A le­gal safety net

Buy­ers should sign sale agree­ment only after proper due dili­gence of a prop­erty and its ti­tles

HT Estates - - HTESTATES - Su­nil Tyagi

When it comes to sale and pur­chase of im­move­able prop­erty, par­ties of­ten ex­e­cute an agree­ment to sell or ATS prior to sign­ing the sale deed, which sets out the prin­ci­pal terms of the trans­ac­tion. Th­ese terms and con­di­tions in­clude the ad­vance sale con­sid­er­a­tion, to­tal sale con­sid­er­a­tion, time pe­riod within which the sale deed is to be ex­e­cuted and reg­is­tered, obli­ga­tions to be per­formed by the par­ties be­fore the trans­fer takes place, etc.

It is an im­por­tant doc­u­ment in the sale trans­ac­tion as it en­ables the process of sale to go through with­out hur­dles. There­fore, all terms and con­di­tions in­cluded in the ATS must be un­der­stood thor­oughly by both par­ties and obeyed through­out the sale process till the time the sale deed is made.

As per t he T r ans­fer of Prop­erty Act, 1882, an ATS for sale of im­move­able prop­erty does not by it­self trans­fer the ti­tle or cre­ate ownership in the prop­erty un­less sale deed is ex­e­cuted con­vey­ing the prop­erty. An ATS gives the par­ties a right to com­pel the other party to ex­e­cute a sale deed in re­spect of the prop­erty or to re­cover dam­ages for breach of con­tract if the sale deed is not ex­e­cuted. Some­times a sit­u­a­tion arises where the seller has ex­e­cuted an ATS but does not ful­fil his obli­ga­tions and sells the prop­erty to an­other pur­chaser. In such a case, the pur­chasers’ claim over the prop­erty may be­come dis­putable and nei­ther the pre­vi­ous pur­chaser, nor the sub­se­quent pur­chaser would be able to en­joy the prop­erty.

The law in this re­gard has been clar­i­fied by var­i­ous judg­ments. In one such case de­cided by the Supreme Court in 2004, the seller A, ex­e­cuted an ATS with the com­plainant B, for sale of cer­tain im­move­able prop­erty. On the ex­e­cu­tion of the ATS, A re­ceived cer­tain money as part of con­sid­er­a­tion, but failed to carry out the obli­ga­tions on his part under the ATS. He failed to de­liver the ti­tle deeds and to clear the prop­erty from en­cum­brances. Con­se­quently, B is­sued le­gal no­tices to A but in vain. Soon after, B came to know that A had en­tered into sale trans­ac­tion for the prop­erty with an­other pur­chaser, C.

There­fore, B filed a suit be­fore the trial court. The main is­sue in the mat­ter was whether C was a bona fide pur­chaser of the prop­erty in ques­tion, with­out notice. The trial court ruled in favour of the sale ex­e­cuted by A in favour of C be­cause B had failed to pay the bal­ance amount as per the ATS on time to pur­chase the prop­erty. Also, B had failed to prove that C had notice of the ear­lier ATS ex­e­cuted be­tween A and B. Ag­grieved by this de­ci­sion, B ap­pealed to the high court which then re­versed the find­ings of the trial court. It con­cluded that C had notice of the said ATS at the time of the sale and that a fresh ATS had been ex­e­cuted be­tween A and C only to de­feat the claim of B.

Ag­grieved by the de­ci­sion of the high court, C and A ap­proached the Supreme Court. The apex court up­held the de­ci­sion of the high court and ruled in favour of B and con­cluded that C was not a bona fide pur­chaser since he had knowl­edge of the pre­vi­ous ATS ex­e­cuted be­tween A and B. The courts’ de­ci­sions made it clear that the first pur­chaser would not be en­ti­tled to re­lief in a case of this kind if the sec­ond pur­chaser was a bona fide buyer and did not have in­for­ma­tion of or any ear­lier agree­ment with the first pur­chaser.

Any per­son not mak­ing the nec­es­sary in­quiries with re­gards to prior agree­ment of sale by in­spect­ing record or by get­ting it in­spected will be con­sid­ered as hav­ing ac­tual knowl­edge or deemed knowl­edge of such prior agree­ment. This type of sit­u­a­tion arises of­ten in sale or pur­chase trans­ac­tions of im­move­able prop­erty when the seller in or­der to get a high price for his prop­erty sells it to an­other pur­chaser even though he had al­ready en­tered into an agree­ment to sell with the orig­i­nal pur­chaser. Due to a gen­eral no­tion that pur­chaser’s rights can only be ex­er­cised on ex­e­cu­tion of sale deed, the rights of a pur­chaser are of­ten ig­nored de­spite his money be­ing blocked to pur­chase the said prop­erty.

The apex court has clar­i­fied the po­si­tion and recog­nised the rights of pur­chaser who has per­formed his part of the con­tract as per the agree­ment to sell. The pur­chasers should, there­fore, be aware while mak­ing pur­chase of any im­move­able prop­erty and un­der­take due dili­gence re­gard­ing any prior third party rights cre­ated by the seller which may ham­per the pur­chaser’s rights in the prop­erty.

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