SVKM’s NMIMS

KIRIT P. MEHTA - SCHOOL OF LAW

SALE AND ENCUMBRANCES ON SALE

For the subject of – Transfer of Property

March, 2019

Submitted to: Submitted by:

Prof. Kamaljeet Singh Sandhu Shravani Bhide
(A025)
B.B.A., L.L.B
(Hons.)
Third Year
 ABSTRACT

Sale of immovable property has been defined as a transfer of ownership in exchange for a price
paid or promised or partly paid and partly promised by the Transfer of Property Act. The sale
deed is chargeable with stamp duty under Article 23 of Schedule 1 to the Indian Stamp Act and it
has to be executed on stamp paper equal to that of conveyance or else attracts duty penalty of 10
times that of actual stamp duty. The sale deed transferring immovable property of the value of
100 or more requires registration under Indian Registration Act 1908.

An encumbrance, as it pertains to real estate, means any legal issue that burdens or restricts
usage or transfer of the property. An encumbrance can be a mortgage (loan), a lien (voluntary or
involuntary), an easement or a restriction that limits the transfer of title. An encumbrance can
involve money, but not always. All liens are encumbrances, but not all encumbrances are liens.

A lot of people wrongly assume an encumbrance refers only to a mortgage. For instance, when a
home buyer finances the purchase of a home, that financial verification typically consists of two
documents: the promissory note, which is an obligation to pay, and the mortgage or deed of trust,
which secures the note and is recorded. A mortgage is slightly different than a deed of trust but
for our practical purposes, they both are an encumbrance. When a mortgage or deed of trust has
been paid off, the encumbrance is then removed from the property in the public records. A
common document to remove an encumbrance is called a reconveyance deed, which reconveys
clear title to the property owner.

This paper deals with all of the aforementioned in detail.

Keywords: Transfer, Sale, Section 54, Section 57, Burdens, Legal Issue, Lien, Deed of Trust,
Financial Verification, Reconveyance.
 NEED FOR RESEARCH

Objectives for Research:

1. To Analyze the essentials of Sale.

2. To understand the various elements of Encumbrances of Sale.
3. To understand the importance of Section 57 of the Transfer of Property Act.

Research Questions:

1. What constitutes as a valid Sale?

2. What does Encumbrance of Sale mean? What are the various kinds of Encumbrances?
3. Whether there is a legal recourse available against Encumbrance on sale?
4. What is the objective to remove such encumbrances?
5. Whether Encumbrances are to be prima facie?
 INTRODUCTION

Sale defined under Section 54 of the transfer of property act is a transfer of ownership in
exchange for a price paid or promised or part-paid and part promised. Such transfer, in the case
of tangible immovable property of the value of one hundred rupees and upward, or in the case of
a reversion or other intangible thing, can be made only by a registered instrument.

In case of tangible immovable property of a value less than one hundred rupees, such transfer
may be made either by a registered instrument or by delivery of the property. Delivery of
tangible immovable property takes place when the seller places the buyer, or as such person as
he directs,in possession of the property. 1

An owner has three basic rights over his property, aright of title, an exclusive right to possess
and enjoy the property and an exclusive right to alienate it. In a sale of property, all these rights
are conveyed by the owner with his free consent 2 in favor of the transferee who is called a buyer.
No rights remain with the seller, thus, the transfer of this totality of rights is called an absolute
transfer.in contrast lease and mortgage are transfer of a right in the property. For instance, in a
lese, there is a transfer of a right to possess and enjoy the property, but the title and a right of
alienation remain with the owner. 3 Whether a transaction amounts to a sale or not would depend
on the substance of the transfer. For instance, the intention of the parties in a transaction, which,
though described as a sale with consideration, is in fact a security for the money, the transaction
is not sale but a mortgage.4

An encumbrance is a claim against a property by a party that is not the owner. An encumbrance
can impact the transferability of the property and restrict its free use until the encumbrance is
lifted. The most common types of encumbrance apply to real estate; these include mortgages,

1
Poonam Pradhan, Property Law, 2nd Ed., 2011.
2
Ratan Bai v. Basanti Bai, AIR 2008 (NOC) 1172 (MP)
3
Poonam Pradhan, Property Law, 2nd Ed., 2011.
4
Ramlal v. Phagua (2006) 1 SCC 168
easements and property tax liens. Not all forms of encumbrance are financial, easements being
an example of non-financial encumbrances. 5

PRESENT SCENARIO

In the case of AI Champdany Industries Ltd. v. Official Liquidator 6, the Supreme Court defined
‘Encumbrance’ as “being, ‘a claim, lien, or liability, attached to property’; and this definition is
wide enough to cover the plaintiff's claim (in the present case), which was, as assignee for value
of a reversionary interest, against a person coming in under a subsequent title”.

