This article is written by Sarabjit Singh, pursuing Certificate Course in Advanced Civil Litigation: Practice, Procedure and Drafting from Lawsikho.com. Here he discusses “Rule against Perpetuity and Perpetual Transfers”.
Only if human beings had their way they shall wish to live perpetually. However, laws of nature prevail over mankind and all living beings are destined to perish. So, the next best Homo sapiens’ desire is to preserve and pass his real assets from generation to generation or vernacularly ‘pust dar pust’, ‘naslan bad naslan’, ‘pidhi dar pidhi’.
Effects of perpetuity or generation to generation phenomena
Imagine an asset that shall forever continue to remain within a family till eternity, and deprive all others from enjoying its benefits. This impedes free and active circulation of property both for purposes of trade and commerce, as well as betterment of the property itself. Can you imagine, even the owner himself is denied the right to dispose it for higher value or to tide away difficult times. Similarly, the state is divested from earning revenue, which is only possible if property can change hands frequently. So, if perpetuities are allowed then even though the transferee has received the property, he has no power to alienate it. To quote Sir D. Mulla, “It is illogical to imagine a dead person below the grave controlling properties above his grave.” For this very reason, the state and the lawmakers felt the need for drafting the ‘Rule against perpetuity’.
Perpetuity may arise under two circumstances: –
- Transferor of property is deprived of the power of alienation.
- Remote interest is created in the property but without the right of alienation to the transferee.
However, a condition restraining alienation is void under section 10 of ‘The Transfer of Property Act,’ (TPA), and remote interest is governed by section 14 of TPA.
Rule against Perpetuity
Section 14 of the ‘The Transfer of Property Act, 1882’ (TPA) is rightly called ‘Rule against perpetuity’ as it limits the maximum time period beyond which property cannot be transferred. Starting from the date that the transferor transfers the property + lifetime of the last prior interest holder’s + gestation period of the unborn beneficiary + 18 years, ( ‘Age of majority of persons domiciled in India’ under section 3 of The Majority Act, 1875). This period is called the perpetuity period, and vesting of the property in the transferee cannot be postponed beyond this limit.
The above transfer is contingent to many other conditions viz. sections 5, 10, 13, 15, 16, 18 and 20 of TPA. However, it is to be borne in mind that section 18 of TPA allows transfer in perpetuity for benefit of public, and so provisions of section 14 & 16 do not apply in such cases.
Understanding section 13, 14 & 16 of TPA
These sections are complex and intertwined, so we will do ourselves a favor by breaking them threadbare.
Section 13 TPA
“Transfer for benefit of unborn person – Where, on a transfer of property, an interest is created for the benefit of a person not in existence at the date of the transfer, subject to prior interest created by the transfer, the interest created for the benefit of such person shall not take effect, unless it extends to the whole of the remaining interest of the transferor in the property.”
- Person in existence: To begin with, the ultimate beneficiary of the transfer is an unborn person, who is not yet in existence. Child may not be physically born, but from conception itself, he is considered as a person in existence. Transfer of interest in property is valid from the day of conception, though the same shall vest on birth of such child.
- Prior Interest: Section 5 of TPA mandates transfer of property inter vivos or between living persons only. Since, the transferor wishes to pass interest on to a person not in existence, to overcome this predicament a prior interest is created in favor of living person on the date of transfer.
- Whole remaining interest: Prior interest transferred to a living person is lifetime interest, which means he can enjoy the benefits of the property without alienation. In other words, transferor transferred limited and not absolute interest. The remainder interest in the transferred property is the right of alienation, which is still held by the transferor. For the transfer to be valid in the hands of final beneficiary this right of alienation plus prior interests together should reach the beneficiary.
Additional salient features of Section 13 TPA
- Transferor cannot fetter the free disposition of the property in the hands of more than one generation.
- Section 13 does not prohibit successive interests, limited by time or otherwise, created in favor of several persons living at the time of transfer. Prohibited is grant of interest, limited by time or otherwise, to a person not in existence.
- After the last life-interest if more than one, property must rest in someone for resting cannot be perpetually delayed.
When all the above conditions are met, then only the transfer is held to be valid under section 13.
Section 14 TPA
“Rule against Perpetuity – No transfer of property can operate to create an interest which is to take effect after the life-time of one or more persons living at the date of such transfer, and the minority of some person who shall be in existence at the expiration of that period, and to whom, if he attains full age, the interest created is to belong.”
- After the life-time: Here again, to safe-guard against violating section 5 of TPA, transfer of property has to take place latest; during life-time of prior interest and conception of beneficiary, otherwise the transfer shall fail.
- Attains full age: The degree of transfer of interest in favor of beneficiary can be broken into 3 stages. On conception interest is created, which becomes vested interest on birth i.e. as per section 20 of TPA, and on attaining age of majority; absolute interest that includes enjoyment of property, possession, alienation etc.
Section 16 TPA
“Section 16: Transfer to take effect on failure of prior interest – Where, by reason of any of the rules contained in sections 13 & 14, an interest created for the benefit of a person or of a class of persons fails with regards to such person or the whole of such class, any interest created in the same transaction and intended to take effect after or upon failure of such prior interest also fails.”
- Prior Interest fails under section 13 & 14: Before section 16 comes into operation, the prior interest created should fail. This is because it does not fulfil either of the conditions mentioned in section 13 & 14 for a person or a class of persons.
