RULE OF PRIORITY UNDER PROPERTY LAW

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Introduction

The maxim “qui prior Est tempore potior Est jure” which means “he who is earlier in time is stronger in law” applies in cases where there are two or more equitable interests. The courts’ have found it troublesome while dealing with the determination of relative rights and priorities of successive assignees of the same or overlapping rights.[i] In other words, they find it hard to determine as to whose rights should come first when parties approach the court with conflicting interests. As the name itself suggests, the doctrine of priority talks about who should be given priority over whom.

The doctrine of priority is provided under section 48 of the transfer of property act. The doctrine is important because many a times, subsequent interests are created in a property which gives rise to conflicting interests. This doctrine helps the courts to reach a conclusion in such cases. This is a principle of natural justice which says that one who has advantage in time should also have an advantage in law when rights in favor of two or more are created. This section has developed on the principle “nemo dat quod non habet” which means “no one can give what they do not have”. When a man in possession of property has created an interest in favor of someone, he cannot later deviate from it and create another interest without being free from the previous transaction.

Section 48[ii] of transfer of property act, 1882

“Priority of rights created by transfer—Where a person purports to create by transfer at different times rights in or over the same immoveable property, and such rights cannot all exist or be exercised to their full extent together, each later created right shall, in the absence of a special contract or reservation binding the earlier transferees, be subject to the rights previously created.”[iii]

This section of transfer of property act says that when an owner of a property wishes to transfer an interest at different times in the same immovable property, and the rights arising out of these transactions cannot coexist or enjoyed to their full capacity then the rights created later would be subjected to rights previously created unless there is a special contract or reservation binding the prior transferees.

Essentials of Section 48

  • The right/interest is transferred to different people in the same property;
  • The interest created should be at different times. i.e., prior and subsequent;
  • Such interest cannot coexist or enjoyed to full extent together;
  • The right created at a subsequent stage is subject to the right created before.

Provided that there is no contract which binds the first transferee.

Also, the property in which interest is transferred must be the same and the rights of different persons should conflict to apply this principle.

Basis of the principle- “Qui prior Est tempore potior Est jure”

The maxim says that “he who is earlier in time is better in law”. This means that the subsequent transferee cannot prejudice the interests of the transferee who came before him. When a transferor would transfer interest in the same property repeatedly then all subsequent transferees would take that interest with the interest of prior transferee. It is also based upon the principle of “nemo dat quod non habet” which means no one can give what he himself is not entitled to. Thus, a subsequent mortgage would fail to jeopardize the rights of the old mortgagee.

Example– Reema mortgages her property to Rajesh for 1 crore. She later sells the same property to Priya. Now, two interests have been created in the same property. But Priya has acquired an interest in the property with the interest of Rajesh. Thus, if Reema fails to pay the mortgage amount then the property would be used to recover the amount. This would be because subsequent interest is subject to prior interest.

In the case of Duraiswami Reddi vs. Angappa Reddi[iv] The madras high court held that the first transferee would be entitled to enforce his rights even though his documentation was late and the subsequent person enters into the transaction without the knowledge of the first transaction rendering him a bona fide transferee.

What happens when subsequent transactions relating to the mortgaged property are made?

1. Creating Interest by selling the property

An immovable property which is given as a security against a long is known as mortgaged property. In simple words, when one person is giving to loan money to another, some property is pledged as security for the repayment of loan. The person either gives original documents or conditional possession of the property to the lender until he repays the loan. An example is housing loan. Whenever one takes a loan from a bank, the bank retains original documents of the property as a security for repayment of loan. In case of default, the bank can auction the property and recover the loan amount.[v]

In general terms, mortgage is defined as an interest created in some immovable property for securing repayment of loan.

In the case of Chouth lal vs. Hira lal[vi] A sale deed was executed in favor of one defendant on 17th January 1932. This deal was executed on 5th mar, 1932. In the meanwhile, a mortgage on the same property was created in favour of another party on 20th February, 1932. It was held that the mortgage would have its effect over the subsequent mortgage.[vii]

In Hafiz Md. Anwar vs. Jaumna prasad Singh[viii] It was held by the court that if subsequent transactions have been entered into at different times, then they would not confer any interest, right or title. This is in accordance with section 48 of the transfer of property act.

