Saturday 15 April 2023

Restrictions on Transfer of Property & ‘Rule Against Perpetuity’

 

Rule Against Perpetuity – Simplified

Restrictions on Transfer of Property & ‘Rule Against Perpetuity’

By Saji Koduvath, Advocate, Kottayam published in https://indianlawlive.net/2022/09/09/rule-against-perpetuity-simplified/


Prologue

  • ‘Perpetuity’ or constancy is not the rule, in all spheres of life.
  • In law of transfer of property, the rule is ‘rule against perpetuity or permanency’. 
  • The Acts on Transfer of Property and Succession expressly disfavor  ‘perpetuity’; and, stand against stagnancy in transference.

Our Apex Court has said in R. Kempraj v. Barton Son & Co, AIR 1970 SC 1872 as under:

  • “It is well known that the rule against perpetuity is rounded on the principle that the liberty of alienation “shall not be exercised to its own destruction and that all contrivances shall be void which tend to create a perpetuity or place property for ever out of the reach of the exercise of the power of alienation”.

Part – I

Section 10 and 11, TP Act

Sec. 10. Condition absolutely restraining alienation – Analysed

  • Sec. 10 of the TP Act (Condition absolutely restraining alienation) directs that if there is a condition in a transfer of property ‘absolutely restraining the transferee from disposing of his interest’, that condition is void.

Instances of “Absolute Restraint” and “Reasonable Restraint” 

  • Sale or gift (transfer) with direction – transferee should not sell (absolute restraint). The direction is void.
  • Sale or gift (transfer) with direction – transferee should sell to a particular person alone (in-effect absolute restraint). The direction is void.
  • Sale or gift (transfer) with direction – transferee should not sell outside family (in-effect absolute restraint). The direction is void.
  • Sale or gift (transfer) with direction – transferee should not sell for 3 years (reasonable restraint). The direction is valid.
  • Direction to members of Zoroastrian Housing Society – not to sell property other than Zoroastrians (reasonable restraint). The direction is valid.

In Gayasi Ram v. Shahabuddin, AIR 1935 All 493, the sale deed contained a clause that the vendee shall not transfer the house by mortgage, gift or sell to any one except the vendor or his heirs and if in contravention of the clause, the property is sold the vendor or his heir would have a right to get back the house by paying Rs. 175/- and if the property was to be sold in court auction sale, the sale would be invalid. The sale consideration for the house was Rs. 150/-. It was held (relying on Dal Singh v. Khub Chand, AIR 1921 All 97, Asghari Begam v. Maula Bakhsh, AIR 1929 All 381, and Gomti Singh v. Anari Kuar, AIR 1929 All 492) that this impugned clause in a sale between strangers was an absolute restraint on alienation; and therefore the same was void, in view of Section 10 of Transfer of Property Act; and that in such cases question of pre-emption did not arise. (See also: Manohar Shivram Swami v. Mahadeo Guruling Swami, AIR 1988 Bom 116)

In Trichinopoly Varthaga Sangam Ltd. v. T. N. Shanmughasundaram, AIR 1939 Mad. 769, the Clause in the Partition deed – the property should not be sold to any stranger; and lease only to brothers or their heirs for a sum not exceeding Rs. 1000/-. The court found that there was “no obligation” for a member to buy “even at Rs. 1000/-“. Hence it was held – Restriction is ‘absolute’, and hence, void. (See also: Rosher v. Rosher, (1884) 26 Ch D 801).  

Similarly, it was held in Manohar Shivram Swami v. Mahadeo Guruling Swami, AIR 2008 Bom 116, that the condition in the Sale Deed prohibiting sale ‘outside family’ was void – as it was absolute restraint.

Reasonable Restraint is Allowed in Law

The words ‘absolute restraint‘ in Sec. 10 of the TP Act makes it clear that ‘reasonable restraint’ is allowed in law. Hence, it is clear that the cases in this subject has to be dealt with on the facts of each case.

Therefore, it is not possible to place a hard and fast rule on the validity of the restrictions of enjoyment for a particular period, enjoyment in a particular manner, restrictions on transfer etc. In Renand v. Tourangeaon, (1867) LR 2 PC 4, it was held that a condition prohibiting transfer the property for twenty years was held to be an absolute restraint and hence void. But it was opined that if it were for a period of 3 years, it would have been a partial restraint and valid. This decision is referred to in Athmaram Rao v. Shanthan Phawar (2018 Madras High Court).

