ASPECTS OF FACTS & LAW RELATING TO S.M.E.

LOANS

Normally, any financial institution which lends money insists on security of immovable property.
The original title deeds of an immovable property can be deposited for any borrowing and it is
called mortgage by deposit of title deeds or equitable mortgage. A charge is created on the
property covered by the document deposited. There should be utmost care & caution to be
excised while taking immovable property as security on grant & disbursal of loans of higher
value as the repayment is guaranteed only on the basis of high stakes of the property offered as
security as the customer due to his immediate need only would have offered such property as
security & would never meant to lose it for the same loan which would be lesser in value than
that property offered.

Mortgage of an immoveable property and

Precautions to be taken prior to such mortgage:

One of the most common dilemmas faced by NBFC’s is as relating to mortgaging of an

immoveable property and precautions to be taken prior to such mortgage.

Therefore prior to advancing of any loan on the basis of creation of mortgage or charge over any
immoveable property, it is advisable to approach a legal professional to ensure that proper title of
the seller of the immoveable property is established and also to ensure subsequent documentation
vests the immoveable property and the title to the immoveable property completely in favour of
the purchaser.

All consequent issues like S.M.E. loans, providing collateral etc. with reference to the property
would be affected if perfect title does not pass on to the purchaser under a registered Sale Deed
which would adversely affect the interest of the person who lend the money / Mortgagee based
on such security offered through a mortgage Deed.

Registration of a Sale Deed does not ratify or rectify an inherently defective title.

Ownership:-

The origin of ownership is in possession:

Actual possession implies a right to retain it until the contrary is proved and to that extent
possessor is presumed to be the owner .

The concept of ownership gave birth to “title” and the idea of title as the better right to obtain or
retain possession evolved through dower and detenue.
A person, who would succeed in establishing a better right to have possession than the other,
would be the owner.

All titles to land are ultimately based on possession.

This is the position in English law as well as Indian law.

There is a dictum which says that so far as land is concerned, there   is no law of ownership but
only a law of possession. 
Ownership never remains suspended or in abeyance but is ‘vested’ in some person or other in
some form of right or other.

Every property always remains vested in a legal person or a living person and only the person in
whom the property is vested can transfer it   to another person.

Possession :-

Possession is the prima facie evidence if title .Whether the property stands in the name of the
present owner can be ascertained by obtaining Possession Certificate from Village Office.
Possession Certificates will be issued only to owners of property and at least in the erstwhile
Malabar Region of Kerala such possession Certificates are issued after mutation of names in the
Revenue Records with out any delay. So much so land tax also will be accepted from such
owners and receipts issued to them and the fact of possession can be ascertained by verifying
Possession Certificate and Land Tax (Basic Tax) Receipt.
  
Property here connotes immoveable property. They may be land or building. We may note here
that land may be:-

a) Private land
b) Government land
c) Government land on lease
d) Land held by Corporate Bodies
e) Land held by Trust

In case of Buildings ,buildings may be are

a) Private building
b) Government building
c) Government building on lease
d) Buildings held by Corporate Bodies
e) Buildings held by Trust

For the purpose of Scrutiny of the title .property can be divided as registered or unregistered.
Unregistered Property: As a general rule, intending customer should deliver an abstractt of title (such as
will, deeds of convergence and also the events coming in devolution of the ownership) at his expense.
Observe if there are any defects.

Registered property: unlike the un-registered property where the responsibility of the intending
customer is intending customer is hancy, the mortgage has more care to be taken in case of registred
property.

Title to Immoveable Property:

An immoveable property can be residential, commercial or any other property including

buildings thereon.

The person who is the owner of the immoveable property derives his ownership for the property
from various documents and deeds relating to the property establishing his ownership and title to
the same.

Title is a legal term for a bundle of the rights in the bundle may be separated and held by
different parties.

Title means a right to property considered with reference either to the manner in which it has
been acquired to its capacity of being effectually transferred.

It may also refer to a formal document that serves as evidence of ownership.

Title can be created by act of parties or by operation of law.

Title is original or derivative i.e.,    is acquired by transfer or operation of law  or by wrong or

tort .i.e., by wrongful possession, abatement, or    usurpation.

Title is the evidence of the right of ownership or the ground of right of ownership.

Title is distinct from possession, a right that often rights in a piece of property in which a party
may own either a legal interest or an equitable interest accompanies ownership but is not
necessarily sufficient to prove it.

