Real Estate Deals via Power of Attorney Sales deprecated by Supreme Court

Deed of conveyance, Stamp duty and Registration essential for valid transfer of title and protection of rights over property

The Hon’ble Supreme Court of India (“Court”) has, in its order dated May 15, 2009, passed in the Special Leave Petition (“SLP”) filed by Suraj Lamp & Industries Pvt. Ltd. Vs. the State of Haryana & Anr., frowned upon the increasing tendency to effectuate transfer of freehold immovable property through ‘Power of Attorney’ Sales instead of execution and registration of regular deeds of conveyance. This practice evolved years ago in cities like Delhi to circumvent the restrictions laid down by law and to evade tax such as stamp duty and registration charges payable on a deed of conveyance. Consequently, many parties have been defrauded and lost legal protection over the title of properties they assumed they had “purchased” via such Power of Attorney Sales.

The SLP was filed impugning an order of the High Court whereby the Petitioner was unsuccessful in seeking an order for initiation of certain proceedings under the Right of Information Act of 2005. These proceedings originally stemmed from an RTI application in an investigation by the police authorities in a matter regarding the protection of the Petitioner’s rights over a property transferred to it by a Power of Attorney (“PoA”).

While these were the main issues before the Court, it interestingly discussed the larger issue of the increasing number of transfer of property transactions within the country on the basis of PoAs. The Court analyzed the following questions in this context:

What comprises a ‘Power of Attorney’ Sale?

The Court noted that a ‘Power of Attorney’ Sale is a method by which the parties, handover possession of the premises and execute an agreement of sale and a general power of attorney or a will bequeathing the property to the “purchaser” instead of a deed of conveyance (as is required under law). This is done upon receipt of the agreed consideration.

How did the ‘Power of Attorney’ sale evolve?

The Delhi Development Authority (“DDA”) had undertaken large scale development by construction of flats. Any flat so allotted by the DDA to the allottee, would not be freely transferable. The subsequent transfer required the permission of the DDA, which was granted only on the payment to the DDA of the ‘unearned increase’, which is the difference in the market value/sale price and the original cost of allotment.   

It appears that the first instances of the ‘Power of Attorney’ sales as a method of transfer was evolved by lawyers and documents writers in Delhi, to overcome such restrictions on the transfer of flats by the DDA. In this system, the allottee would deliver possession of the premises on receipt of the agreed consideration and execute the following documents:

a)       An Agreement of Sale confirming the terms of the sale, delivery of possession and payment of full consideration and undertaking to execute any document when required in the future;

b)       An Irrevocable General Power of Attorney in favour of the purchaser or his nominee, authorizing him to manage, deal with and dispose of the property without reference to the vendor;

c)       A Will bequeathing the property to the purchaser as a safeguard against the consequences of death of the vendor before transfer.

There appears to be an increasing tendency to effectuate transfer of freehold immovable property through such ‘Power of Attorney’ sales instead of execution and registration of regular deeds of conveyance.

What is the issue?

Given that such ‘Power of Attorney’ Sales were adopted to overcome the restrictions/prohibitions in the terms of allotment (of the DDA flats) and the rules of allotment of the DDA governing the allotment of flats, such transactions were irregular and illegal as they were contrary to the rules and terms of allotment.

In the absence of a registered deed of conveyance, no right, title or interest in an immovable property could be transferred to the purchaser.

Interestingly, the Delhi High Court had, in certain cases held that such ‘Power of Attorney’ Sales had created an interest in the DDA flats and issued injunctions or decrees protecting such interest by preventing the vendor from further dealing with the said property. This led to a general impression that the ‘Power of Attorney’ Sales were a valid and recognized mode of transfer.

Extension of the concept

This led to the extension of the concept of such ‘Power of Attorney’ Sales by execution of a Sale Agreement, General Power of Attorney and a Will in respect of freehold properties¹ (and not just DDA flats). 

The Registration Act, 1908.

The Registration Act, 1908, (“Registration Act”) was inter alia enacted with the intention of bringing orderliness, discipline and public notice in regard to transactions relating to immovable property and protection from fraud and forgery of documents of transfer. Section 17² of the Registration Act provides for a list of documents for which registration is compulsory.