Our Apex Court held in Zoroastrian Co-operative Housing Society Ltd. v. District Registrar, Co-operative Societies (Urban ), AIR 2005 SC 2306, that in the matter of a Housing Society, the restriction imposed in the light of the byelaws of the Society that the property should not be sod to others, other than Zoroastrians, was a valid condition.

Sec. 11. Restriction repugnant to Absolute interest created  – Analysed

  • Sec. 11 of the TP Act (Restriction repugnant to Absolute interest created) cautions that the terms, in an absolute transfer, that direct enjoyment of interest in a particular manner, is invalid.
  • But the direction for securing the beneficial enjoyment of another piece of such property is valid.

Instances of ‘Absolute Sale & Enjoyment in a Particular Manner’ in S. 11, TP Act

  • Absolute sale or gift with direction – transferee should reside there. The direction is invalid.
  • Absolute sale or gift with direction – transferee should not cut trees. The direction is invalid.

Instances of ‘No Absolute Transfer‘ in S. 11, TP Act

  • On a ‘Harmonious Construction’ of the deed, sale or gift subject to a condition – transferee should reside there, or look after transferor (that is, no absolute transfer). The direction is valid.
  • In a transfer, life interest alone is created (that is, no absolute transfer) and a direction – assignee should not cut trees. The direction is valid.

In Bhavani Amma Kanakadevi v. CSI, Dakshina Kerala Maha Idavaka, AIR 2008 Kerala 38, the question came for consideration was whether a provision in a sale deed that in the event of failure to construct a private college in the property sold thereunder, the property shall be re-conveyed by the vendee to the vendor for the same sale consideration is barred under the provisions of Sections 10 or 11 of Transfer of Property Act. Observing that (though) Ext.A2 did not contain a specific clause prohibiting respondent from alienating the property to third parties, the implied clause – that in the event of failure to construct a college, the property shall be reconveyed to the assignor at the same price – shut out any other option. The High Court held that it was an absolute restraint on the right of respondent to deal with the property including alienation, which was void as provided under Section 10. 

The court referred to the following decisions:

  • Jatru Pahan v. Mahatma Ambikajit Prasad ( AIR 1957 Patna 570),
  • Gayasi Ram v. Shahabuddin (AIR 1935 All. 493)
  • Manohar Shivram Swami v. Mahadeo Guruling Swami (AIR 1988 Bombay 116)
  • Fatima v. Saraswathi Amma (AIR 1986 Kearla 56).
  • Thomas v. AA Henry, 2008(2) KLT 63, ILR 2008(2) Ker. 12
  • Trichinopoly Varthaga Sangam Ltd. v. T. N. Shanmughasundaram, AIR 1939 Mad. 769.

Contingent Interest and Contingent Remainders

Read Blog: Transfer of Property with Conditions & Contingent Interests

Part – II

RULE AGAINST PERPETUITY

Rule against perpetuity, in Indian law, is applicable when property is transferred to an ‘unborn’ person. Sec. 14 of the Transfer of property Act directs that such (unborn) person must have born within the life-time of ‘one or more persons’ named in the transfer deed (who must be one living at the date of such transfer).

Under the English jurisprudence, it is pertaining to and for ‘controlling the duration of private trusts‘. The Rule Against Perpetuities Applied to Trusts, 9 ST. LOUIS L. REV. 286 (1924) speaks as under:

  • “Under the rule against perpetuities, private trusts may be created for the life of the last survivor of any number of designated persons, in being at the commencement of the trust, and for period of 21 years thereafter.”

Indian law specifies, and limits, the doctrine to the transfer of property to ‘unborn’ persons. Sections 13 and 14 of the TP Act are the relevant provisions.

Sec. 13. Transfer for benefit of Unborn Person

(Similar provision in Section 113 of the Indian Succession Act, 1925)

Sections 13 and 14 of the TP Act are worded in a tiresome manner. It is too difficult to understand the purport of the Section, in its correct perspective, without a thorough exploration. Both these sections says about transfer of property to unborn persons.

Sec. 13 of the TP Act reads as under:

  • 13. Transfer for benefit of unborn person. Where, on a transfer of property, an interest therein is created for the benefit of a person not in existence at the date of the transfer, subject to a prior interest created by the same transfer, the interest created for the benefit of such person shall not take effect, unless it extends to the whole of the remaining interest of the transferor in the property.

