Transfer of Property Act, 1882 / Chapter IV / Mortgages

Section 77: Receipts in lieu of interest

Section 77 regulates a mortgage in which the parties agree that the income received by a mortgagee in possession will stand in place of interest on the mortgage debt, or in place of interest and specified parts of the principal. It creates a limited exception to four duties under Section 76.

Complete text of Section 77 - Transfer of Property Act, 1882

Meaning and application of Section 77

Under Section 58, a mortgage is a transfer of an interest in specified immovable property to secure a loan or other monetary obligation. The mortgagor provides the security; the mortgagee holds the secured interest. A mortgagee in possession is one who has possession of the mortgaged property during the continuance of the mortgage. Receipts ordinarily include income such as rent and profits arising from that property.

Section 77 operates only when the mortgagor and mortgagee have a contract that the receipts, for as long as the mortgagee remains in possession, are to substitute for (1) interest on the principal mortgage-money, or (2) interest plus defined portions of that principal. Merely receiving rent does not by itself establish such an agreement. The agreed treatment of receipts, and whether specified portions of principal are covered, should be ascertained from the mortgage terms and applicable evidence.

Which duties under Section 76 do not apply?

Where Section 77 applies, the following particular duties in Section 76 are excluded:

• Clause (b): the duty to use best endeavours to collect rents and profits.
• Clause (d): the duty, subject to its terms, to make necessary repairs from available rents and profits.
• Clause (g): the duty to keep clear, full and accurate accounts and provide copies and supporting vouchers at the mortgagor's request and cost.
• Clause (h): the ordinary rule for crediting receipts or a fair occupation-rent against interest, principal and any surplus.

The exception is limited. Section 77 does not displace Section 76(a) (prudent management), (c) (payment of public charges and rent, subject to its terms), (e) (no destructive or permanently injurious acts), (f) (treatment of insurance proceeds), (i) (accounting after tender or deposit), or the provision on loss occasioned by the mortgagee's default, to the extent otherwise applicable. A mortgagee cannot use Section 77 as a general exemption from proper stewardship.

Practical examples

Interest only: A mortgages a rented building to B. They expressly agree that B will retain the rents received during possession in lieu of interest on the principal loan. While this agreement applies, the four listed Section 76 duties are displaced by Section 77; the other applicable obligations continue.

Interest and part of principal: A and B instead agree that receipts will replace the interest and an expressly defined part of the principal each year. Section 77 recognises that arrangement. Its precise effect on the outstanding balance depends on the contract; it does not automatically extinguish the entire principal.

No agreement: If B merely collects rent without an agreement of the kind specified in Section 77, the ordinary rules under Section 76, including the accounting and crediting provisions, remain applicable.

Related sections and official sources

Read Section 76 - Liabilities of mortgagee in possession, Section 72 - Rights of mortgagee in possession, and Section 62 - Right of usufructuary mortgagor to recover possession. Consult the India Code record for the Transfer of Property Act, 1882 and the Legislative Department for the Act and relevant legislative materials. Consider applicable State amendments and the particular mortgage terms.