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REAL ESTATE UPDATE 21st February, 2025 Issue No. 26/24-25
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FIRST IN TIME, FIRST IN RIGHT: THE PRINCIPLE OF MORTGAGE PRIORITY
BACKGROUND
The Supreme Court recently decided a case involving two banks claiming rights over the same property due to loans given at different times. In The Cosmos Co-Operative Bank Ltd. v. Central Bank of India & Ors.[1], the borrowers first took a loan from Central Bank of India in 1989, offering an unregistered agreement of sale as security. Nearly a decade later, in 1998, they took another loan from Cosmos Bank, this time depositing another unregistered agreement of sale along with a share certificate issued by the cooperative housing society.
Upon default by the borrowers, both banks claimed priority over the property. Cosmos Bank argued that Central Bank’s mortgage was invalid, as it was based on an unregistered agreement of sale, while Central Bank maintained that its mortgage was valid under the concept of equitable mortgage. The case eventually reached the Supreme Court after going through the Debt Recovery Tribunal (DRT) and the Debt Recovery Appellate Tribunal (DRAT).
JUDGMENT
Justice J.B. Pardiwala, delivering the judgment, ruled in favor of Central Bank of India, confirming that an equitable mortgage under Section 58(f) of the Transfer of Property Act, 1882 can still be valid if the borrower deposits title documents with the lender with the intent of creating security. The Court also upheld the long-established “first in time, first in right” principle, stating that a mortgage created earlier takes priority over a later one unless fraud or negligence is involved. Since Central Bank’s mortgage was created in 1989, it held the first charge over the property, making Cosmos Bank’s claim secondary.
The Supreme Court reviewed the decisions of the Debt Recovery Tribunal (DRT) and the Debt Recovery Appellate Tribunal (DRAT), which had examined whether an unregistered agreement of sale could create a valid mortgage. The High Court had ruled that Central Bank’s mortgage had priority over Cosmos Bank’s claim as it was created earlier. It also noted that by the time Cosmos Bank sanctioned its loan in 1998, the property was already under the control of a Court Receiver, appointed in 1994 as part of earlier legal proceedings. The Supreme Court agreed with the High Court’s findings, reiterating that an unregistered agreement of sale does not grant ownership rights. However, it clarified that a mortgage by deposit of title deeds can still be legally valid if there is a clear intention to create a charge over the property. As Central Bank had taken security over the property in 1989, its mortgage was enforceable and took precedence over the subsequent mortgage claimed by Cosmos Bank. Dismissing the appeal, the Supreme Court upheld the High Court’s ruling, confirming that Central Bank had the first right over the property and reinforcing the principle that mortgage priority is determined by the date of its creation.
CONCLUSION
The Supreme Court’s ruling reinforces the principle of mortgage priority, confirming that an earlier mortgage takes precedence over a later one unless fraud or negligence is established. By upholding the validity of equitable mortgages under Section 58(f) of the Transfer of Property Act, 1882. The judgment clarifies that a mortgage by deposit of title deeds is legally enforceable even without a registered deed, provided there is intent to create security.
The decision underscores the importance of due diligence by lenders, emphasizing that banks must verify prior encumbrances and ongoing legal proceedings before granting loans.
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[1] Special Leave Petition (C) No. 11557/2019