Selling Mortgaged Property Without Bank Approval: Legal Guide for Buyers

Have you ever wondered what happens when a builder sells a property that's already mortgaged with a bank, without proper authorization? This concerning situation affects many homebuyers in India. To protect yourself from such predicaments, it's essential to understand what a mortgage truly is and the legal implications of selling a mortgaged property without a No Objection Certificate (NOC).

What is a Mortgaged Property?

A mortgaged property serves as collateral in exchange for a home loan or loan against property. In this arrangement, the borrower who pledges the property as security is called the mortgagor, while the lender who provides money in return for legal interest in the property is known as the mortgagee.

When mortgaging a property, both parties sign a detailed agreement called a mortgage deed. This document outlines all terms and conditions, including that the property remains with the lender until the loan and interest are fully paid. If the borrower defaults on payments, the mortgagee has the right to take possession of the property.

Quick Facts About Mortgaged Properties

• Mortgagor: The person who pledges the property as security
• Mortgagee: The financial institution that lends money in exchange for the mortgage
• Check if property is mortgaged: Visit https://www.cersai.org.in/CERSAI/asstsrch.prg
• Participate in auction to buy mortgaged property: Visit https://ibapi.in

Tenure of a Mortgage Loan

Mortgage loans typically come with affordable interest rates and can extend for a maximum period of about 30 years, depending on the lender's policies and borrower's eligibility. Smart strategies to reduce your home loan EMI can help you manage your mortgage more effectively.

Who Owns a Mortgaged Property?

Even while a property is under mortgage, the debtor (the person who borrowed the money) remains the legal owner. The mortgage deed only grants certain rights and interests to the lender until all dues are repaid within the agreed timeframe.

Documents Required to Sell a Mortgaged Property

To sell a mortgaged property legally, you'll need:

• Clear title deed
• Encumbrance certificate
• Property mortgage deed
• Mutation certificate
• Property tax receipts
• Utility bills
• No objection certificate from bank and housing society

How Can a Mortgaged Property Be Sold?

The sale of mortgaged property is governed by the Transfer of Property Act, 1882. Under Section 69(1)(c), a mortgaged property can be sold without court intervention if these conditions are met:

• The mortgage deed explicitly grants the mortgagee the right to sell the property.
• The mortgagor defaults on payments for at least 90 days (three months) after receiving a payment demand notice.
• The mortgaged property or part of it is located in major cities like Mumbai, Delhi, Chennai, Kolkata, etc., at the time the mortgage deed was executed.

Whose Permission is Needed to Sell a Mortgaged Property?

Banks and Non-Banking Financial Companies (NBFCs) can sell mortgaged properties to recover outstanding dues under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. This law allows them to auction the property without court intervention after issuing multiple notices to the defaulting borrower.

How to Check if a Builder Has Mortgaged a Property to a Bank

Unfortunately, some builders mortgage properties to banks for construction financing and then abandon projects midway. To verify if a property is free from mortgage:

1. Check land records at the sub-registrar's office.
2. Visit the Ministry of Corporate Affairs portal (www.mca.gov.in/MinistryV2/master+details.html) to research the builder's financial liabilities.
3. Check the CERSAI portal by entering the property's registration number to determine if it's under mortgage.
4. Request a builder NOC confirming the property is not mortgaged.

Is it Legal for a Builder to Sell a Mortgaged Property Without Bank NOC?

No, it is illegal and constitutes fraud under Section 420 of the Indian Penal Code (IPC). If a builder sells a mortgaged property without the bank's NOC, the bank retains the right to repossess the property from the buyer to recover its dues. In such cases, the homebuyer suffers the consequences of inadequate due diligence. This highlights the importance of thoroughly checking all property-related documents to ensure you're purchasing a property with clear title, free from mortgage and encumbrances.

To protect yourself, understanding how RERA protects homebuyers in India is essential before making any property investment.

How to Legalize a Mortgaged Property Bought Without NOC

Consider this example: Rahul Sharma purchased a 2BHK apartment in Pune in December 2024 for ₹55 lakh without taking a home loan. When he received the encumbrance certificate the day after registration, he discovered the builder had sold him a property that was already mortgaged to a bank. This was confirmed through an online title search. Since he didn't use a home loan, he missed the additional layer of due diligence that banks typically provide.

To make this transaction legally valid, Rahul must ensure:

• The builder pays all dues to the bank and obtains an NOC and registered release deed stating the property is free from mortgage/lien.
• A registered ratification deed is executed between the builder and Rahul, detailing the NOC and release deed. Since the builder sold the property, he loses his right of redemption under Section 60 of the Transfer of Property Act, 1882, which automatically transfers to Rahul as the new legal owner.
• If the builder refuses to cooperate, Rahul can file a fraud case under Section 420 of IPC and criminal breach of trust under Section 406 of IPC, alleging the builder concealed the mortgage status before selling the property.

How RERA Can Help When a Builder Sells a Mortgaged Property Without NOC

Homebuyers can file complaints with their state's RERA grievance redressal cell, which typically addresses issues within 60 days. If unsatisfied with RERA's ruling, buyers can escalate to the Tribunal Court for further resolution.

Understanding homebuyer rights under RERA can provide additional protection in such situations.

How to Buy a Mortgaged Property

Purchasing a mortgaged property can be advantageous as these are often sold in distress sales where the primary goal is debt recovery rather than profit. To explore such opportunities:

• Check properties listed on the Indian Banks Auctions Mortgaged Properties Information (IBAPI) portal under the Ministry of Finance.
• Don't assume the bank has completed all due diligence – they often sell properties "as is."
• Be aware that outstanding property taxes, maintenance dues, and other liabilities may transfer to you as the new owner.
• Conduct the same thorough due diligence as you would with any other property purchase.

Conclusion

Selling or buying a mortgaged property without proper NOC from the bank can lead to severe legal complications and financial losses. As a prudent homebuyer in India, always verify the mortgage status of a property before purchase, especially when dealing directly with builders. The extra time spent on due diligence can save you from significant troubles in the future and ensure your property investment remains secure. For a more comprehensive approach, check out 10 steps to ensure a profitable deal while buying a home.

Frequently Asked Questions

1. Can I check online if a property is mortgaged?
Yes, you can check on the CERSAI portal (www.cersai.org.in) by entering the property registration number.

2. What happens if I buy a mortgaged property without knowing?
You risk losing both your money and the property as the bank can repossess it to recover its dues.

3. Can a homebuyer file a criminal case against a builder for selling mortgaged property?
Yes, you can file a fraud case under Section 420 of IPC and criminal breach of trust under Section 406.

4. Is a mortgaged property more affordable than a regular property?
Often yes, as these are typically sold in distress sales where the goal is debt recovery rather than profit.

5. Can the original owner reclaim a mortgaged property after it's sold to a new buyer?
No, once sold, the original owner loses their right of redemption under Section 60 of the Transfer of Property Act.

6. How long does RERA take to resolve complaints about mortgaged properties?
RERA typically resolves complaints within 60 days of filing.

7. Can a bank auction a mortgaged property without informing the owner?
No, banks must issue multiple notices to the defaulting borrower before auctioning the property.

8. Do I need a lawyer when buying a mortgaged property?
Yes, it's highly recommended to hire a property lawyer to ensure all legal aspects are properly addressed. To learn about other essential professionals to consult, read about 5 key steps to ensure a safe and informed flat purchase.