Thus, where a document purports or operates to create, declare, assign, limit or extinguish, whether in the present or future, ‘any right, title or interest, whether vested or contingent of the value of Rs. 100 and upwards to or in immovable property, the Registration Act requires that the same be compulsorily registered. 

Section 49³ of the Registration Act provides that where a document is required to be registered under the provisions of Section 17 of the Registration Act, such document inter alia shall not affect any immovable property unless the said document is registered.

Registration of a document gives a notice to the world at large that such a document has been executed and thus, provides safety and security to transactions pertaining to immovable property. It provides clarity as to the nature and extent of rights that exist with the transferor.   

Who would prefer a ‘Power of Attorney’ Sale?

The Court noted that recourse to such ‘Power of Attorney’ Sales is now being taken in regard to freehold properties, even where there exists no bar or prohibitions regarding transfer or conveyance of such properties, by the following categories of persons.

a)      Vendors with imperfect title who cannot or do not want to execute registered deeds of conveyance;

b)      Purchasers who want to invest undisclosed wealth/income in immovable properties without any public record of the transactions. The process enables them to hold any number of properties without disclosing them as assets held;

c)      Purchasers who want to avoid the payment of stamp duty and registration charges either deliberately or on wrong advice. Persons who deal in real estate resort to these methods to avoid multiple stamp duties/registration fees so as to increase their profit margin.

The Court states that in its view, the consequences of such ‘Power of attorney’ Sales were disturbing and far reaching and would adversely affect the economy, civil society and law and order. The said practice would enable large scale evasion of income tax, wealth tax, stamp duty and registration fees and thereby deny the benefit of such revenue to the government.  Such transactions would also enable persons with undisclosed wealth/income to invest the same and earn profit thereon, thereby encouraging circulation of black money and corruption. Such transactions would also have disastrous collateral effects and would lead to criminalization of real estate transactions.

Whilst appreciating the fact that some states had made efforts to controls such ‘Power of Attorney’ Sales, the Court noted that the steps taken were neither adequate nor properly implemented.  

In the said order, the Court has requested the Solicitor General of India to appear in the matter and give suggestions on behalf of the Union of India and (2) directed notice to be issued to the States of Punjab, Haryana, Delhi, Uttar Pradesh and Maharashtra to consider certain questions in respect of such ‘Power of Attorney’ Sales.

Analysis: 

Whilst the said matter continues to remain pending before the Court, by its order dated May 15, 2009, the Court has clearly expressed its views that any such transfers in real estate transactions are to be discouraged and deprecated. The Court has taken heed of the fact that such practice is responsible for creating havoc and has spawned a large number of disputes resulting in numerous proceedings and criminal complainants. The Court has also noted that any process that interferes with regular transfers of property under deeds of conveyance requires to be discouraged and deprecated. In doing so, the Court has clearly set out the fact that a valid transfer of right, title and interest in a property would require a validly executed and registered Deed of Conveyance.   

While most of the states in the country have recognized these issues and are trying to make the law on payment of stamp duty and registration water tight, the fact that these illegal practices still prevail despite the law being crystal clear, which lead us to the obvious conclusion that such practices emanate for ulterior motives or improper advice. Parties seeking to have their rights protected should ensure that the transfer of the property takes place under proper documentation and payment of proper stamp duty and registration charges.

² Sec.17: Documents of which registration is compulsory.—(1) The following documents shall be registered, if the property to which they relate is situate in a district in which, and if they have been executed on or after the date on which, Act XVI of 1864, or the Indian Registration Act, 1866 (20 of 1866), or the Indian Registration Act, 1871 (8 of 1871), or the Indian Registration Act, 1877 (3 of 1877), or this Act came or comes into force, namely—

              

(a)     instruments of gift of immovable property;

(b)     other non-testamentary instruments which purport or operate to create, declare, assign, limit or extinguish, whether in present or in future, any right, title or interest, whether vested or contingent, of the value of one hundred rupees and upwards, to or in immovable property;

(c)     non-testamentary instruments which acknowledge the receipt or payment of any consideration on account of the creation, declaration, assignment, limitation or extinction of any such right, title or interest; and

(d)     leases of immovable property from year to year, or for any term exceeding one year, or reserving a yearly rent;

(e)     1[non-testamentary instruments transferring or assigning any decree or order of a Court or any award when such decree or order or award purports or operates to create, declare, assign, limit, or extinguish, whether in present or in future, any right, title or interest, whether vested or contingent, of the value of one hundred rupees and upwards, to or in immovable property:]

Provided that the State Government may, by order published in the Official Gazette, exempt from the operation of this sub-section any leases executed in any district, or part of a district, the terms granted by which do not exceed five years and the annual rents reserved by which do not exceed fifty rupees.