As articulated in Sec. 5 of the Transfer of Property Act, ‘Transfer of Property’ must be by a living person, to another living person. Sec. 13 is an enabling provision to transfer property to an unborn person. It directs that following conditions must be satisfied for a valid transfer to an unborn person:

  • (i) Prior interest must have been created in ‘someone’:
    • The interest in the property (referred to in this Section as prior interest), for the period between the transfer and the birth of the unborn person, must have been created (in someone), by the same transfer.
      • [The aforesaid proposition can be deduced from the clause in Sec. 13 – “subject to a prior interest created by the same transfer”];
  • (ii) Whole of the remaining interest of the transferor must be created in the unborn person – purport and principle:
    • The ‘prior interest-holder’ must have been directed (by the transferor) to create/transfer the whole remaining interest (directly) to such unborn person.
    • The transfer under Sec. 13 cannot be limited to ‘life interest’ alone (as in English law) of the ‘unborn’ (Life-interest is the interest that remains only in his/her life time – thereafter it will go to a named person or another ‘unborn’).
    • The transfer under Sec. 13 must be definite in nature; it cannot be unlimited or ‘perpetual’.
    • That is, if a life-interest stands created, or continues, on an intermediary, (after the birth of the said ‘unborn’) it will not ‘take effect‘.
      • [These can be deduced from the clause in Sec. 13 – “the interest created for the benefit of such person shall not take effect, unless it extends to the whole of the remaining interest of the transferor in the property”; and from the illustration in Sec. 13.]
    • Note: 1. ‘Whole of the remaining interest of the transferor in the property‘ may by be the the whole fractional interest of the transferor (originally he had).
    • 2. Though it may appear worded otherwise, it can also be the fractional interest (of the whole interest) that is intended to be transferred to the ‘unborn’.

The Illustration in Sec. 13 of the TP Act reads as under:

  • Illustration: A transfers property of which he is the owner to B in trust for A and his intended wife successively for their lives, and, after the death of the survivor, for the eldest son of the intended marriage for life, and after his death for A’s second son. The interest so created for the benefit of the eldest son does not take effect, because it does not extend to the whole of A’s remaining interest in the property.

“For the benefit of” – Implies ‘TRUST’

Sec. 13 begins with the words – “Where, on a transfer of property, an interest therein is created for the benefit of a person not in existence”. The words ‘for the benefit of‘ definitely brings-in the concept of ‘trust’.

  • Note: Trust is ‘an obligation’ upon the trustee to administer the trust property, as if he is its owner and as required by the author, for the benefit of the beneficiaries.

Read Blogs: What is Trust in Law

Trustees and Administration of Public Trusts

Transfer to Unborn can only be made by a Machinery of Trust

Mulla, on The Transfer of Property Act, in commentary to Sec, 122, Gifts, it is stated:

  • “A gift may be made by the equitable machinery of a trust; and the interposition of the trustees enables a gift to be made to a person not yet in existence and, therefore, incapable of being the donee of a direct gift.” (See: Controller of Estate Duty, Bombay v. Bhagwandas Velji Joshi, 1983-139 ITR 316 (Bom); 1981-6 TAXMAN 202; Saraswathi v. Devaki Amma, ILR 1986-1 Ker 550; 1985 KLT 217.)

In Mathen Mathew v. Kunjika Bharathi: AIR 1968 Ker 12, it is held as under:

  • “18. The gift can be to the named donees as representing the group of persons composed of the wife and children including children to be born. Such a gift can be made only through the machinery of a trust, the named donees holding as trustees for themselves and the other beneficiaries.”

In The Commissioner of Income Tax v. Brig. Kapil Mohan, [2001] 252 ITR 830: 118 Taxman 430 (Delhi ) observed as under:

  • “5. A transfer cannot be made directly to an unborn person, for the definition of transfer in Section 5 is limited to living persons. Such transfer can only be made by the machinery of trusts. Possibly, to express this distinction, the expression “for the benefit of” has been used, since trustees being the transferees hold the property for the benefit of the unborn person.”

The Madras High Court in T Subramania Nadar v. T Varadharajan, AIR 2003 Mad 364, pointed out as under:

  • “12. Under Section 13 of Transfer of Property Act transfer cannot be made directly to an unborn person as the definition of transfer in Section 5 of Transfer of Property Act is limited to living persons. The transfer in favour of an unborn person can be made by a machinery. It is intended to express this distinction by the words “for the benefit of“, the trustees being the transferees who hold the property for the benefit of the unborn persons. The estate must vest in some person between the date of the transfer and the coming into existence of the unborn person. The interest of the unborn person must therefore be in every case preceded by a prior interest. Section 13 says that the interest of the unborn person must be the whole remainder.” 

