This article is by Shivi Khanna, a student of the School of Law, Sushant University, Gurugram. This article examines the rights, duties, and liabilities of both, the buyer and seller in the ‘sale of immovable property’ under Section 55 of the Transfer of Property Act, 1882.
It has been published by Rachit Garg.
Table of Contents
Introduction
Section 54 of the Transfer of Property Act, 1882 (hence referred to as the Act), defines what constitutes a sale; how a sale is to be made; and what is a contract for sale. In a ‘sale’ there is a “transfer of ownership” from the transferor to the transferee, in exchange for a price or consideration. The price can be – a price paid, or promised, part-paid or part-promised. The transferor is called the ‘seller’ and the transferee is called the ‘buyer.’ For a sale to be valid, the buyer must transfer the property with free consent (as per Section 10 of the Indian Contract Act, 1872).
The transfer of a property includes the transfer of 3 basic rights:
- Right to possess and enjoy the property;
- Right of alienation;
- Right of title;
This is an ‘absolute transfer’ – the seller does not retain any rights or privileges with respect to the transferred property after a sale is made. There must be a total transfer of rights from the seller to the buyer for it to constitute a sale. The intention and substance of a transaction are also important. For example, if the owner is only putting up the property as a security or collateral for a loan taken from the bank, then this would be a mortgage, not a sale. Similarly, if a house was to be put up for rent to a tenant, then this would be a lease and not a sale. A power of attorney cannot be called a sale.
However, when studying the process of the sale of immovable property, it is not enough to merely read Section 54. This article attempts to understand and examine the significance of the provisions of Section 55 of the Transfer of Property Act, 1882, which is read along with Section 54 of the Act.
Section 55 of the Act, “in the absence of a contract to the contrary”, defines the duties, liabilities, and rights of both the buyer and seller, respectively, where there is a transfer of immovable property. The main objective behind Section 55 is to ensure fair dealings, prevent fraudulent acts, and keep the property in circulation (avoid the property becoming stagnant and going to waste).
It is important to note, that Section 55 is applicable only where there is no contract to the contrary – which implies that as long as there is a clause in the contract of sale outlining the rights, liabilities, and duties of the buyer and seller, there is no need for the provisions of Section 55 to apply.
Contract to the contrary
This phrase implies that any liabilities or charges imposed by the provisions under Section 55 of the Act, can be offset or nullified by a contract to the contrary. The contract can be expressed or implied, but its terms should be clear. If there is ambiguity with respect to the terms of the contract, then the decision regarding the same is usually made in favour of the buyer. Only a contract to the contrary can allow the buyer and seller to avail an exception from the provisions of Section 55.
Seller’s duties or liabilities before the sale
The following sub-heads are the duties/liabilities of a seller before the sale of immovable property:-
Disclosure of material defects in the property or title
Section 55 imposes a duty on the seller to reveal or disclose all ‘material defects’ with respect to both the property and seller’s title. This duty applies where the seller is aware of the said defect and the buyer is not. The defect must also be of such a nature that despite practising due diligence, a prudent man would not be able to discover the problem in the property or title. If the seller were to deliberately neglect this duty, then it would amount to fraud or omission, on his part.
What is a material defect?
A material defect is a factor that can affect the decision of the buyer on whether to buy a certain property or not, once he becomes aware of it. Material defects can be of the following types:
- Something which interferes with or obstructs the enjoyment of the property;
- Failure to disclose a defect in the title;
- Non-disclosure of street alignment, lack of right of way, or non-existence of independent passage to the property;
- Right of way of public which cannot be discovered on first inspection of the property;
For example, ‘X’ wants to sell his farmhouse to ‘Y’ but does not disclose the fact that due to the property being considerably old, the entire farmhouse is in urgent need of renovation and refurbishment, else there could be danger of collapse. This is a material defect in the property, and ‘X’ as the seller who is aware of the defect, has a responsibility to inform ‘Y.’ If “X’ fails to make the disclosure, then ‘Y’ has the right to rescind the contract.
Defect in title
It is the duty of the seller to convey a good title to the buyer. However, the burden of proof to show that there has been non-disclosure with respect to a defect in the title lies with the buyer.
Another example, ‘Q’ wants to sell a flat to ‘Z’. However, the actual ownership of the title of the flat in question is still in dispute. At the time of making the contract of sale, ‘Q’ does not possess the authentic title to the property. This is a material defect in the title. ‘Q’ is bound to inform ‘Z’ of the actual ownership of the title.
In some cases, there is a defect in both the property and the title. For example, when the property which is the subject-matter of the transfer, is illegally built on government land. Consequently, the seller receives a notice of demolition for the illegally built property.