In Supreme Court on Words and Phrases it is stated that

“the word ‘encumbrance’ means a burden or charge upon property or a claim or lien upon an
estate or on the land”.

In Advanced Law Lexicon, encumbrance is defined as:

“An infringement of another's right or intrusion on another's property.”

In Black's Law Dictionary encumbrance is defined as:

“Any right to, or interest in, land which may subsist in another to diminution of its value, but
consistent with the passing of the fee….”

Encumbrance, therefore, must be capable of being found out either on inspection of the land
or the office of the Registrar or a statutory authority. A charge, burden or any other thing
which impairs the use of the land or depreciates in its value may be a mortgage or a deed of trust
or a lien or an easement. Encumbrance, thus, must be a charge on the property. It must run with
the property. If by reason of the statute no such burden on the title which diminishes the value of
the land is created, it shall not constitute any encumbrance.

Therefore, the present scenario for encumbrances as defined by the Supreme Court is that these
encumbrances are to be prima facie and could be found out on inspection. Any hindrance that

5
Encumbrances, https://www.investopedia.com/terms/e/encumbrance.asp#ixzz5QligFof8
6
(2009) 4 SCC 486.
does not diminish the value of a property is no Encumbrance, also, such an encumbrance shall be
attached to the property in question.

LEGAL ASPECTS

 SALE

Ordinarily meaning of the word “sale” is a transaction entered into voluntarily between two
parties known as the buyer and the seller for an agreed consideration known as price. 7

Essentials of a valid sale:

(i) Parties to a sale;

(ii) Subject matter of sale;
(iii) Price;
(iv) Mode of executing a sale.

Parties to a sale

The parties to a sale are – the transferor who is called a seller, and the transferee who is referred
to as the buyer. A contract of sale must be based on a mutual agreement between the seller and
the buyer.8 The seller must be a person competent to a contract, i.e., he must be a major and of
sound mind, and should not be legally disqualified to transfer the property. Statutory
incompetency refers to an incompetency imposed under law or statute. Similarly, a judgment
debtor is not capable to sell his property that is to be sold in execution under the order of the
court.

The transferor should either be the owner of the property or should have a authority to dispose of
it. For instance, the karta of a joint family property is authorized to transfer the property under
certain specified circumstances. The transferee must be person competent to receive a transfer in

7
Awami Kumar vs. State, AIR 1977 Raj. 80.
8
Misahul Enterprises vs. Vijaya Srivastava, AIR 2003 Del 15.
his favor. He should not be subject to a legal disqualification. A minor is a competent transferee
in a transaction of a sale. 9

Subject matter of a sale

Section 54 only governs the sale of immovable property. Immovable property cn be tangible or
intangible.

Price

Price10 in the ordinary sense connotes money considerations for the sale of property. 11 Where,
instead of price, some other valuable consideration is kept, the transaction is not a sale but can be
an exchange or a barter. Where the consideration is money but is not specific, the transaction
would still be a sale. Thus, if the transaction on the face of it is complete, it cannot be regarded
12
as a mere agreement only on the ground that the price is unascertained at that time. Price is the
essence of the contract for sale. In absence of price there cannot be a valid sale. But, adequacy of
price is not mandatory.

The ordinary rule governing sale is that payment of consideration is simultaneous with the time
when the conveyance is executed by the seller. This rule can be deviated from in case of an
agreement to the contrary to the parties.13

Mode of Execution

Sale of tangible immovable property of the value of Rs 100 and upwards or in case of a revision
or other intangible things, can be made only in writing. The deed must be properly attested and
should also be registered.14

In case of tangible immovable property of the value of less than Rs 100, transfers must be made
either by a registered instrument or by delivery of the property. In such cases, the transfer is
completed by the delivery of possession of the property.