“TRANSFER OF PROPERTY” and ‘CREATION OF INTEREST’ in Sec. 13

It is clear that the words, ‘transfer of property‘ and ‘an interest created therein’ are used in Sec. 13 to denote two different notions. Transfer of property to the ‘unborn’ should take place on his/her birth. Creation of interest can be done only on attaining his/her majority.

Can a limited ‘beneficial enjoyment’ be allowed to ‘prior-interest-holder’

It appears that there is no impediment in giving a limited ‘beneficial enjoyment’ (like appropriating income derived; right to reside in the building) to the ‘prior-interest-holder’- up to the birth of the ‘unborn’ person. If it is not so specifically provided, the prior-interest-holder will be a mere ‘trustee’ for the unborn person (the beneficiary). These propositions are made from the following:

  • Sec. 13 only directs -‘the whole of the remaining interest‘ must have been directed to be vested in the (unborn) person (when he/she born). The word ‘remaining’ persuades only one reasoning.
  • The prohibition in Sec. 13 is that ‘life interest’ (interest that remains only in his/her life time) alone can be conferred upon the ‘unborn’; that is, creation of life-interest alone is bad in law.
  • Sec. 13 speaks about ‘Transfer of Property’ to the ‘unborn’ on his/her birth, and, therefore, it can also be a ‘conditional transfer’.
  • Generally speaking, the question of ‘trust’ comes only on birth of the ‘unborn’. Though property can be given to ‘unborn’, it is only because of specific enacted provisions (Section 9 of the Indian Trusts Act; Section 14 of the TP Act). Since those provisions do not expressly prohibit, the aforesaid ‘conditional transfer’ can be made validly (provided it does not be bad under Sec. 11 of the TP Act – as shown above.
  • The owner of a property is free to deal with his property in any manner he wishes, unless expressly or impliedly restricted by law. ‘Conditional transfer’ is permitted by the TP Act itself.
  • If a ‘conditional transfer is made, it can only be upto the birth of the ‘unborn’. [It is clear from the words in Sec. 13 – “the interest created for the benefit of such person shall not take effect, unless it extends to the whole of the remaining interest of the transferor in the property”; and from the illustration in Sec. 13.]

In either case, the ‘the whole of the remaining interest‘ must have been directed to be vested in the (unborn) person (when he/she born).

Even if no trustee is appointed, and it does not come out from the deed of transfer as to who should be the trustee, the court will appoint a trustee, on the principle – ‘no trust will fail for want of trustees’.

Sec. 13 does not specifically refer to Prior Interest “HOLDERS”. Why?

  • The (main) object of this section is to provide – ‘whole remainder interest … in the unborn person‘.
  • The creation of interest, in a prior interest HOLDER, for the period between the transfer and the birth of such unborn person, is an inevitable coincident.
  • As stated earlier, a limited ‘beneficial enjoyment’ could be given, to the prior interest HOLDER, up to the birth of the ‘unborn’ .
  • For the above, only an indication as to creation of prior interest was apposite.

Sec. 14. Rule against Perpetuity – Analysed.

(Similar provision in Section 114 of the Indian Succession Act, 1925)

Sec. 14 of the TP Act reads as under:

  • 14. Rule against perpetuity. No transfer of property can operate to create an interest which is to take effect after the life-time of one or more persons living at the date of such transfer, and the minority of some person who shall be in existence at the expiration of that period, and to whom, if he attains full age, the interest created is to belong.

Sec. 14 of the TP Act lays down the following:

  • Property can be transferred to an unborn person.
  • Sec. 14 basically declares the maximum period (perpetuity period) for creating an interest in an unborn person as regards an immovable property.
  • For transferring property to an unborn person, such (unborn) person must have born within the life-time of ‘one or more persons’ named in the transfer deed (who must be one living at the date of such transfer).
  • The interest in the property can be created in favour of such (unborn) person only on attaining majority by such (unborn) person (i.e., 18 years).
    • Therefore, the maximum period (perpetuity period) for creating the interest in the property in favour of such (unborn) person will be the remaining (after transfer) ‘life-time‘ of such ‘one or more persons‘ (who were living at the date of such transfer) plus (+) the ‘minority’ of such (unborn) person (i.e., 18 years).
    • It is clear – such (unborn) person must have born at least on the day of death of such ‘one or more persons‘.
  • Sec. 14 allows the transferor to name any ‘one or more persons‘ whose ‘life-time’ is to be taken into consideration for Sec. 14.
  • Who are such ‘one or more persons‘ has to be inferred from the transfer deed.
  • As stated in Sec. 13, the interest in the property, for the period between the transfer and the birth of such unborn person (referred to as prior interest), must have been created in ‘some’ (prior interest) holder.
    • Note: The prior interest holder in Sec. 13 need not necessarily be the ‘one or more persons‘ stated in Sec. 14.