In Haryana Financial Corporation v. Rajesh Gupta (2010), the seller ‘A’ wanted to sell a factory by way of auction. The buyer ‘B’ deposited a certain amount with ‘A’, on the condition that ‘A’ must ensure that there is an independent passage or way to the unit. The tacit understanding regarding this condition was established through frequent communication between the parties. However, this passage was in fact, too narrow and not broad enough to meet ‘B’s’ requirements. Ultimately, ‘A’ was not able to arrange for an adequate passage to the unit. Therefore, ‘B’ refused to pay the pending amount for the property. In response, ‘A’ regarded the amount previously deposited by ‘B’ as a forfeit and placed the property back for auction. Here, the Court, in light of Section 55(1)(a) of the Transfer of Property Act, 1872, held that the seller ‘A’ was in the wrong for failing to disclose a material defect – i.e., there was no adequate passage to the factory. The seller would not be allowed to take advantage of this wrong to swallow up the deposited money.
To produce the title deeds for inspection
If the buyer asks for it, then the seller has to supply the title deed for inspection before the execution of the sale deed. The main objective is to satisfy the buyer that there is no defect or problem with the title, and it would not lead to any disadvantage if the buyer were to acquire it. The delivery of the title is usually at the place of the seller/seller’s representative or lawyer. However, the legislature can also make provisions with respect to the place of delivery.
To answer relevant questions as to the title
Before the sale, the seller also has the duty to answer all ‘relevant’ questions with respect to the sale. If the seller fails to answer, then the buyer has the right to rescind the contract. Answering relevant questions as to the title is the responsibility of the seller because it is his duty to ‘make out a good title in himself.’ If the information contained in relevant documents leads to doubts or questions, the seller must resolve them upon being asked by the buyer.
To execute conveyance
Conveyance is the legal process of transferring the property from the seller to the buyer. The conveyance is executed before the execution of the sale deed to complete the process of the sale. Section 55(1)(d) stipulates that the buyer must tender the instrument.
In Jamshed Khodaram Israni v. Burijori Dhunjibhai (1915), there was an agreement between the buyer and seller to transfer property – a certain piece of land – for Rs. 85,000. The buyer deposited Rs. 4000 as a deposit. Within 2 months from the date of the agreement, the conveyance was to be signed, and Rs. 80,500 was to be paid by the buyer. After the registration and transfer, the remaining balance of Rs. 500 would be paid by the buyer. However, if the buyer failed to make payment within the time period mentioned in the agreement, then the deposited money could be forfeited by the buyer. Ultimately, the buyer failed to make payment within the stipulated 2 months, and as a result, the seller forfeited the deposited money. The buyer sued the seller for specific performance. The Court held that the language of the plainly expressed stipulation must concretely show the intention of the parties to make their rights dependent on the observation of prescribed time limits.
The duty to tender a conveyance and to pay the consideration at the time of the execution is subject to a contract to the contrary.
To take reasonable care of the property and title deeds
The seller’s duty to take reasonable care of the property and title deeds begins before the execution of the sale deed and continues till the delivery of property to the buyer. Section 55 stipulates that if there is damage to the property or titles, within the time period specified by the Section, then the buyer has the right to lower the price or consideration he has to pay. The buyer can also opt to sue for damages and demand compensation from the seller.
To pay the outgoings
If there are any encumbrances on the property then it is the seller’s duty to clear them up before the execution of the sale deed. Regardless of whether the seller has knowledge of the encumbrance or not, the seller still has to resolve it. The buyer has the right to enforce this duty on the seller through Section 69 of the Indian Contract Act, 1872. The seller has to pay any rents or charges accrued to the property before the date of execution of the sale deed. The seller also has the duty to deal with public charges, and in cases where necessary, gain the permission of the statutory authority to make the sale.
Seller’s duties after the sale
The following are the seller’s duties/liabilities after the sale of immovable property:-
Give possession to the buyer
After the sale deed is executed, the seller must hand over possession of the property to the buyer. Even if the buyer has not yet furnished the promised consideration, the seller cannot refuse to hand over possession. The question of whether the buyer can be compelled to pay the consideration to the seller has arisen and has been debated heatedly. The High Courts have taken the following views regarding the delivery of possession:
- It is ‘equitable’ to make handing over possession of the property by the seller, conditional to the payment of the price by the buyer.
- The language of Section 55(1)(f) must be followed and interpreted at face value. If the buyer has paid the full consideration then he can acquire possession and ownership of the property through the apparatus of the courts.
If the buyer asks for enforcement of specific performance with respect to the delivery of possession, when the full price has not been paid by him, the court will require the buyer to deposit money with the court to show his intention to pay the balance amount due. The court can also order the buyer to present proof of his intention to make the due payment.
It was observed in B Rajamani v. Azhar Sultana (2005), that if the buyer fails to show his intention to pay, additionally, failing to show that the amount was ready and available, it is indicative of his lack of desire to fulfil the contract.