9
Poonam Pradhan, Property Law, 2nd Ed., 2011.
10
The term price has not been defined in the Transfer of PropertyAct, 1882, but is used in the same sense as in the
Indian Contract Act, 1872, s. 77.
11
Commr of Income Tax v.Motor and General Stores, AIR 1976 SC 200.
12
Unnao Commercial Bank v. Kailash Nath, AIR 1955 All 393.
13
Chandra Shankar v. Abhia, AIR 1952 Bom 56.
14
Tandonbi Devi v. Katlana Singha, AIR 2009 (NOC) 587.
 ENCUMBRANCE

An encumbrance, as it pertains to real estate, means any legal thing that burdens or restricts
usage or transfer of the property. A property free-and-clear from any and all encumbrances is
rare in many real estate circles. An encumbrance can be a mortgage (loan), a lien (voluntary or
involuntary) an easement or a restriction that limits the transfer of title. An encumbrance can
involve money, but not always.15

DEED OF TRUST OR MORTGAGE

A lot of people wrongly assume an encumbrance refers only to a mortgage, for example, because
that is the more common usage. When a home buyer finances the purchase of a home, that
financial verification typically consists of two documents: the promissory note, which is an
obligation to pay, and the mortgage or deed of trust, which secures the note and is recorded. A
mortgage is slightly different than a deed of trust but for our practical purposes, they both are an
encumbrance.

When a mortgage or deed of trust has been paid off, the encumbrance is then removed from the
property in the public records. A common document to remove an encumbrance is called a
reconveyance deed, which reconveys clear title to the property owner.16

LIENS

Liens are monetary claims against a property to secure an obligation or debt of the property
owner. A contractor can have a mechanic’s lien imposed for non-payment of repairs or work
completed on the property. For example, for the construction of a driveway until the contractor is
paid for their work. Liens for unpaid taxes are also common. Mortgages are a lien against a
property. Court judgments can also create a lien. In some cases a sale of the property can be
forced in order to satisfy lien-holders.17 For example, a mortgage is the most common form of a
lien between a homeowner and a lender. The lien will stay on the property until the mortgage is
paid in full. The consequence of not satisfying a lien on a property is a foreclosure sale with the
net proceeds going towards paying off the debts of the owner.18
15
Elizabeth Weintraub, Definition of Encumbrance and Encumbrances in Real Estate,
https://www.thebalance.com/definition-of-encumbrance-1798545
16
Id.
17
https://www.thebalancesmb.com/types-of-real-estate-encumbrances-2866978
18
Types of Real Estate Encumbrances, https://www.finweb.com/real-estate/types-of-real-estate-encumbrances.html
Liens can be further be divided into:

 Voluntary Liens

A voluntary lien is a document that an owner willingly signs and it generally is recorded against
the property in the public records. It could be a lien in exchange for money changing hands such
as a second loan or a home equity line of credit or even a refinance of existing secondary
financing.

 Involuntary Liens

Two types of involuntary liens that are fairly common are a lis pendens and a mechanic's lien. By
involuntary, it means the homeowner did not necessarily agree that such a lien can be filed
against the property but a lien nonetheless appeared. Lis pendens is a pending legal action. The
lis pendens would prohibit the sale until the court action was resolved.

A mechanic's lien is generally filed by a contractor or the contractor's sub-contractors for work or
materials that remain unpaid. All involuntary liens will need to be paid off for a title company to
issue a title policy without naming the encumbrances as exceptions to the title insurance.
Involuntary encumbrances remain with the property until released.19

EASEMENTS

An easement is the legal right to use a property without owning it. For example, a utility
company has the right to place power lines on a property. This appurtenant 20 easement will allow
one owner the right to access the property of the other. An example of this is the right to access
the beach on a walkway that is cutting through another owner’s property. This type of real estate
encumbrance also runs with the land.21

19
Supra Note 14.
20
When two properties with different owners are adjacent to each other and one has rights to use the property of the
other, it's an appurtenant easement.
21
Supra Note 18.
Probably the most common type of easement is an easement for maintenance of utilities, but an
easement could also be granted for access (right of way) to a parcel of land that is landlocked
without a road. Easements are an encumbrance because they prohibit certain actions and affect
rights to the property.

DEED RESTRICTIONS

A deed restriction is an encumbrance that usually runs with the land. Also known as restrictive
covenant, this encumbrance tells the homeowner what they cannot do with their property. Also
known as covenants or conditions, deed restrictions are limitations on how a property is used or
on the type of structures that can be placed on a property. These are very common when new
subdivisions are developed. The developers and builders place deed restrictions in order to
control the uses of the property and maintain standards of construction.22

A deed restriction can be anything from restricting an owner from placing a satellite dish on their
property, to where cars may be parked on a property. These restrictions are put in place to
maintain a standard for the uses of the property. The restrictions are added as a means to protect
property values.23

ENCROACHMENTS

An encroachment is a piece of property that is crossing over the boundary lines onto an adjacent
property. Building a fence inside the lines of an adjacent property or allowing tree branches to
hang into a neighbor’s yard are considered encroachments. This is usually determined when a
surveyor discovers the encroachment in preparation for the sale of a property. The other property
owner may require the encroachment to be removed.24

LICENSE

A license is the privilege to use another’s property. However, this privilege can be revoked at
any time. An example of a license is allowing a neighbor to store their car in your garage. You
can cancel that right at any time, unlike an easement.