In many cases, both possession and title may be transferred independently of each other

Conveyance of the document may be required in order to transfer ownership in the property to
another person.

Title Deeds:

The title documents and deeds vary from property to property and also from State to State.
Most title documents are specific to State legislation although the overall ownership and title to
the property is as covered under the provisions of the Transfer of the Property Act, 1882.

Types of Title Deeds:

Titles as well as title deeds are created by acts of parties and also by operation of law. Title is
created by acts of parties in the following   manner:

1) Transfer by way of sale by executing and registering Sale Deeds.

2) Transfer by way of Gift by executing and registering Gift Deeds.
3) Transfer by way of Settlement by executing and registering Settlement Deeds.
4) Transfer by way of Exchange by executing and registering Exchange Deeds.
5) Property owned jointly by more than one person is partitioned among the joint owners by
executing and registering Partition Deeds

Title Deed issued under specific Statutes:

Provisions are there in certain Statutes for conferring title to specified immovable property on
certain specified category of persons.
For example,   ‘Patta’ or Certificate of Purchase issued to cultivating tenants, Kudikidappukars
and, Assignment Deed coupled with Patta issued to assignees of excess land under the Kerala
Land Reforms Act; Assignment Deed and Patta issued under the Kerala Land Assignment Act
and the various Rules and Schemes framed there under. 

Such title deeds subject to the restriction if any regarding alienation and mortgage etc are good
title deeds.

Title under Awards and Court Decrees:

 Title is often created or declared by decrees of Courts or by Awards by other legal Fora. These
are however not treated as “Title Deeds”, but are mere evidence of title based on which title deed
can be made.

Documents:

The documents relating to property or commercial transactions are generally called Instruments

or Deeds. The term “Document” has very wide import.

Under general law ‘document’   means any matter expressed or described up on any substance
by means of letters, figures or mark for the purpose of recording that matter.

The dictionary meaning of ‘document’ is   “a deed, writing, inscription, that furnishes evidence.
This would mean that even a piece of paper on which something is written or typed or printed is
to be treated as ‘document’.

With the introduction of Cyber law, electronic documents are also now legally recognised in our
country as having evidentiary value

Instrument:

The Indian Stamp Act defines an “Instrument” to include every document by which any right or
liability is purported to be created, transferred, limited, extended, extinguished or recorded.  

A testamentary document ( e.g., a Will while the testator/ author of the will is alive) an Award ,
Decrees and Judgments of Courts, Certificates of Shares , Share Warrants ,etc are not considered
as Deeds.

So is the case with land tax receipts, municipal resolutions, Corporation resolutions, allotment
letter etc. 

Abstract of title deeds:

Abstract of title this depicts the chain of transaction that has taken palce regarding the property under
opinion. Generally it may be done for a period of 30 years. This would open on eyes to so may transitions
regarding the said property which he may not be aware of

Always it is better to prepare the abstract of title deeds in a tabular form, documents should be mentioned
seriatim, date should be related, nature of document to be written, particulars of owners & predecessors
has to be noted, any change in mutation has to be mentioned, abstract of encumbrance ( at least for 30
years or right for the date of original or mother deed) should be obtained. Then all the documents of
transferor have to be arranged chronologically. After that, these documents here to be compared with
encumbrance. If you came to know of any transaction or conveyance as per encumbrance certificate but
that document is not found in list then clarification should be obtained from the intending customer & gap
should be filled up by requisitioning those requisite deed or document. This can be done after obtaining
documents as per check slip/

Abstract of title deeds

CHECK LIST

On Abstract of Title Deeds

Serial Name of documents Whether produced?

No Yes No
01 Absolute Sale Deed/ Conditional Sale deed/
Auction Sale deed extended by statutory bodies
02 Encumbrance Certificate from sub-register, from
date of allotment title date or 30 year earlier till
date.
 03 Possession certificate issued by statutory body/
Society.
04 Allotment Letter issued by the statutory body/
Society.
05 Khatha Certificate issued by the statutory body/
Society.
06 Certified or copy of the Lease Cum Sale
Agreement.
07 Latest Tax Paid Receipt
08 Auction Sale Confirmation issued by the
statutory body/Society.
09 Genological Tree

Investigation, Tracing & Scrutiny of Title in case of Mortgage of property offered as

security in SME Loan Agreements :

Verification of Encumbrances and Charges:

1] Investigation of title starts with the present owner’s original title deed which will always be
‘the document of title ’to the property under study.

