Charge on Property As Explained Under Transfer of Property Act

This article explains the charge on property under the Transfer of Property Act 1882. A charge is a financial liability or commitment. A charge on the property is where the immovable property is made security for the payment of money. The security has to be for a debt.

Charge on Property as Explained Under Transfer of Property Act

1. Where immovable property of one person is made security for the payment of money to some other person by – a. Act of parties, or b. Operation of law, and
2. The transaction does not amount to a mortgage.
3. The latter person is said to have a charge on the property.
4. All the provisions of a simple mortgage apply to such a charge.
5. This section does not apply to the charge of a trustee on the trust property for expenses properly incurred in the execution of his trust.
6. No charge can be enforced against to the charge of a trustee on the trust property for expenses properly incurred in the execution of his trust.

Charge on immovable property is created to secure payment of money. Section 100 says that where the immovable property of a person is made security for the payment of money to another and the transaction is not a mortgage, it is said that a charge has been created. In a charge, there is no transfer of any interest in favour of the charge-holder but he is only entitled to recover his money from the property. In a charge, there is the creation of only a personal obligation, i.e., a right to payment out of the specified property.[i]

Security for payment of money

It is necessary under section 100 that there must be a clear intention to make a particular property security for the repayment of a debt.

Where the property is not intended to serve as security there can be neither a mortgage nor charge.[ii]

An encumbrance on the property has the effect of being a charge. Entering into a memorandum of understanding to sell a property has been held to be not creative of any encumbrances or charge on property. Receiving advances or amounts in pursuance of a memorandum also does not amount to creating encumbrance.

Who can create Security?

Property can be made security either by the act of parties or by operation by law.

Act of Parties

When a charge is created by an act of parties, no particular form of words is required to create it. All that is necessary is that there must be clear intention to give property as security for payment of money in praesenti.[iii] A charge on future property is valid and operates on such property when it comes into existence.

Operation of Law

A charge may be created as a result of a legal obligation and not by violation of parties. The following are examples of the creation of charge by operation of law –

1. Section 55(4)(b) – the vendor has not been paid the amount due. Where the ownership of the property passes into the hands of the buyer before the payment of the whole of the purchase money, the seller is entitled to a charge upon the property in the hands of the buyer.[iv]
2. Section 55(6)(b) – here, the vendee acquires in respect of purchase money paid in advance. The vendee is entitled to a charge on the property, as against the seller and all persons claiming under him to the extent of the seller’s interest in the property, for the amount of any purchase money properly made by the buyer in anticipation of the delivery and for interest on such amount.
3. Section 73 – here mortgagee’s lien is on surplus sale proceeds.

Transaction does not amount to a mortgage

The main points of distinction between a mortgage and a charge are –

1. A mortgage is a security for the payment of debt. A charge is a security for the payment of money, which may or may not be a debt.
2. A mortgage may be security for the performance of an engagement giving rise to a pecuniary liability. In the case of charge, it is not so.
3. A mortgage involves the transfer of an interest in some specific immovable property. There is no transfer of an interest in a charge in favour of a charge-holder. The charge-holder can satisfy his claim out of a particular property without transferring that property to him.
4. A mortgage can be created only by the act of parties. A charge can be created either by the act of the parties or by operation by law.
5. In a mortgage, there may be a covenant to pay. In a charge, there can be no covenant to pay.
6. A mortgage gives rise to a right in rem. A charge does not give rise to right in rem (against the world). It is available only against those particular persons who are affected by the notice of the charge.
7. A mortgagee can follow his security into whatsoever hands it may go. A mortgagee can even follow a bona fide purchaser for value. A charge-holder cannot follow his security.
8. A mortgage can be enforced by foreclosure suit for money and sale (under sections 67, 68 and 69). A charge can be enforced only by sale of property through the court.
9. Every mortgage is a charge. A charge is a much wider term than a mortgage. Every mortgage is a charge, but every charge is not a mortgage.
10. A simple mortgage can be enforced within 12 years, whereas other types of mortgages can be enforced within 30 years. A charge can be enforced within 12 years.

Enforcement of charge

A charge can be enforced by a suit even when created by a decree.

Extinction of charge

A charge may be extinguished in the same manner as a simple mortgage. Therefore, a charge may be extinguished –

1. By act of parties by the release of debt or security.
2. By novation, or
3. By merger.

Distinction between charge and lien

1. A charge may be created both by the act of parties and the operation of law. At the same time, a lien arises by operation of law only.
2. A charge can exist on immovable property only. At the same time, a lien may be created both on immovable and movable property.
3. A charge is not possessory in nature. Whereas a lien is possessory in nature.
4. A charge-holder may satisfy his claim by selling property subject to charge. Whereas a lien-holder can satisfy his claim by private sale or by retaining possession

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[i] Gobinda Chandra Pal v. Dwarka Nath Pal, (1908) 35 Cal 837

[ii] Nathan Lal v. Durga Das, AIR 1931 All. 62

[iii] JK (Bombay) Pvt. Ltd. v. New Kaiseri-Hind Spg & Wvg Ltd, AIR 1970 SC 1041

[iv] State of Karnataka v. Shreyas Papers Pvt Ltd, AIR 2006 SC 865

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1. Mortgage: Meaning, Explanation And Kinds
2. Marshalling, Contribution and Subrogation | TPA, 1882