Supreme Court invalidates power of attorney sales

By Utsav Mukherjee, Vidhii Partners
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The recent Supreme Court decision in Suraj Lamp and Industries Private Limited and Ors v State of Haryana and Ors invalidates the transfer of property through agreement of sale and power of attorney, except in specific genuine cases.

Utsav Mukherjee Associate Vidhii Partners
Utsav Mukherjee
Associate
Vidhii Partners

The Supreme Court came down heavily on the prevalent practice of sale through power of attorney, observing that the practice involved an agreement for sale, followed by execution of a general power of attorney in favour of the purchaser to deal with the property in any way. The net effect of such a transaction was transfer of the property to the purchaser, but without a registered instrument of sale.

This allows the purchaser to avoid the payment of a hefty stamp duty and is also used to invest black money, as there is no record of such a transaction. In the absence of any record, a vendor with an imperfect title may pass on the property to one or more purchasers, who then must pursue expensive and circuitous litigation or approach the land mafia to get their properties vacated.

This further creates a huge problem for professionals dealing with real estate as it is practically impossible to trace an accurate chain of title without correct records.

Legal issues

The court considered section 5 of the Transfer of Property Act, 1882, which defines “transfer of property” as the way by which property is conveyed from one living person to another; section 54, which defines “sale” as the transfer of ownership of property for a price and says that such sale can only be conducted through a registered instrument of sale; and section 17 of the Registration Act, 1908, which makes a deed of conveyance compulsorily registrable.

Reading these provisions together, and relying on the judgment in Narandas Karsondas v SA Kamtam and Anr, the court ruled that a contract for sale does not by itself create a charge on the property and that a transfer of immovable property by way of sale can only be by a deed of conveyance. In the absence of a deed for conveyance (duly stamped and registered as required by law), no right, title or interest in an immovable property can be transferred.

Further, a power of attorney is not an instrument of transfer in regard to any right, title or interest in an immovable property, and even an irrevocable power does not have the effect of transferring the title to the grantee.

Overruling the decision of Delhi High Court in Asha M Jain v Canara Bank, which noted that “power of attorney sales have been recognized as a mode of transaction”, the court ruled that recognizing or accepting transactions through agreement of sale and power of attorney as concluded transactions is bad in law.

The path ahead

It was contended before the Supreme Court that making such transactions invalid would cause hardship to lots of people and that such people should be given time to regularize their deeds of conveyance, or the decision should apply only to future transactions. The court rejected this contention, stating that the judgment merely reiterates the well settled legal position that such transactions are not transfers or sales and cannot be treated as completed transfers or conveyances.

The court however clarified that where such agreements were entered into prior to the current decision, they may be relied on to apply for regularization of allotments or leases by development authorities. Further, if the documents relating to such transactions had already been accepted and acted on by any developmental authority or by municipal or revenue authorities, they need not be disturbed merely on account of the decision.

The court also stated that the judgment will not affect the validity of agreements of sale and powers of attorney executed in genuine transactions.

Positive step

While the decision may have a negative impact on the market in the short run, it will certainly promote transparency in the real estate sector and deal with the problems of land mafia and black money. Further, if the states reduce the stamp duty on deeds of conveyance, as advised by the court, legal transactions are likely to increase, leading to higher revenue for the states.

It must be noted that allowing power of attorney sales in cases of genuine transactions leaves room for corruption and backroom deals as the courts will have to decide the genuineness of transactions on a case by case basis.

Still, the decision was a much needed one. It is a step towards reducing the risks associated with a sale transaction and will generate confidence in the minds of bona fide purchasers that the transaction they enter into is not fraught with future risks.

Utsav Mukherjee is an associate at Vidhii Partners and can be reached at utsav.mukherjee@vidhiipartners.com.

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