Image source: https://www.lawnn.com/family-settlement-deed/

This article has been written by Vidhya Sumra, pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho

Introduction 

From low-income families to ultra-wealthy families, many people put their hard-earned money into immovable property to enjoy for the rest of their lives. After the owner’s demise, his legal heirs inherit the property he left behind, according to his wishes either as expressed in his will, or, if he dies without leaving a will then according to the provisions of the Succession Act.

In India, property disputes are very common. Property disputes account for 66% of all cases seeking judicial review, while family disputes account for 10% of all cases. Problems can arise because of the absence of a registered will or someone attempting to contest the will. Some people also try to resolve their differences amicably through a family settlement arrangement, which summarizes how the family members have agreed upon the property’s distribution among the heirs or beneficiaries. For most squabbling relatives, the obvious remedy is to take the matter to the courts. However, this time-consuming, tedious, and costly mechanism does not ensure a satisfactory outcome. Some families may choose to resolve property disputes outside the courts. In this regard, family members may go in for a family settlement deed. A family settlement deed is a much more amicable and cost-effective alternative.

What is a family settlement deed?

A family settlement deed is also known as a family compromise agreement. It is an arrangement or a legal document between the family members that records that all family members agree to common terms and conditions in the event of any disagreements. This agreement involves participation and needs to be signed by all the members acknowledging that this agreement was not made through fraudulent means, force, and coercion from any family member. It is normally in the context of resolving a disagreement. 

The agreement is confirmed with the approval of all family members who firmly support the resolution given in the agreement at a later date when the event mentioned in the agreement occurs. It is presented in the form of a deed and is properly attested and registered by government officials.

The aim is to protect the family’s assets and reputation by recognizing that it is not in the family’s best interests for members to participate in fights or disputes. The aim is to maintain and protect the peace, stability, and overall well-being of the family and its members. A family settlement arrangement is useful in a variety of situations, including land and immovable properties, bonds, lawsuits, and family feuds.

According to Halsbury’s Laws of England, “A Family Arrangement is an agreement between members of the same family, intended to be generally and reasonably for the benefit of the family, either by compromising doubtful or disputed rights or by preserving the family property or the peace and security of the family by avoiding litigation or by saving its honor. The agreement may be implied from a long course of dealing. But it is more useful to embody or to effectuate the agreement in a deed to which the term family agreement is applied.”

In Ram Charan Das vs Girija Nandini Devi, it was held that courts give effect to a family settlement on the large and general basis that its purpose is to resolve current or potential property disputes among family members. In this context, the term “family” should not be interpreted in the narrow sense of a group of people who are legally recognized as having a right of succession or a claim to a share in the property in question.

What are the benefits of forming a family settlement deed?

A family settlement deed is a contract that is used to resolve all family disputes outside of the courtroom. It does not involve any significant third-party approvals or acceptance. The following are some of the advantages of forming a family settlement deed:

  1. It settles inter-rights in a property matter among family members without causing conflicts.
  2. Preserving family rights and settling peace by preventing lawsuits or saving honor is general and fair for the sake of the family.
  3. Since consideration for a promise is essential in a contract, it is legally binding on all family members, much like any other contract or arrangement, and must be followed in order to keep the peace in the home.

What are the most important aspects of a family settlement deed?

The family settlement deed should be made on the basis of good faith. It must not have the consequence of restricting the rights of a family member who is not a consenting party to the agreement. It should be in the essence of resolving conflicts and maintaining peace, rather than provoking conflicts or disturbing the harmony. There should be no fraud or unfair control by any family member or member. It has to be a purely voluntary arrangement.

A family settlement deed in the form of transfer, allocation, and recognition of pre-existing rights. As long as it satisfies the other requirement of a valid family settlement deed, any of the pre-existing rights of one or more family members can be revoked by their approval. The issue to be considered is the recognition of their right and not its transfer, even if there is revocation of rights by one or more members.  

Format of a family settlement deed

Drafting a family settlement deed is a structured way of preventing any future disputes between family members in the event of certain issues or the demise of any person’s family members. Forming a settlement deed between the family members is an ideal solution before taking matters to the courts.  As informed above, when a matter is taken to the courts, it becomes costly and time-consuming as it involves costs for hiring lawyers, documentation, and fees. In addition, the matter will take time for the court to pass the settlement decision that will benefit all the parties. 

The family settlement deed is a legally binding document and is prepared after structured negotiations between the family members. In general, while drafting the Family Settlement Deed, the following clauses should never be ignored: 

  • Names of family members:

Since family settlement deeds are structured to avoid future disputes, it is important to have names of all participating family members whose decision matters in the family arrangement.