- Fate of second interest: On failure of prior interest, the second interest which too is created in the same transaction, and was to be exercised after or on failure of prior interest, shall fail for all purposes.
Per contra under 15 of TPA, if interest is created in the same property for more than one person, then it shall be valid for only those who fulfil the conditions of section 13 & 14 and fail for the rest.
Application of law against perpetuity in the practical aspect
To understand the same let us study the 1934 judgment of High Court of Oudh in case titled Girjish Dutt vs. Data Din. Brief facts of the case are that one Mt. Sugga made a gift deed in favor of Mt. Ram Kali who is the daughter of Data Din, son of Mt. Sugga’s real brother. The gift contained three alternative contingent grants independent of each other namely: –
“12…..(1.) A grant to Mt. Ram Kali for life, with remainder to her sons and grandsons, dependent upon the contingency that there was a son or a grandson or sons or grandsons alive at the time of her death. (2.) A grant to Mt. Ram Kali for life, with remainder to her daughters for life, dependent upon the contingency that there were no sons or grandsons alive at Mt. Ram Kali’s death, but that there was a daughter or daughters alive at that time, and (3.) A grant to Mt. Ram Kali for life, with remainder to Data Din, dependent upon the contingency that there were no sons or grandsons or daughters alive at the time of Mt. Ram Kali’s death.”
Infra table about the gift deed: –
Validity of Gift deed as per Section 13 & 16 of TPA
|Contingency||Interest transferred Life or Absolute||Ultimate beneficiary & Interest Transferred.||TPA section|
|One||Life interest in favor of Mt. Ram Kali||Remainder / Absolute interest in favor of son/grandson if alive at the death of Mt. Ram Kali||Transfer valid u/s 13|
|Two||Life interest in favor of Mt. Ram Kali||Life interest in favor of daughters i.e. in the absence of sons / grandsons.||Violates Section 13, as whole of the remainder interest of Mt. Sugga has not been transferred to daughters.|
|Three||Life interest in favor of Mt. Ram Kali||No issue of Mt. Ram Kali i.e. neither sons, grandsons or daughters.
Therefore, absolute interest is transferred to Mr. Data Din father of Mt. Ram Kali
|In the absence of any issue the whole of remainder interest u/s 13 fails, and so does transfer to Mr. Data Din u/s 16.|
“18. Admittedly Mt. Ram Kali had no children at the time when the gift was made in her favor and she died issueless. The gifts therefore in favor of her male or female descendants were in favor of unborn persons. These gifts were also clearly subject to the prior interest created by the same transfer in favor of Ram Kali. Section 13, Transfer of Property Act, requires that such a transfer in order to be valid must extend to the whole of the remaining interest of the transferor in the property. As the gift over in favor of the sons or grandsons of Mt. Ram Kali related to the absolute interest, it was clearly valid. It seems equally clear that the gift over to the daughters was void because the transfer in their favor related merely to a limited interest….”
“19. If we analyze the section it will be seen that three conditions are necessary for its implication: (1) There should be an interest created for the benefit of a person or a class of persons which must fail by reason of the rules contained in Sections 13 and 14; (2) there should be another interest created in the same transaction; and (3) the other interest must
be intended to take effect after or upon failure of the prior interest. We have already held that the interest created for the benefit of the daughters fails by reasons of Section 13, T.P. Act. It is also clear that the interest created in favour of Data Din is an interest created in the same transaction. There can therefore be no doubt about the first two conditions being satisfied. The only question is whether the interest created in favour of Data Din was one intended to take effect after or upon failure of the prior interest created in favour of the daughters. It is agreed by both parties and is also clear from the terms of the will that the gift in favour of Data Din was not intended to take effect after the gift in favour of the daughters. The intention of the donor clearly was that Data Din should get the property only in case the gift in favour of the male-descendants and the daughters of Ram Kali failed. The case therefore seems to be fully covered by the words “upon failure of such prior interest.”
Indian Succession Act (ISA) & TPA
Sections 113, 114, 115 and 116 of Indian Succession Act, 1925, (ISA) are true reflections of sections 13, 14,15 & 16 of TPA. This is because, transfer of property also takes place under ‘Indian Succession Act, 1925’ (ISA). It regulates intestate and testamentary succession i.e. when testator a person makes a will before his death for the disposition of his property or when he dies without making a will. A will comes into operation only on the death of the testator.
Exceptions to rule of perpetuity
- Section 18 of TPA provides protection from rule against perpetuity when the transfer is in favor of public viz. advancement of religion, knowledge, commerce, health, safety or any other object beneficial to mankind.
- Does not apply to personal agreements that do not create interest in property.
- Renewal of lease agreements.
- Covenant for redemption of property under mortgage.
- Charge created over property, as this does not amount to transfer of interest.
- Contract of pre-emption.
The rule against perpetuities limits the duration by imposing certain restrictions on the use, enjoyment and transfer of property. Nevertheless, the rule against perpetuity along with relevant sections of TPA are complex and abstract in its application, especially when seen through the eyes of the transferor. Despite the best of intentions, the ultimate beneficiary or grantee may be deprived of their interests through an inadvertent choice of words while drafting the pertinent covenant. It shall not be an understatement that the majority of the so-called learned advocates drafting such instruments are themselves incompetent to understand the subtilties of the law.
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