Nature of possession has a significant influence on the delivery of possession. The seller must vacate the property, regardless of whether he himself occupies it or a tenant occupies it. The seller must also clear out any trespasser illegally occupying the property. However, when there is already a tenant occupying the property or in the case of a usufructuary mortgage, the buyer only gains a symbolic possession.
To covenant for title
It is the duty of the seller to deliver a good title to the buyer, free from any defects or problems. In order to enforce the right of specific performance against the buyer, the seller must ensure that the title is beyond reasonable doubt and convince the court of its authenticity.
The seller must have a saleable interest in the property. Where the seller does not in fact have a saleable interest, even if he is not guilty of fraud, he is still liable to pay damages to the buyer.
The seller cannot represent a higher title than that which he actually owns. If the seller misrepresents the title, then he can be held liable to pay damages.
An incorrect description of the property is not covered under the covenant of title, however, if the buyer finds out about it before the conveyance is executed, the buyer can cancel the contract or sue for damages, depending on how severely distorted the description is.
In Ram Swarup and Another v. Fattu (1960), it was held that the buyer need not inquire into the seller’s title. Mere suspicion of the buyer with respect to whether the seller’s title holds good or not, does not prevent the covenant from operating. The English law doctrine – caveat emptor, i.e. buyer beware – does not apply here.
To deliver title deeds on receipt of the price
Once the consideration has been paid by the buyer to the seller, it becomes the latter’s duty to deliver all documents relevant to the property’s title that he owns/holds. The right to the deeds runs with the land, therefore, there is an absolute transfer from the seller to the buyer. The buyer needs to be careful to check if there is an unregistered mortgage with respect to the property and title deeds, and his failure to inquire about this would amount to gross negligence.
Where only a part of the property is sold, while the seller retains a portion as well, he is entitled to hold onto the title deeds. Where the property is sold to multiple buyers, the buyer of the lot of the greatest value gains the right to hold the title deeds. When the sale is made at different time periods, the last purchaser has the right to hold the title deeds. However, the holder of the title deeds has the duty to furnish said documents to the other property-holders when asked, at the cost of the one who asked for the deeds. The individual holding the title also has the duty to keep the title documents in good condition, safe from damage and fire.
Seller’s rights
A seller has the following rights:-
- The seller has the rights to rents and profits generated from the property till it is transferred to the buyer
- Payment of promised consideration from the buyer to the seller;
Rents and profits
Till the ownership is passed from the buyer to the seller, the latter is entitled to any income generated from the property, including rent collected from tenants occupying the property. If the buyer takes possession before the completion of the sale, then he can enjoy the income from the rent. However, the buyer is also liable to pay interest on the unpaid consideration he had promised to pay when he made the contract of sale. On the other hand, if the ownership of the property passes to the buyer, but the seller still retains possession of the property, then the seller is not allowed to collect interest on the purchase money. The seller cannot enjoy both possession and interest at the same time. The seller must choose between the two – interest and possession.
Payment of consideration
A seller is entitled to full consideration as stipulated in the contract of sale. If the contract specifies that the payment must be made within a certain time period, then the buyer must adhere to the said time limit. The buyer failing to pay within the time limit specified in the contract would amount to a breach of contract on his part.
In Nalamothu Venkaiya v. BS Neelakanta (2005), a contract of sale was made, and it was stipulated that the payment must be made within a specified time. The buyer gave an oral promise, however, he did not deposit any money as an assurance. When the buyer sued for specific performance, the court held that the oral promise did not hold weight, and the fact that he did not make a deposit showed his lack of intention to fulfil the contract.
In a case where a seller has already transferred the ownership to a buyer, but the latter has not paid the entire consideration, a charge can be placed on the property. Even if the buyer transferred the property further, the charge would still exist as long as the consideration remains unpaid. The seller can also avail interest on the pending consideration from the date of transfer of possession. The charge can be imposed only from the date the conveyance is executed.
An exception to this rule of charge – is oral sale and lease.
A seller’s charge on the pending consideration cannot be extinguished by a promissory note for unpaid money. The rule that interest and possession are mutually exclusive still applies here. Furthermore, the seller cannot forfeit deposited money, in the case where the amount remains unpaid, taking into consideration a contract to the contrary.
Buyer’s duties before sale
The following are the duties/liabilities of a buyer before the sale:-
Duty to disclose material facts
When the buyer has knowledge or information about the nature and extent of the seller’s interest in the property, and such knowledge or information indicates an increase in the material value of such interest, the buyer has a duty to disclose such information to the seller. This duty applies when the buyer has reason to believe that the seller is unaware of said information.
To pay the price
The duty of the buyer to furnish the promised consideration is paramount. He must pay or tender at the agreed time and place of executing the sale, and to such person as per the instructions of the seller. The duty to pay is “personal in nature” and the buyer upon refusal of the seller to accept it is free to make a deposit with the court.