2[(1-A) The documents containing contracts to transfer for consideration, any immovable property for the purpose of  Section 53-A of the Transfer of Property Act, 1882 (4 of 1882), shall be registered if they have been executed on or after the commencement of the Registration and Other Related Laws (Amendment) Act, 2001 and, if such documents are not registered on or after such commencement, then, they shall have no effect for the purposes of the said Section 53-A.]

 

 (2) Nothing in clauses (b) and (c) of sub-section (1) applies to—

               

(i)                  any composition-deed; or

(ii)                 any instrument relating to shares in a Joint Stock Company, notwithstanding that the assets of such Company consist in whole or in part of immovable property; or

(iii)                any debenture issued by any such Company and not creating, declaring, assigning, limiting or extinguishing any right, title or interest, to or in immovable property except in so far as it entitles the holder to the security afforded by a registered instruments whereby the Company has mortgaged, conveyed or otherwise transferred the whole or part of its immovable property or any interest therein to trustees upon trust for the benefit of the holders of such debentures; or

(iv)                any endorsement upon or transfer of any debenture issued by any such Company; or

(v)                  any document  3[other than the documents specified in sub-section (1-A)] not itself creating, declaring, assigning, limiting or extinguishing any right, title or interest of the value of one hundred rupees and upwards to or in immovable property, but merely creating a right to obtain another document which will, when executed, create, declare, assign, limit or extinguish any such right, title or interest; or

(vi)                any decree or order of a Court  4[except a decree or order expressed to be made on a compromise and comprising immovable property other than that which is the subject-matter of the suit or proceeding]; or

(vii)               any grant of immovable property by the Government; or

(viii)             any instrument of partition made by a Revenue Officer; or

(ix)                any order granting a loan or instrument of collateral security granted under the Land Improvement Act, 1871 (26 of 1871), or the Land Improvement Loans Act, 1883 (19 of 1883); or

(x)                 any order granting a loan under the Agriculturists Loans Act, 1884 (12 of 1884), or instrument for securing the repayment of a loan made under that Act; or 

5[(x-a)        any order made under the Charitable Endowments Act, 1890 (6 of 1890), vesting any property in a Treasurer of Charitable Endowments or divesting any such Treasurer of any property; or]

(xi)                any endorsement on a mortgage-deed acknowledging the payment of the whole or any part of the mortgage-money, and any other receipt for payment of money due under a mortgage when the receipt does not purport to extinguish the mortgage; or

(xii)         any certificate of sale granted to the purchaser of any property sold by public auction by a Civil or Revenue officer

6[Explanation.—A document purporting or operating to effect a contract for the sale of immovable property shall not be deemed to require or ever to have required registration by reason only of the fact that such document contains a recital of the payment of any earnest money or of the whole or any part of the purchase money.]

(3) Authorities to adopt a son, executed after the 1st day of January, 1872, and not conferred by a will, shall also be registered.

³ Sec.49: Effect of non-registration of documents required to be registered.—No document required by Section 17 1[or by any provision of the Transfer of Property Act, 1882 (4 of 1882),] to be registered shall—

                (a)           affect any immovable property comprised therein, or

                (b)           confer any power to adopt, or

                (c)           be received as evidence of any transaction affecting such property or conferring such power,

unless it has been registered:

2[Provided that an unregistered document affecting immovable property and required by this Act or the Transfer of Property Act, 1882 (4 of 1882), to be registered may be received as evidence of a contract in a suit for specific performance under CHAPTER II of the Specific Relief Act, 1877 (1 of 1877), 3[* * *]or as evidence of any collateral transaction not required to be effected by registered instrument.]

 

- Sahil Kanuga & Shafaq Uraizee-Sapre