Example:

“This Deed of family settlement is made at ____ on this ____day of______, 

Between

  • Mr. ___________, aged______, son of Shri _________ resident of ___________, holding PAN__________(hereinafter called the First Party);

AND

  • Smt. __________, aged______, wife of Shri __________ resident of ___________, holding PAN__________ (hereinafter called the Second Party), 

AND

  • Smt. __________, aged____, wife of Shri ________ resident of __________, holding PAN _________(hereinafter called the Third Party),

AND

  • Shri___________, aged ________, son of _________ resident of __________, holding PAN___________(hereinafter called the Fourth Party).”
  • Details of the property:

This is a very essential clause of the agreement. As we know, this is a contract that is used to resolve all family disputes outside of the courtroom related to properties so this clause shall have details of all the properties like house number, area and even a site map. Example:

“WHEREAS the First Party is absolute owner and in actual possession of ____ consisting of ____, admeasuring ____, total measuring ____ sq. ft., situated in ______ which is bounded as described in the schedule of property attached to this Deed.”

  • Reason for forming a family settlement deed

The aim of family arrangement is to settle conflicts amongst family members without disturbing family peace so the family settlement deed binds on family members to accept terms and conditions of the deed. It states the main function of the agreement. Example:

“Now this deed certifies that the Parties hereby agree with each other that they will observe, perform, and convene the terms and conditions indicated hereinabove in accordance with the Deed for family settlement and in respect of the settlement reached between the Parties hereunder.”

  • Dispute:

As informed above, the aim to form a family settlement arrangement is to resolve a dispute related to properties between family members. So it is necessary to add details regarding the settlement of the dispute in the agreement. Example:

“That it is hereby declared and agreed between the parties that this agreement for family settlement ends all disputes between the parties relating to the respective rights and claims of the parties to the joint family properties and the parties admit and acknowledge the claims of each other towards their respective properties as per this agreement for family settlement.”

  • Details of additional assets:

This clause would contain information related to any additional assets like any other immovable properties, shares, golds, etc. Example:

First Party is the absolute owner of the assets listed in Annexure A attached to this Agreement. First Party has an estimated sum of Rs. ____ in a separate Saving bank account mentioned in Annexure B hereunder”.

  • Division of the property:

It is essential to add details about the division of the properties amongst family members to settle disputes between them. Example:

“a. The party of the first part herein is allotted the schedule ‘A’ mentioned property. 

b. The party of the second part herein is allotted the schedule ‘B’ mentioned property. 

c. The third part herein is allotted the schedule ‘C’ mentioned property.”

  • Settlement of dispute:

This is also a very important clause in the agreement. This contains a declaration from the parties that they will not claim any further rights. Example:

“It is expressly agreed by and between the parties hereto that the heirs will not claim any rights under the said codicil and that the Party of the Third Part will not claim any rights.”

  • Resolution

This clause will contain the details regarding resolution and parties will confirm that all disputes between them are settled. Example: 

“The parties confirm and declare that all disputes and differences between them have been resolved and that none of them has any further or other claim or demand of any kind against the other or others.”

  • Declaration:

It is important under the family arrangement that the family members agree with the solution and convene to the terms and conditions. Example:

“The parties also agree and declare that the conditions of the Memorandum of Family Settlement reached between them and recorded herein are fair and bona fide and that they are in the best interests of all parties.”

  • Signature and thumb impressions
  • Legal attestation

Can a family settlement deed be made orally?

Yes, a family settlement deed can be communicated orally and it does not need to be registered if it is made verbally. It is legally recognized and legitimate. To determine if such an arrangement is legitimate and equitable, all of the essential factors of a valid family arrangement will be added.  However, recording documentation in writing is recommended to prevent any misunderstanding. 

Legal enforceability of the family settlement deed

As informed above, it is important for the family members who sign the deed to recognize that the settlement deed has legal force, and all parties agreeing to the terms and conditions shall abide by it. It shall also be forwarded to the relevant authorities to facilitate the transfer of property and division in accordance with the terms and conditions of the family settlement deed. The parties to the family settlement deed must also sign the declaration, no objection certificate, and other related documents with respect to the transfer of the property. 

Provisions

  1. As informed above, post demise of the owner of the property, his legal heirs inherit the property he left behind, either according to his preferences as stated in his Will or, if he dies without leaving a Will, according to the rules of the Succession Act applicable to such individuals.
  2. The agreement must follow the fundamental rules of Contract Law. It is impossible to force a family arrangement.
  3. This agreement is an instrument of partition and therefore is required to be stamped under Schedule 1 of Article 45 r/w Section 2(15) of the Stamp Act. However, an oral family agreement dividing the property does not require stamping.
  4. The courts have ruled that any property transferred as part of a family arrangement or division is not subject to capital gains taxation. A family arrangement in which property is given away cannot be interpreted as a ‘transfer’ for capital gain purposes. As a result, no capital gain tax is due under Section 45 of the Income-tax Act of 1961.