G. Ramakrishniah v. Dasaratharama Reddiar, AIR 1970 Mad 484 ( Natesan, J.), vividly explains these matters, as under:

  • “The perpetuity period under Section 14 of the Act consists of the lifetime of one or more persons living at the time the transfer takes effect, and the further period of the minority of a person in existence at the close of the person living at the time of the transfer. ….. Section 14 of the Act however does not place any restriction as to who can be the living person whose existence can postpone the vesting. It allows the settlor to use any life for the purpose…… It may be any person or any number of persons, but the person or persons must be living at the date of such transfer. True, one must infer from the document itself the person or persons whose life has to be considered.”

Status of the ‘one or more persons‘ whose ‘life-time’ is to be taken into consideration

  • As stated earlier, the prior interest holder in Sec. 13 need not necessarily be the ‘one or more persons‘ stated in Sec. 14.
  • They are not ‘trustees’ inasmuch as no property is entrusted for their administration, and no obligation is casted upon them.

Therefore, they are persons merely chosen by the transferor of property (to an unborn), for the purpose of Sec. 14.

Part – III

The exceptions to the rule against perpetuity

  1. Transfer for Public Benefit (Not for private trusts): Read Blog: Dedication of Property in Public Trusts
  2. Covenants of Redemption of mortgage.
  3. Personal Contracts
  4. Pre-emption: Read Blog: Preemption is a Very Weak Right; For, Property Right is a Constitutional & Human Right
  5. Perpetual Lease

End Notes

Sec. 10 to 15 of the TP Act

Sec. 10. Condition restraining alienation.

  • Where property is transferred subject to a condition or limitation absolutely restraining the transferee or any person claiming under him from parting with or disposing of his interest in the property, the condition or limitation is void, except in the case of a lease where the condition is for the benefit of the lessor or those claiming under him: provided that property may be transferred to or for the benefit of a women (not being a Hindu, Muhammadan or Buddhist), so that she shall not have power during her marriage to transfer or charge the same or her beneficial interest therein.

Sec. 11. Restriction repugnant to interest created.

  • Where, on a transfer of property, an interest therein is created absolutely in favour of any person, but the terms of the transfer direct that such interest shall be applied or enjoyed by him in a particular manner, he shall be entitled to receive and dispose of such interest as if there were no such direction.
  • Where any such direction has been made in respect of one piece of immoveable property for the purpose of securing the beneficial enjoyment of another piece of such property, nothing in this section shall be deemed to affect any right which the transferor may have to enforce such direction or any remedy which he may have in respect of a breach thereof.

Sec. 12. Condition making interest determinable on insolvency or attempted alienation.

  • Where property is transferred subject to a condition or limitation making any interest therein, reserved or given to or for the benefit of any person, to cease on his becoming insolvent or endeavouring to transfer or dispose of the same, such condition or limitation is void. Nothing in this section applies to a condition in a lease for the benefit of the lessor or those claiming under him.

Sec. 13. Transfer for benefit of unborn person.

  • Where, on a transfer of property, an interest therein is created for the benefit of a person not in existence at the date of the transfer, subject to a prior interest created by the same transfer, the interest created for the benefit of such person shall not take effect, unless it extends to the whole of the remaining interest of the transferor in the property.
  • Illustration: A transfers property of which he is the owner to B in trust for A and his intended wife successively for their lives, and, after the death of the survivor, for the eldest son of the intended marriage for life, and after his death for A’s second son. The interest so created for the benefit of the eldest son does not take effect, because it does not extend to the whole of A’s remaining interest in the property.

Sec. 14. Rule against perpetuity.

  • Rule against perpetuity.No transfer of property can operate to create an interest which is to take effect after the life-time of one or more persons living at the date of such transfer, and the minority of some person who shall be in existence at the expiration of that period, and to whom, if he attains full age, the interest created is to belong.

Sec. 15. Transfer to class some of whom come under sections 13 and 14.

  • If, on a transfer of property, an interest therein is created for the benefit of a class of persons with regard to some of whom such interest fails by reason of any of the rules contained in sections 13 and 14, such interest fails 1[in regard to those persons only and not in regard to the whole class].

Sec. 16. Transfer to take effect on failure of prior interest.

  • Where, by reason of any of the rules contained in sections 13 and 14, an interest created for the benefit of a person or of a class of persons fails in regard to such person or the whole of such class, any interest created in the same transaction and intended to take effect after or upon failure of such prior interest also fails.
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