2] Once the original deed is perused the investigator proceeds to verify the parent documents or
the prior title deeds.

3]To what extent and up to what period the prior title deeds are to be perused will vary from case
to case.

The safest thing is to peruse the title deeds for the last 30 yeas.

The reasons for this proposition are ;

 ( 1 ) The period of Limitation against Government is 30 years ;

( 2) . Under Section 90 of the Evidence Act , a document 30 years or more are presumed to be
validly executed.

( 3) The contents of any document are presumed to represent the correct agreement or

understanding between the parties there to .

However a search for the last 12 years is treated as normally sufficient .

If the title cannot be reasonably be ascertained with in 12 years, then it is necessary to go back
as much as necessary.
Whether all the title deeds including parent documents to be examined should be originals will
also differ from case to case.

In addition to ascertaining the owner’s title, it is the duty of the investigator to rule out the
possibility of any subsisting charge by way of equitable mortgage on the property under
investigation. For this, perusal of all original title deeds for the last 12 years or even more may
become necessary.

To make an Illustration : 

“A owns 10 cents of land by a sale deed of the year 1999.

This property was originally sold by B in 1988.
After that there were five transfers and A is the 6th transferee.”
In this case, to be on the safer side all the six original deeds from 1988 onwards and at least a
copy of B’s own title deed are to be perused.
This is because the same land was again and again transferred and re-transferred.

Another Illustration:

An owned 10 acres of land by a Gift Deed of the year 1965.

Out of it A sold seven cents to B in 2003.
In this case B’s original deed is to be perused.
Besides the original of A’s title deed is to be examined; it could be   returned after substituting a
reliable copy of it.
Thus if there is no prior Deed with in 12 years the earliest available one has to be looked in to.

The Advocate who examines the title of the owner of immovable property , makes or causes to
be made searches in the Offices of the Sub-Registrar and the Revenue Authorities as well as the
Municipal Offices concerned , to find out whether any transaction has taken place in respect f the
property during the past relevant period, whether there are any encumbrances created ,or any
other claim subsisting , whether any lis pendens notice is registered ,whether the property stands
in the name of its owner in the Revenue records etc.

This practice however is good.

But in Karnataka provisions are made in the law for getting Encumbrance Certificates from the
concerned Sub-Registrar’s Offices.

Such Certificates will contain all transactions relating to the property covered by such
Certificates and the Investigator will be able to ascertain whether there exists any registered
charge or encumbrance over the said property.

The best and ideal thing is to obtain Encumbrance Certificates for 30 years;

but it is sufficient to get Certificate for 13 years so that full 12 years will be covered. 
Other charges can be ascertained by perusing the title deeds for sufficient number of years and
the possibility of subsisting equitable mortgage can be ascertained by calling for and verifying
the original prior title deeds .
The recitals in the title deeds will clearly reveal if any charges are created by the maker of the
deed.

For example, in some Partition Deeds monetary obligations are fixed for equalisation of shares.

In some Gift Deeds the right of alienation will be restricted till the death of the donor or
monetary obligations in favour of some individual or individuals are made a precondition for the
enjoyment the gift.

It follows therefore from the foregoing discussions that for a proper investigation of title the
following Title Deeds / Documents are necessary: -

 Original Title Deed of the present owner

 Parent Documents /Prior Title Deeds covering 13 years
 Encumbrance Certificate for 13 years
 Possession Certificate from Village Office
 Up to date Basic Tax Receipt
 Up to date Building Tax Receipt, if any

There is also a practice of obtaining Location Certificate from the Village Office along with the
Possession Certificate. Location   Certificates will help to ascertain the exact location of the
property and its present boundaries .A Field Map / Survey Sketch of the property also can be
obtained from the Village without much difficulty. How ever in cases where there are approved
Building plan, license, and Permit, Location Certificates and Field Map / Survey sketch can be
dispensed with.

Title to immovable property is ascertained by perusing relevant “Documents” and “Deeds”

pertaining to such property.

Objects of Investigation of Title:

The object of    investigations of title is to ascertain the ownership and title of a given property,
in most cases immovable in nature.

The attributes of ownership are :

 
(1)right to have and to get possession ;
(2) right to prevent interference by others ;
(3) Power of alienation
(4) liberty of using the object according to owner’s will ;
(5)liberty of enjoying the fruits and to avail of the object owned ;
(6) liberty of changing its form and even destroying it.
The following aspects should come out in investigating title to immovable property:

 A full description of the property.