Does the family settlement deed need registration?

The family settlement deed may be communicated verbally or in writing, but documentation is recommended to prevent any misunderstandings. If a settlement is oral, it does not need to be registered. However, registration is a good choice for making the written word legal since it is recognized in a court of law. The family settlement deed is definitive and conclusive and it cannot be revised or amended at any point during the settlement process. All parties to the family settlement deed are bound by the terms of the deed and must adhere to their respective shares as defined and specified in the family settlement deed and shall also agree to the registration of the deed before the concerned authorities. 

In Tek Bahadur Bhujel vs Debi Singh Bhujil, the Court had considered that a family arrangement can be reached verbally. Its terms may be written down as a memorandum on what was agreed upon by the parties. The memorandum does not have to be prepared with the intention of being used as a foundation for the parties’ future title. It’s normally made as a record of what was decided upon so that there are no ambiguities in the future. Only when the parties reduce the family agreement in writing with the intention of using that writing as evidence of what they have negotiated and when the arrangement is brought on by the document as such, does the document require registration since it becomes a document of title declaring for the future what rights in what properties the parties hold?

Further in Ramgopal vs Tulshi Ram And Anr, the following principles were established:

  1. It is possible to make a family settlement deed verbally.
  2. If the decision is taken verbally and there is no written record then there is no need for registration. 
  3. If it could have been made verbally but was reduced to the form of a “document”, registration is required (when the value exceeds Rs. 100).
  4. Whether the words have been “reduced to the form of a document” in each case is a matter of reality that must be decided based on the meaning and phraseology of the writing, as well as the circumstances and intent for which it was written.

In Mt. Jileba v. Parmesra, it was stated that “if a family agreement is made orally and information about its terms is submitted to a Court in writing, that writing would not be considered to be a deed of family arrangement and would not be required to be registered.”

How does a family settlement deed guarantee legal remedy?

If a family settlement deed is duly notarized and registered with the relevant authorities, the right holders are assured of all legal remedies. The family settlement deed is recorded in front of the registrar with all terms and conditions accepted by the family members. The deed binds all parties to the agreement by referring to legal obligations made in the Indian Contract Act. If all the legal conditions are met, the family settlement deed becomes legally enforceable under the Indian Succession Act, 1925. 

Does it attract stamp duty?

This depends on how the document is made. Generally, if it is a document recording a past transaction or merely reducing an earlier oral family arrangement, then it may not be necessary to pay stamp duty and registration fees as this is not a document of title.  Otherwise, it must be duly stamped and licensed if it is supposed to be a document of the title containing statements of parties’ rights.

In the subsequent reference bench judgment of the Bombay High Court in the matter of the Chief Controlling Revenue Authority vs Shri Abdul Karim Ebrahim Balwa, the revenue authorities referred the matter to the Maharashtra Law Department to consider whether the family settlement is a partition and attract stamp duty.

In a negative decision, the reference bench said, “Once we remember this, it is apparent that this agreement is a family arrangement for the resolution of a dispute. It is nothing more than a record of events that occurred between the parties through the efforts of mediators and the resolution of conflicts on their own and the ratio defined in Kale’s Case Supra”.

Difference between a family settlement deed and partition

Family Arrangement 

Partition

Based on disputed, probable, or even hypothetical arguments between family members.

There are very clear pre-existing rights.

There is a degree of relationship involved.

It is made between people who are not related by blood but are co-owners of land.

A family arrangement can be in the nature of re-aligning, re-distributing or even consolidating certain claims and rights.

Recording past transactions of division/ partition of property.

It can be even oral in which case it does not require registration and stamping.

It requires compulsory registration as it creates, assigns, limits, or extinguishes rights or title in a property 

Conclusion

In view of the above, it is clear that the family settlement arrangement is beneficial because it allows for an amicable negotiation between parties which takes less time than going to court. The registration and stamping requirement of the family settlement deed depends on the terms and conditions of the deed agreed between the family members. To express this purpose, the deed that records previously negotiated terms of oral partition between family members must be carefully written. If a document/deed is vague, it can be interpreted in a variety of ways, such as a partition deed, which must be registered and subject to stamp duty.

References

  1. https://economictimes.indiatimes.com/realty-trends/property-disputes-family-settlement-better-option-than-approaching-a-court/articleshow/20121849.cms
  2. https://blog.ipleaders.in/family-settlement-agreements-substituting-inheritance-rights-for-a-mutually-beneficial-deed/
  3. https://www.moneycontrol.com/news/business/real-estate/memorandum-of-family-settlement-all-you-need-to-know-6090551.html
  4. http://cs-india.com/what-is-family-settlement-agreement/
  5. https://shrutidesai.in/deed-of-family-arrangement-law/

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