Encumbrances on the property
Generally, it is understood that the seller has the duty to get rid of any encumbrances before he sells the property to the buyer. Before the sale deed is executed, if the buyer finds out that there are charges/encumbrances on the property being sold, despite receiving assurances from the seller to the contrary, the buyer can retain a portion of the purchase money to offset the charges on the property. The buyer can upon finding out about the encumbrances before the sale, also choose to rescind the contract or sue for damages.
Buyer’s duties after sale
The following are the duties/liabilities of a buyer after the sale:-
To bear the loss to property
Once the ownership of the property has been transferred from the seller to the buyer, any loss to the property as a result of the destruction, injury, or decrease in value – not caused by the seller’s actions – is to be borne by the buyer. This rule applies even where – possession has not been delivered yet by the seller; full payment of consideration has not been furnished by the buyer. The key point to pay attention to is the passing of ownership. Once the buyer attains ownership, even if he does not have possession, he has to bear the losses.
To pay the outgoings
Similar to the case of bearing loss to the property, the key point to focus on is ownership. Once the ownership passes to the buyer, he also gains the obligation to pay any public charges or rent payable with respect to the property. Public charges may include taxes imposed by the municipality or relevant authorities on the property. The authorities charge tax against the property itself and not on the buyer or seller in particular. Before the sale, public charges are paid by the seller. After the sale, public charges are paid by the buyer. Upon completion of the sale, the seller ceases to enjoy the benefits from the property, however, he gains the right to be indemnified by the buyer with respect to charges imposed after the completion of the sale.
Buyer’s rights
The buyer has the following rights:-
- Benefits of improvements
- Charge for prepaid consideration
Benefits of improvements
During the interval between the passing of ownership from the seller to the buyer, and payment of consideration by the buyer, if there is an increase in the value of the property, the seller cannot demand a price higher than the one agreed upon before. Here, the buyer is entitled to the increase in value of the property. Where there is an increase in the material value of the property, and benefits arising from rents and profits derived from such improvement or increase – it is the buyer’s right to enjoy such benefits. The buyer can also enjoy the repairs, and improvements made by the seller after the completion of the sale. Since the buyer has paid for the exclusive enjoyment of the property and its associated benefits, the seller loses his right to derive benefits from the property after the sale.
Charge for prepaid consideration
Although the amount varies from case to case, the seller usually asks for a deposit from the buyer at the time of making the contract of sale. The buyer can charge a lien on the property against the interest of the seller and the people claiming under him, and the interest on the deposit money that he had paid in anticipation of delivery. This is a statutory charge and commences from the date of payment of consideration. Interest on the prepaid amount lasts from the date of payment till the date of delivery of possession. However, the exception to this charge on prepaid consideration: is when the sale is invalid or the buyer himself commits a default.
Earnest
Earnest is part of the purchase money or consideration deposited by the buyer with the seller when the agreement is made. Earnest is kept as a security by the seller and indicates the intention of the buyer to fulfil the agreement. If the buyer commits a default then the seller has the right to forfeit the earnest. However, mere delay on the part of the buyer to make payment does not amount to a default. If the seller commits a default then the buyer can avail of a refund by filing a suit. The seller’s defaults include making a faulty title, not delivering possession in time, failing to obtain any permissions necessary for the sale, etc.
In Shri Hanuman Cotton Mills v. Tata Air Craft Ltd (1969), the following observations about earnestness were made:
- When the contract is concluded it must be given.
- It indicates the intention of the buyer to fulfil his part of the contract. It is symbolic of the binding nature of the contract.
- It is part of the consideration agreed upon between the parties for carrying out the transaction.
- It is forfeited when the buyer commits a default (mere delay is not a default).
- Unless there is a contract to the contrary, the earnest is forfeited when the buyer commits default.
Conclusion
Section 55 of the Transfer of Property Act, 1882, lists the rights, liabilities, and duties of both the buyer and seller, with respect to a transaction where there is a transfer of immovable property unless there is a contract to the contrary. To understand the transfer of property, it is not enough to merely read Section 54 of the Act which describes – what is a sale; how a sale is made, and what is a contract of sale. Section 54 must be read along with Section 55 to gain a complete picture of the intricacies that go into the entire process of transfer between the buyer and seller. Section 55 provides a means for both the buyer and seller to protect their individual interests without worrying about suffering a loss due to unfair means or fraud. Section 55 focuses on endorsing fair dealings and encourages the transfer of property to prevent it from remaining stagnant or going to waste. This Section is also based on the principles of fairness, equity, and good consciousness.
References
- Mallika Taly, Vepa P. Sarathi’s Law of Transfer of Property including Easements, Trusts and Wills, EBC, Lucknow
- Dr. Poonam Pradhan Saxena, Property Law, 2nd edition, LexisNexis
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