Priority of a Legal Mortgage Over an Equitable Mortgage: A Landmark Clarification

1. Introduction

The Supreme Court of India, in the case titled The Cosmos Co. Operative Bank Ltd. v. Central Bank of India (2025 INSC 243), profoundly addressed the complex interplay between different types of mortgages, particularly legal and equitable mortgages. Originating as an appeal against a High Court decision, this litigation involved two major banks—Central Bank of India (Respondent No.1) and The Cosmos Co. Operative Bank Ltd. (Appellant)—both of which offered loan facilities secured by the same flat.

The primary debate revolved around whether an unregistered agreement of sale, deposited as security, could constitute a valid charge or mortgage against the property in question. Central Bank of India had relied on two unregistered agreements of sale, whereas Cosmos Bank’s security included not only an unregistered agreement but also the original share certificate from the housing society. Determining when and how each bank’s charge arose—and which bank had the right to enforce it first—lay at the heart of the controversy.

Ultimately, this judgment clarifies some pressing legal issues regarding:

• The meaning and effect of equitable mortgage in Indian law.
• The distinction between an equitable mortgage under English common law and a mortgage by deposit of title deeds under Section 58 of the Transfer of Property Act, 1882 (TPA).
• Which lenders have priority in enforcing security interests when multiple mortgages or charges exist over the same property.

2. Summary of the Judgment

In essence, the Supreme Court disagreed with the High Court’s conclusion that Central Bank of India’s claim had unqualified primacy simply by virtue of it being the first to receive an unregistered agreement of sale as collateral. The Court reasoned that:

• An unregistered agreement of sale alone cannot create a valid “legal mortgage” over immovable property under the TPA, but at best may amount to an “equitable mortgage” or a charge in some circumstances.
• A deposit of the actual title deed (in this case, the share certificate of ownership issued by the housing society) creates a statutory “mortgage by deposit of title deeds” under Section 58(f) TPA, which is accorded priority over equitable mortgages.
• An equitable mortgage (arising out of an unregistered agreement to create a charge) is subservient to a subsequent fully valid and enforceable statutory mortgage by deposit of title deeds, except in certain limited and fact-specific situations (like notice, fraud, or negligence by the subsequent mortgagee).

Consequently, the Court allowed The Cosmos Co. Operative Bank’s appeal, set aside the High Court’s judgment, and recognized Cosmos Bank’s right to first enforce recovery against the deposited sale proceeds.

3. Analysis

3.1 Precedents Cited

The Court relied on several important precedents, including:

• Suraj Lamp & Industries (P) Ltd. v. State of Haryana (2012) 1 SCC 656: Clarified that an unregistered agreement of sale does not, by itself, create any interest in land or constitute a validly enforceable mortgage against subsequent transferees.
• Bank of India v. Abhay D. Narottam (2005) 11 SCC 520: Affirmed the principle that an agreement of sale, even if deposited to secure a loan, cannot pass legally enforceable title—hence, it is insufficient as a legal mortgage.
• Dattatreya Shanker Mote v. Anand Chintaman Datar (1974) 2 SCC 799: Explained the nature of charges under Section 100 of the TPA and how those charges do not necessarily equate to valid transfers of interest.
• Anita Enterprises v. Belfer Coop. Housing Society Ltd. (2008) 1 SCC 285: Observed that, in a co-operative housing society context, the ownership or membership interest differs from typical landlord-tenant relationships.
• SHAKEEL AHMED v. SYED AKHLAQ HUSSAIN (2023 SCC OnLine SC 1526): Reiterated that unregistered sale agreements alone do not confer title or right to sue for ownership unless followed by specific steps under law.

