender must transfer the property back to the borrower once the debt is paid in full.

Mortgage by Deposit of Title-Deeds

Often called an “equitable mortgage,” this requires:

• An existing debt;
• Handing over the original property ownership documents (title-deeds); and
• A clear intent that these documents serve as security for the loan.

Critical factors here include defining what counts as a title-deed and where they are handed over. If the exchange includes a formal contract, that contract must be registered. If it’s just a record of a finished hand-over, registration may not be needed.

This is common in Karachi and other notified cities. For banks, this type of mortgage can also be created by making a specific entry in the official land records (record-of-rights).

Anomalous Mortgage

Any mortgage that does not fit into the five categories mentioned above is classified as an anomalous mortgage. These are usually custom contracts tailored to specific situations.

Other forms of security include:

Pledge or Pawn

A pledge involves delivering physical goods to a lender as security for a debt or the performance of a task. It is a form of “bailment” where the lender holds the item until the borrower fulfills their obligation.

Charge

A charge occurs when a borrower’s property is designated as security for a debt, but no interest in the property is actually transferred. This is the primary difference between a charge and a mortgage.

Lien

A lien is a right to keep someone else’s property until a debt is paid. It can be created by law, by a clear contract, or by standard trade practices. A “particular lien” allows someone to keep a specific item they worked on (like a tailor keeping a suit) until they are paid for that specific work.

Registration of Mortgages, Charges etc.

Transfer of Property Act, 1882

Under Section 59, any mortgage (except for the deposit of title-deeds) involving Rs. 100 or more must be registered. The document requires the borrower’s signature and at least two witnesses. If the amount is less than Rs. 100, the parties can choose to register or simply hand over the property (except in simple mortgages).

Registration must follow the Registration Act, 1908. A mistake in registration can ruin the mortgage. While an unregistered document can’t be used as primary evidence of the mortgage, it might be used to show the borrower’s personal debt or the nature of the lender’s possession.

Companies Act, 2017

Under this Act, almost any security interest created by a company, including charges on share capital, real estate, book debts, movable property, or intellectual property like patents, must be registered with the registrar within 21 days.

If a company fails to register these interests, the security becomes void against liquidators and other creditors if the company fails. However, the underlying debt remains valid, and the money becomes due immediately.

Effect of Non-Registration

Failing to register a company charge doesn’t mean the debt disappears. It simply means the lender loses their “priority” status. Against the company itself, the mortgage remains enforceable as long as the company is still operating and not being shut down (liquidation).

Prohibition of Floating Charge on Assets

Under banking laws, a bank cannot create a “floating charge” (a charge on assets that change, like stock-in-trade) on its own property unless the State Bank of Pakistan approves it in writing to protect depositors. Any charge made without this is invalid. Banks can appeal a refusal to the Federal Government within 90 days.

Mortgage Concepts

At common law, a mortgage was seen as a full transfer of title that would be canceled once the debt was paid. Today, some regions still use this “title theory,” while others treat a mortgage strictly as a “lien theory” (a right to sell but not ownership). Pakistan uses a structured legal framework that blends these concepts.

The History of Mortgage Law

The concept began in 12th-century English feudalism. Originally, lenders took full ownership and possession immediately. If the borrower missed the deadline by even one day, they lost everything. Ancient “live pledges” (where land income paid the debt) eventually gave way to “dead pledges” (where the lender kept the income and the borrower had to find other ways to pay).

A mortgage is a contract creating an interest in land, not the loan itself. It acts as evidence of a debt. It is a transfer of interest on the condition that the interest returns to the owner once the contract is fulfilled. This allows the borrower to stay on the property while the lender holds a legal right to it.

Express Contractual Terms of a Mortgage

While every contract is different, most include these standard clauses:

Redemption: The rule that once the debt is paid, the mortgage is canceled and the lender must return the legal interest.

Transferability: Covenants apply to the borrower and their heirs, and stay in place even if the lender sells the loan to someone else.

Personal Covenant: The borrower’s personal promise to pay. The lender can often sue the borrower even if the property has been sold to someone else.

Title Integrity: The borrower guarantees they truly own the property and have the right to mortgage it.

Free and Clear: A guarantee that the property has no other hidden debts or legal issues that would block the lender’s rights.

Further Assurances: A promise that the borrower will cooperate to help the lender get clear title if a default happens.

Prior Encumbrances: The borrower must disclose any other existing loans on the property.

Insurance: The borrower must keep the property insured or provide funds to cover its value if it is destroyed.

Release of all Claims: The borrower drops any legal claims against the lender regarding the property, except for the right to get the title back after payment.

Acceleration on Default: A vital clause stating that if one payment is missed, the entire remaining loan amount becomes due immediately.

Quiet Possession: A promise that the lender won’t interfere with the borrower’s use of the property as long as payments are made.

Omnibus Clause: If the borrower fails to pay taxes or insurance, the lender can pay them and add those costs (plus interest) to the main loan.

Repairs: The borrower must keep the property in good shape to protect the lender’s security value.

Advances: The lender isn’t forced to give the money if legal issues (like a builder’s lien) appear after the contract is signed.

Sale Clause: Also called “Due on Sale,” this allows the lender to demand full payment if the borrower sells the property.

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