UNDERSTANDING USUFRUCTUARY MORTGAGE

The word USUFRUCT is a combination of two words usus and fructus.

Usus refers to the right to use something directly without damaging or altering it, and fructus refers to the right to enjoy the fruits of the property being used – that is, to profit from the real property by leasing it, selling crops produced by it, charging admission to it, or similar acts.


DEFINITION OF USUFRUCTUARY MORTGAGE


The Indian Transfer of Property Act defines, USUFRUCTARY MORTGAGE as a mortgage—Where the mortgagor delivers possession 1[or expressly or by implication binds himself to deliver possession] of the mortgaged property to the mortgagee, and authorises him to retain such possession until payment of the mortgage-money, and to receive the rents and profits accruing from the property 2[or any part of such rents and profits and to appropriate the same] in lieu of interest, or in payment of the mortgage-money, or partly in lieu of interest 3[or] partly in payment of the mortgage-money, the transaction is called an usufructuary mortgage and the mortgagee an usufructuary mortgagee.


In simple words usufruct is a legal right accorded to a person or party entity that confers the temporary right to use and derive income or benefit from someone else's property. While the usufructuary has the right to use the property, they cannot damage or destroy it or dispose of the property


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BACKGROUND OF USUFRUCTUARY MORTGAGE


Usufructuary mortgages have been quite popular in India, especially in rural India, since the mid-19th century. Owing to urgent need for money arising out of natural calamities (drought, flood, etc.), weddings, funerals or life-threatening diseases, farmers/villagers would pledge their land to get money from money lenders. Owing to the widespread practise in 19th century it was recognised by the law during the latter part of that century – Section 58 (a) the Transfer of Property Act, 1882, deals with mortgages and Clauses B to G define their various types, including usufructuary mortgage, known as Bhog-Bandhak Hrin in Hindi.

EVOLUTION & CURRENT SCENARIO


Usufructuary mortgage contracting is a common medium of borrowing in India that involved borrowing large sums to meet contingencies. The practice seems to have gained further ground in rural India through non-banking institutions. Banks avoid lending in usufructuary mortgage products owing to the complexity and management issues there-off.

Under the law, such a mortgage must also be registered by payment of stamp duty. The stamp duty charges vary from state to state, and are equal to the property registration charge.


FEATURES & CHARACTERSTICS OF USUFRUCTUARY MORTGAGES

  • Usufructuary mortgage is a type of mortgage where the mortgagor delivers the possession and right to enjoy an income of and from the property to the mortgagee.

  • If the mortgagor is not in a position to give immediate possession, it is sufficient if he gives the right to possession.

  • Instead of giving actual possession, the mortgagor may direct the tenants of the mortgaged property to pay the rent to the mortgagee.

  • The possession or right is conferred for a limited time period. It can be granted to the usufructuary, or person holding usufruct, as a way to look after property until the death of a property owner and it can be settled if the property owner is in ill health.

  • While the usufructuary has the right to use the property, they cannot damage or destroy it or dispose of the property.

  • A usufructuary does not have full ownership of the property, because they do not enjoy the third property right, abusus, which refers to the right to consume, destroy, or transfer ownership of the property to someone else.

  • No title is given to the mortgagee.

  • Mortgagor has not given any personal security a right to sale a foreclosure to the mortgagee.

  • The mortgage does not incur any personal liability to repay the money; and

  • There be no personal liability to pay there is forfeiture and therefore, the remedies of foreclosure or sale are not available to the mortgage

Example- X has been granted usufruct over Y’s property. Y’s property is a guesthouse with a garden that needs maintenance . Y is in ill health and can no longer tend to the property and run the business. X, as the usufructuary, has the right to use the property and run the business on Y's behalf for the time the usufruct is in effect. The usufruct may be in effect until Y's death when the estate will be settled and the property will be passed on per act of law or the directions in the estate.


MATURITY & CLOSURE


The right of a usufructuary borrower to recover possession of the property starts when mortgage money is paid out of rents and profits or partly out of rents and profits and partly by payment or deposit, and not merely on the expiry of loan tenor, which is typically 30 years. This means that the mortgage can be foreclosed prior to maturity of the entire tenor, in case the mortgagor has sufficient funds to pay-off the borrowed money, subsequently, possession of the property can reclaimed by mortgagor.


PROS & CONS


Pros -In rural belts the usufruct mortgage is quite popular as it offers advantages over other forms of contracts in risky environments when insurance and credit markets are very imperfect. Due to close proximity and local intelligence, lenders in village are better placed to understand the local nuisances of getting into such deals. Banks and financial institutions from organized sector don’t have the requisite expertise and therefore shy away from such transactions


Cons-Except in an emergency situation, such transactions should be avoided as the advantages may back-fire.By entering in such transaction, the borrower obtains a decent amount for an immediate need and can choose when to repay the loan. However the unpredictability of future events may turn out adversely leading to situation, where he is unable to pay back the mortgage, at all.


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