3.2 Legal Reasoning

• Unregistered Agreements of Sale Under Section 54 TPA: The Court underscored that an unregistered agreement of sale constitutes neither a transfer of title nor a valid property interest. While such agreements can sometimes be used for specific performance, they do not create a mortgage or “first charge” over property in a way that prevails over subsequent secured creditors.
• Equitable Mortgage vs. Legal Mortgage (Mortgage by Deposit of Title Deeds):

  Under English law, depositing documents of title without completing required formalities typically generates an “equitable mortgage.” Section 58(f) of the TPA, however, statutorily recognizes “mortgage by deposit of title deeds” as a legal mortgage—if the deposited document indeed evidences valid title and the deposit is made with an intent to create security.

  Consequently, the Central Bank of India’s reliance on unregistered sale agreements alone, though creating an equitable charge, was deemed subordinate to Cosmos Bank’s mortgage, which was perfected via lodging the share certificate (the pivotal title document for co-operative flats in Maharashtra).

• Priority of Charges:

  The Court clarified that mortgages by deposit of actual title deeds take legal precedence over earlier equitable or unperfected claims created only by unregistered agreements. A prior equitable mortgage can be displaced by a subsequent legal mortgage, unless the subsequent mortgagee had knowledge of the earlier equitable arrangement or knowingly participated in fraud or gross negligence.

  Applying Section 78 TPA, the Court found that the earlier bank (Central Bank) had not notified the subsequent bank or the housing society of its charge in any robust manner. Because the share certificate was available to and relied upon by Cosmos Bank, it was reasoned that Cosmos Bank’s mortgage had priority.

3.3 Impact

The judgment advances clarity on issues routinely encountered in Indian banking and real estate transactions, particularly:

1. Reaffirms that registration of documents (or deposit of actual title deeds) is vital for creating a statutorily recognized security interest (legal mortgage) that can defeat earlier equitable claims.
2. Encourages lenders to ensure they receive the full chain of title or at least the principal title document—and complete any required registration—to avoid losing priority to subsequent lenders.
3. Highlights that, in a co-operative housing scenario, the share certificate itself often represents ownership or the “title deed.” Hence, banks should exercise added caution in reviewing the availability and authenticity of the share certificate.
4. Bolsters due diligence norms, emphasizing that a prior, unregistered charge may be easily overridden if there is no proof that subsequent mortgagees had notice or engaged in wrongdoing.

4. Complex Concepts Simplified

4.1 Equitable Mortgage

An equitable mortgage arises when parties intend to secure a property for repayment of a debt but fail to meet all the statutory requirements for a formal (legal) mortgage. In English law, deposit of documents—even incomplete ones—could suffice to raise an equitable interest. In Indian jurisprudence, such an arrangement may be treated akin to a charge under Section 100 TPA unless all the requirements under Section 58(f) TPA are met, which transform the deposit into a legal mortgage.

4.2 Priority of Mortgages

In simple terms, who gets paid first if multiple lenders hold security in the same property? The TPA says earlier mortgages generally get priority. However, when the earlier “mortgage” is merely equitable (unregistered, incomplete, or not involving valid title deeds) and the later mortgage is duly perfected (via valid deposit of the actual title deed), the latter can overtake the former. This is where notice and absence of fraud become crucial—if the second lender has no knowledge of the first lender’s interest and the second does all that is necessary to claim a valid security, it can prevail over the earlier interest.

5. Conclusion

The Supreme Court’s ruling unequivocally sets aside the High Court order, thereby enhancing the legal clarity that a deposit of the actual title deed—here, the share certificate—creates a statutorily recognized mortgage under the TPA, entitled to priority over earlier, unregistered or incomplete securities. This case thus underscores the importance of lenders’ due diligence in acquiring valid title deeds and registering mortgage instruments, wherever applicable, to protect their interests.

In the broader legal context, this decision reinforces the principle that equitable doctrines cannot defeat the clear statutory provisions of Indian property law. It further emphasizes that notice, or the lack thereof, is determinative in resolving competing claims.

Key Takeaway: Document your security meticulously. Unregistered sale agreements alone do not suffice to confer a legal security interest that can survive a subsequent, properly perfected mortgage.