 A chronological list of documents / deeds perused.
 Whether the documents perused are original / photocopies / true copies/ registration
copies etc.
 The nature of title of the owner i.e., freehold, leasehold and whether the title is less than
full ownership
 Whether the title is tainted by any minor’s claim.
 Whether land tax has been paid up to date and whether any dues recoverable as arrears of
land revenue are outstanding.
 Whether the land is affected by any Revenue, Tenancy Legislation or other special
Statutes.
 What is the result of the perusal of encumbrance Certificates on the title to the property in
question
 Whether the possibility of any subsisting equitable mortgage is rule out.
 Whether the owner is in actual possession of the property. On what basis is this aspect
certified.
 What is the type of mortgage is possible. Is the title clear and marketable, free from
encumbrances and claim by minors.
 If the owner is a Company, Partnership, Trust, or other legal person how title is affected
by its rules or bye laws or any special laws or Statutes.
 If the property to be mortgaged is a Flat / Apartment, in residential or Commercial
Complex, how far independent title is ensured. What is the nature of document presently
available?
 If the mortgage is by deposit of title deeds, what are the documents to be kept for the said
purpose?

Investigation of Title:

How to trace title:

Tracing the flow of title is the most important part of the investigation of title .Thorough
knowledge of the various aspects of law especially civil law is a must for this. Law relating to
Minors and the legally disabled; Law of Succession, both inter vivos and intestate; Different land
tenures prevalent   in the locality; Special Statutes like the Kerala Land Reforms Act ,The
Schedule Tribes Act , The Land Assignment Act ; the modes of obtaining title through decrees
of Court etc. are to be thoroughly known to the Investigator in order to make a proper tracing of
title.
Examples of Laws that directly affect property transactions In the Kerala Context:

 The Transfer of Property Act, 1882

  The Indian Contract Act, 1872
 The Registration Act, 1908
 The Specific Relief Act, 1963
 The Urban Land (Ceiling & Regulation Act), 1976
 The Indian Easements Act, 1882
 The Land Acquisition Act, 1884
 The Powers of Attorney Act, 1882
 The Indian Limitation Act, 1963
 The Income Tax Act, 1961
 The Wealth Tax Act, 1957
 The Indian Succession Act, 1925
 The Companies Act, 1956
 The Indian Trusts Act, 1882
 The Foreign Exchange Management Act, 1999
 The Indian Stamp Act, 1899
 The General Clauses Act, 1897
 The Code of Civil Procedure, 1908
 The Married Women’s Property Act, 1874
 The Guardians & Wards Act, 1890
 The Hindu Succession Act, 1956
 The Hindu Adoption and Maintenance Act, 1956
 The Hindu Marriage Act, 1955
 The Hindu Minority and Guardianship Act, 1955
 The Court of Wards Act
 Personal Law – Intestate Succession
 The Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002

 
      State Laws (Karnataka):

1. The Karnataka Land Revenue Acts 1964 and Rules and Notification there under
2. Karnataka Land Reforms Act 1961The Kerala Government Land Assignment and Act Rules
issued there under
3. Scheduled Castes & Schedule Tribes (Restriction on transfer of Certain lands) Act and Rules
issued there under.
4. The Karnataka Survey and Boundaries Act- Rules and Notifications there under
5. The Transfer of Registry Rules
6. The Escheats and Forfeitures Act and Rules
7. Requisition and Acquisition of Property Act and Rules
8. The Kerala Building Tax Act 1975
9. The Kerala Apartment Ownership Act
10. The Kerala Joint Hindu Family System (Abolition) Act 1975, 30 of 1976.
The law relating to transfer of immovable property is governed by the Transfer of Property Act
Two other Acts closely connected to it are the Indian Registration Act and   the Indian Stamp
Act. 
Law of Contract, and the various Statutes passed by State Legislatures from time to time have
important bearing in the matter of ascertaining title to immovable property.
Law relating to succession is another important area connected to investigation of title.

In case of parties who are individual, or entrepreneurs, there is a necessity, and the property is
offered as mortgage.

While the deeds of title to property are accepted as security to the loan offered to the borrower,
the deeds of title have to be checked for its validity in the eye of law and its marketable title.