22
Supra Note 16.
23
Supra Note 20.
24
Jeremy Danilson, Title Searches and the 3 Most Common Types of Encumbrances in Real Estate,
http://danilsonlaw.com/title-searches-3-common-types-encumbrances-real-estate/
 JUDICIAL APPROACH

Section 5725. Provision by Court for encumbrances and sale freed therefrom.—

(a) Where immoveable property subject to any encumbrances, whether immediately payable or
not, is sold by the court or in execution of a decree, or out of court, the court may, if it thinks fit,
on the application of any party to the sale, direct or allow payment into Court,—

(1) in case of an annual or monthly sum charged on the property, or of a capital sum charged
on a determinable interest in the property—of such amount as, when invested in securities of
the Central Government, the Court considers will be sufficient, by means of the interest
thereof, to keep down or otherwise provide for that charge, and

(2) in any other case of a capital sum charged on the property—of the amount sufficient to
meet the encumbrance and any interest due thereon. But in either case there shall also be paid
into court such additional amount as the Court considers will be sufficient to meet the
contingency of further costs, expenses and interest, and any other contingency, except
depreciation of investment, not exceeding one-tenth part of the original amount to be paid in,
unless the Court for special reasons (which it shall record) thinks fit to require a large
additional amount.

(b) Thereupon the Court may, if it thinks fit, and after notice to the encumbrance, unless the
Court, for reasons to be recorded in writing, thinks fit to dispense with such notice, declare the
property to be freed from the encumbrance, and make any order for conveyance, or vesting
order, proper for giving effect to the sale, and give directions for the retention and investment of
the money in Court.

(c) After notice served on the persons interested in or entitled to the money or fund in Court, the
Court may direct payment or transfer thereof to the persons entitled to receive or give a discharge

25
Transfer of Property Act
for the same, and generally may give directions respecting the application or distribution of the
capital or income thereof.

(d) An appeal shall lie from any declaration, order or direction under this section as if the same
were a decree.

(e) In this section “Court” means (1) a High Court in the exercise of its ordinary or extraordinary
original civil jurisdiction, (2) the Court of a District Judge within the local limits of whose
jurisdiction the property or any part thereof is situate, (3) any other Court which the State
Government may, from time to time, by notification in the Official Gazette, declare to be
competent to exercise the jurisdiction conferred by this section.

The object of this section is that property should be, as far as possible, sold free from
encumbrances. If an immovable property that is subject to any encumbrance is sold by the court
or in execution of a decree or out of court, the court may, if it thinks fit, on the application of any
party to the sale, direct or allow payment into the court.

In Mallikarjuna Sastri v. Narasimha26 the court held that the section had no application to the
case as it involved a question of an adjustment of a decree out of court.

CONCLUSION

Encumbrance on sale are very prevalent and it is the responsibility of the buyers to be aware
about certain aspects before buying a property. It is also the responsibility of the seller to inform
the buyer about the property and any such encumbrances attached with it. Such encumbrances
are to be avoided to provide with fair transfer of property from the transferor to the transferee,
and to avoid problems later. Section 57 of the Transfer of Property provides for recourse in case
of such encumbrances.

26
(1901) ILR 24Mad 412.
 BIBLIOGRAPHY

BOOKS REFERRED:

Property Law, Dr. Poonam Pradhan Saxena

The transfer of Property Act, Justice P.S. Narayana

The Transfer of Property Act, Sir Dinshaw Fardunji Mulla

CITES REFERRED:

 Permitted Encumbrances in a Purchase and Sale Agreement,

http://www.cincoland.com/permitted-encumbrances-in-a-purchase-and-sale-agreement/
 Transfer of Property Act, 1882,
https://www.advocatekhoj.com/library/bareacts/transferofproperty/69.php?Title=Transfer%20of
%20Property%20Act,%201882&STitle=Power%20of%20sale%20when%20valid
 Encumbrance certificate discloses charge on property,
https://economictimes.indiatimes.com/encumbrance-certificate-discloses-charge-on-
property/articleshow/5707451.cms
 Encumbrance, https://www.investopedia.com/terms/e/encumbrance.asp
 Definition of Encumbrance and Encumbrances in Real Estate, https://www.thebalance.com/definition-of-
encumbrance-1798545
 Title Searches and the 3 Most Common Types of Encumbrances in Real Estate,
http://danilsonlaw.com/title-searches-3-common-types-encumbrances-real-estate/