In the case of Suresh babu vs. State of Kerala[ix] The court said that “Even if the property which is subject matter of an equitable mortgage is sold by the mortgagor, to a third party, that sale deed will be subject to the mortgage claim. It cannot be said that the title cannot be transferred. So long as the title holder has title, he can transfer the title deed; but it will be subject to the mortgage liability.”[x]

Section 60[xi] of the act talks about the Right to redemption– This right is available to the mortgagor after the principal money has become due and paid. It requires the mortgagee to-

  • Deliver the property deed and documents available with the mortgagee to the mortgagor
  • To deliver possession when he possesses the mortgaged property;
  • At the cost of mortgagor to re- transfer the property to him or to any third party; or
  • Execute an acknowledgement stating “that any right in derogation of his interest transferred to the mortgagee has been extinguished”.

Section 60A[xii] “allows the mortgagor to require the mortgagee to assign the mortgage debt and transfer mortgagor’s property to such third party as mortgagor may direct and the mortgagee shall be bound to obey such direction of the mortgagor”.[xiii]

Section 92[xiv]talks about the Right of Subrogation– The term “subrogation” stands for “substitution”. It allows a person to stand in the shoes of the creditor after paying off his liabilities. In mortgage, this right can be enjoyed only through redemption and therefore, once the entire amount has been paid off can a person enjoy the right of subrogation. The person would acquire the right of foreclosure, redemption and any other rights of mortgagee. The person who redeems is said to be subrogated to the rights of mortgagee.[xv]

Therefore, a transfer by sale in favour of third party can be made because the mortgagor is still the owner. However, when he (third party) would buy the property from mortgagor, he will be buying the right to redemption because that is what mortgagor has with him. He can then redeem the property and enjoy subrogation. Also, the rule of priority would not apply if their interests are not conflicting with one another. i.e., one gets interest through sale and the other through mortgage. Also, it’s his s responsibility to make proper enquiry (caveat emptor) before purchasing the property from mortgagor and ask him to clear the encumbrance.

2. Creating subsequent interest by way of mortgage

A second mortgage is a subsequent mortgage which is made when the original or prior mortgage is still in effect.[xvi]The transfer of property act does not mention such subsequent mortgage to be invalid in whatsoever manner. Thus, when the owner remortgages a property, it stands valid in the eyes of law. There is no law in India which makes such subsequent mortgage invalid, so it is only fair to assume that it is not invalid.[xvii] However, in such cases, when there would be a default in payment then the original mortgagee would have the right to receive the proceeds from the sale of property until all his dues are paid.[xviii]

The term “Pari passu” which means “equal footing” used in connection with the concept of mortgage implies that with the consent of the mortgagees it can be contemplated that the creditors are on equal footing. When a subsequent mortgage is created with the prior consent of first mortgage, this principle is applied. The main point of difference between a subsequent charge and remortgaging the property at the same time is “consent”.[xix]

When there are differences on the availing of the property by the mortgagees, the doctrine of priority kicks in. This has been covered under section 48 of TPA which says ‘first in time is first in law’. In the case of ICICI Bank ltd. Vs. SIDCO Leathers ltd. And ors.[xx] The Supreme Court held that,

“In terms of Section 48 of the Transfer of Property Act, claim of the first charge holder shall prevail over the second charge holder and in case the debts are due to both, the first charge holder and the second charge holder are to be realized from the property belonging to the mortgagor, the first charge holder shall be repaid first”.

A full- bench of the Allahabad High court in Raghunath Prasad v. Jurawan Rai[xxi] said that, “a second mortgagee has a right to sell the property hypothecated to him subject to the rights existing in favour of the first mortgagee”.

The Madras High court in Gangadhara v. Sivarama[xxii] said that “the plaintiff, second mortgagee, was entitled to sell the property subject to the lien of the prior mortgagees.”

Thus, the provisions pertaining to doctrine of priority and supreme courts’ judgment makes it clear that the interests of first mortgagee would prevail over the second.