Otherwise, when the loan remains unpaid and when the necessity arises to seek intervention of
the court for the sale of properties secured them, it may be found that the said properties may not
exist or may have a defective title so as to deprive the fruits of the preliminary decree.

To play safe and to be secured, there is an absolute necessity to check and verify the title deeds
and make an investigation into the title.

Tracing & Scrutiny of title is the survey on to the ownership of the property the prospective
customer offers as security.

Title of the person claiming to be the owner of the property should be traced and scrutinized
based on the nature of the property which he is offering because his title depends upon the mode
by which he acquired the property or devolved upon him as the case may be.

The person who handover the title deeds, be he, the borrower or the guarantor might even
hoodwink the creditor but it rarely happens.

In SCUF, we have qualified and experienced law officers and advocates on the panel to check in
to the title deeds and provide advises as to whether such properties could be taken as security for
the loan to be offered or enhanced.

Scrutiny of title deeds :-

Scrutiny of title deeds of the property is the first and preliminary step to be taken to establish the
ownership of the seller as relating to the property.

For that purpose the Sale Deed relating to the purchase of the property by the seller should be
scrutinized, if the seller has acquired the property by purchase under a Sale Deed.

Arising out of the scrutiny of the Sale Deed the following related documents should also be
examined:-
1. Up to date Tax Paid Receipts.

2. Up to date Encumbrance Certificate

3. Khata as issued by the Corporation/Municipality as relating to the specific State.

The scrutiny of Sale Deed along with the above should further escalate to scrutiny of parent
documents being title documents relating to the immoveable property to be traced from the
original owner of the immoveable property especially if the property had been a larger property.
Documents as relating to partition, division, etc. should also be examined by the potential
purchaser. If the property had been a consolidated agricultural property and if the present
purpose is to acquire the same for any other purpose the conversion order relating to the
consolidated property should also be scrutinized and examined.

In the event of the potential purchase being with reference to only a plot/site, all development
agreements should also be examined to ensure proper documentation between the original owner
of the land and the developer if both are two different parties to ensure no third party claims to
the property.

Notwithstanding the basic requirements to be examined as above, each immoveable property

would have certain issues peculiar to it either as arising out of the situs of the property or out of
ownership of the property which would impact the passing of ownership and title to the
purchaser.

In case of mortgage by deposit of title deeds, the point to be noted is that promissory note is to
be on the date of borrowing and the deposit letter must be on a subsequent date. For example, if
a person borrows money on 1 st December and executes a promissory note evidencing the said
borrowing, he deposits the original documents of his property 5/6 days after the date of
borrowing. He deposits the original title deeds of his property on first December.

A serious point to be noted here is that borrowing by deposit of title deeds is restricted to only
the notified areas. The Govt. from the time to time may notify the places in which borrowing by
deposit of title deeds can be followed. As on date only certain areas are included under the
notified area. For example, Chennai, Coimbatore, Madurai, Tiruchirapalli, etc., are covered by
the notification. But, in case of mofusil areas like Gummidipoondi, Chettipunniyam, etc.,
borrowing by deposit of title deeds cannot be done as these are not coming under the notified
area. In such places, only registered mortgage deed is the answer. Hence, you cannot have a
uniform or standard practice of following the procedure in case of borrowing by resorting to
deposit of title deeds. So, it depends on the place in which the property is situate and whether it
is a notified area or not.

With regard to stamp duty on deposit of title deeds, recently the Government of Tamilnadu has
made an amendment that irrespective of the value of the property mortgaged by deposit of title
deeds, the stamp duty will be Rs.5,000/- only. Similarly for registered mortgage deeds also, they
have reduced the stamp duty from 4 % of the amount borrowed to 1 % with a maximum stamp
duty of Rs.20,000/- . In other words, even if the borrowing is about Rs.50/60 lakhs, still, the
maximum stamp duty payable is only Rs.20,000/- and the Registration fees is Rs.5,000/-. I have
enclosed Xerox copies of model forms for deposit of title deeds as well as registered mortgage
deed (first simple mortgage)

SECOND TIME BORROWINGS:

A question is often asked that after the initial borrowing by deposit of title deeds, if the borrower
wants further accommodation whether we can extend the lending by means of a simple letter on
the same security of immovable property offered by the borrower for the initial borrowing.

Answer for this would be emphatic no.

In such cases, you should register the mortgage deed and there is no question of giving second
loan on the deposit of title deeds for the initial borrowing.