An Agreement For Sale: A Promise And Not Ownership

Introduction

The two important documents usually involved in the sale and purchase of a property are the agreement for sale and the sale deed. An agreement for sale outlines the terms and conditions of a future transaction but does not transfer ownership. Ownership is transferred only when a sale deed is signed and registered. Recently, the Supreme Court (SC), in Indian Overseas Bank v. M.A.S Subramanian, again highlighted and clarified this distinction.[1]

What is an Agreement for Sale?

An agreement for sale is an important legal document that lays down the terms and conditions as agreed upon between the buyer and seller before the actual sale occurs.

Generally, an agreement for sale covers the following:

• Commitment of Sale and Purchase: It ensures that the seller and buyer have agreed to their commitment to selling and purchasing the property. This agreement is for a sale at a future date based on the conditions agreed. However, the mere signing of this document does not transfer the ownership rights to the buyer.
• Details of the Parties: It clearly mentions the details of both the parties including their names and addresses.
• Property Description: It contains a detailed description of the property. This description includes the property’s exact location, size, and boundaries, along with any unique features that make it different.
• Price and Payment Terms: The agreement mentions the total price of purchase, along with other payment details like the payment schedule and the mode of payment. It often also has provisions regarding advance payments or security deposits, depending on the situation.
• Transfer and Possession: It contains details regarding the date and manner of handing over the property. This ensures that the parties are clear on the final steps of the transaction.
• Legal Safeguards: It often contains clauses that verify the title of the property, provide a provision of refund in case any legal issues arise, and outline what happens if the sale does not get completed as planned.
• Conditions and Contingencies: Important factors like financing approvals, property inspections, or other prerequisites are often included to protect both parties.
• Jurisdiction and Applicable Law: In case of disputes, the agreement specifies which legal framework will govern the contract, especially if the transaction involves different states or countries.
• Signatures and Execution: For the agreement to be legally valid, both the buyer and the seller must sign it, along with the date of execution.

What is a Sale Deed?

A sale deed is the final and most crucial document in a property transaction. It legally transfers ownership from the seller to the buyer. It is an undeniable proof of a sale. Without it, ownership does not officially change hands. The following aspects make a sale deed essential:

• Final Transfer of Ownership: The sale deed transfers all rights, titles, and interests in the property to the buyer. However, such a transfer is not entirely legally completed until it is signed and registered.
• Legal Requirement: As per the Registration Act, 1908, a sale deed must be registered at the local registrar’s office. This document holds no legal weight unless it is registered.
• Parties: It clearly mentions the details of both the parties involved, including their  identification and addresses:
  • The Seller: The person transferring the property.
  • The Buyer: The person making the payment.
• Property Details: The sale deed gives a detailed description of the property including its location, size, and boundaries, along with any unique feature that distinguishes it. This ensures that there is no ambiguity or disputes.
• Sale Consideration: This section lays out the financials:
  • The total agreed price.Any advance payments made.
  • The balance amount still due.
• Transfer of Title and Possession: The deed specifies when ownership and possession will shift from the seller to the buyer. From the moment shift is effected, the buyer takes full responsibility for the property.
• Indemnity & Legal Safeguards: The seller is required to ensure and assure that the property being sold is free from any legal disputes, mortgages, or outstanding dues. An indemnity clause is included in the sale deed to protect the buyer if any issue arises at a later point in time.
• Signatures & Witnesses: Both parties sign the deed in the presence of witnesses, whose signatures act as verification. Some transactions may also require notarization for added legal validity.

Difference Between Agreement for Sale and Sale Deed: Transfer of Ownership

Supreme Court’s Recent Decision: Indian Overseas Bank v. M.A.S Subramanian[2]

Background of the Case

• The National Company Law Appellate Tribunal (NCLAT) ruled that the sale deed of October 31, 2011, concerning a piece of land, was not binding on a company. The reason given for this was that the company already had possession of the land due to a previous agreement for sale with the original owner of the property in question (Shri M.A. Shanmugam).
• The reasoning behind this decision of the NCLAT was that although Shri Shanmugam had not registered the sale deed before his death, the fact that the company had possession of the land was sufficient to constitute “part performance” of the contract. Thus, this led to the later sale deed being invalid.
• However, this decision was challenged before the SC by the Indian Overseas Bank (the appellant).

The Supreme Court’s Decision and Reasoning

• The SC overturned the NCLAT’s decision. A major factor in SC’s decision was based on the fundamental legal principle that an agreement for sale does not transfer title or create any interest in a property. To reinforce this, reliance was placed on Section 54 of the Transfer of Property Act, 1882.
• The Court emphasized that for an immovable property that was worth more than Rs. 100, there was only one way to effect a legal transfer of ownership. This was through a registered sale deed, in compliance with the Indian Registration Act, 1908
• In this case, the Court observed that Shri Shanmugam, the original owner, had merely agreed to sell the land to the company in exchange for shares. This was done via an agreement for sale. However, he did not execute and register a sale deed for the same before his death.
• The Court held that since he never executed a registered sale deed, he continued to remain the legal owner of the property even though the possession of the land was with the company. It was noted that such possession under the agreement for sale was not sufficient to transfer the land’s ownership to them.
• Therefore, the Court concluded that the NCLAT erred in holding that the subsequent sale deed was not binding on the company simply because the company was in “part performance” of an agreement for sale. The company’s possession under an agreement for sale did not negate the fact that legal ownership still rested with the original owner (and his legal representatives) until a registered sale deed was executed.
• The Court clarified that their decision did not adjudicate the ownership claims of any of the parties involved (pursuant to the 2011 sale deed or otherwise). They explicitly left open the remedies for all parties to pursue their claims of ownership or enforce their rights through appropriate legal channels, such as by filing a suit for specific performance based on the original agreement for sale.

Conclusion

The difference between an Agreement for Sale and a Sale Deed is more than just a technical distinction; it is a crucial part of property transactions. An Agreement for Sale sets the stage, outlining terms for a future sale, but it does not change who owns the property. That shift in ownership only happens when a Sale Deed is signed and registered. This difference is vital to avoid confusion and legal issues. The SC’s recent decision reinforces this well-established rule, reminding us all that proper documentation is essential to protect property rights.

[1] https://api.sci.gov.in/supremecourt/2018/38616/38616_2018_5_4_58313_Order_07-Jan-2025.pdf.

[2] https://api.sci.gov.in/supremecourt/2018/38616/38616_2018_5_4_58313_Order_07-Jan-2025.pdf.

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