So, the mortgagor can create a subsequent mortgage in favor of the third party (second mortgagee) with the consent of mortgagee or without his consent. But, if there arises difference in enjoyment of mortgage, first mortgagee’s right would prevail over second’s according to the Rule of Priority. For example, if Mortgagor defaults in payment of loan, the property would be used to repay first mortgagee. And after that, second mortgagee’s claim would be adhered to.

Conclusion

Section 48 of the transfer of property act deals with the doctrine or priority. It provides protection to the transferee from subsequent transactions created by the transferor over the same property. If a man creates subsequent interests in the same immovable property which cannot be enjoyed to their full extent or conflict each other, each right which is created after the prior one would be subjected to the previously created right unless there is some contract binding the prior transferee. Thus, the transferor cannot prejudice the rights by creating subsequent interests in the same immovable property. The owner is capable of creating subsequent mortgages or sale the property if he has the title deed, but the doctrine of priority would not allow him to refrain the prior mortgagee from enjoying his rights. This is based upon the doctrine “first in time, first in law”.


[i]“Pallavi Ghorpade, Doctrine of priority in property law, legalservicesindia.com (Apr. 3rd, 2021, 20:09), http://www.legalservicesindia.com/article/757/Doctrine-Of-Priority-In-Property-Law.html.”

[ii]“Transfer of Property act, 1882, § 48.”

[iii]“Indiankanoon.org, https://indiankanoon.org/doc/177158/, last visited May. 4th, 2021.”

[iv]“Duraiswami Reddi vs. Angappa Reddi, (1945) 1 MLJ 425”.

[v]“Adv. Binal G. Shah, sell- mortgage property, blog.ipleaders.in (May. 4th, 2021, 16:06), https://blog.ipleaders.in/sell-mortgaged-property/.”

[vi]“Chouth Mal v. Hira Lal, AIR 1950 Ajmer 50.”

[vii]“Lawtimesjournal.in, https://lawtimesjournal.in/qui-prior-est-tempore-potior-est-jure/, last visited May. 4th, 2021, 22:18).”

[viii]“Hafiz Md. Anwar vs. Jaumna prasad Singh, AIR 1958 Pat. 193 at pp. 195-96.”

[ix]“Suresh babu vs. State of Kerala”.

[x]“Casemine.com, https://www.casemine.com/judgement/in/5dc074a13321bc77c5089de7, last visited May. 8th, 2021.”

[xi]“Transfer of Property act, 1882, § 60.”

[xii]“Transfer of Property act, 1882, § 60A.”

[xiii]“Ejusticeindia.com, https://www.ejusticeindia.com/section-60a-of-the-transfer-of-property-act1882/, last visited May. 29th, 2021.”

[xiv]“Transfer of Property act, 1882, § 92.”

[xv]“Legalbites.in, https://www.legalbites.in/marshalling-contribution-and-subrogation-tpa-1882/, last visited May.29th, 2021.”

[xvi]“Julia Kagan, Second mortgage, Investopedia.com (May. 5th, 2021, 13:47), https://www.investopedia.com/terms/s/secondmortgage.asp.”

[xvii]“Tanmay Karmarkar, Subsequent mortgage of property, livelaw.in (May 5th, 2021, 13:49), http://www.livelaw.in.elibraryhnlu.remotexs.in/know-the-law/subsequent-mortgage-of-property-163940?infinitescroll=1.”

[xviii]“https://www.investopedia.com/terms/s/secondmortgage.asp.”

[xix]http://www.livelaw.in.elibraryhnlu.remotexs.in/know-the-law/subsequent-mortgage-of-property-163940?infinitescroll=1.

[xx]“ICICI Bank ltd. Vs. SIDCO Leathers ltd. And ors., 2006 SCC 10 452”.

[xxi]“Raghunath Prasad v. Jurawan Rai, I.L.R. 8 All. 105”.

[xxii]“Gangadhara v. Sivarama, I.L.R. 8 Mad. 246”.

Authored by: Vaishali Jeswani

Vaishali is a third-year law student pursuing B.A.LLB at Hidayatullah National Law University, Raipur.

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