Validity of Partial Restraint on the Transfer of Property

Transfer of immovable property essentially means transferring the 'bundle of rights' associated with its enjoyment and alienation. Section 10 of the Transfer of Property Act, 1882 (“Act”) prohibits restraints on parties from “absolutely” alienating their property. While free disposal is favoured, reasonable restraints on transfer are allowed. In the case of Mohd. Raza v. Abbas Bandi Bibi[1] it was held that “…a partial restriction upon the power of disposition would not, in the case of a transfer inter vivos, be regarded repugnant under Section 10 of the Act”. 

Interpretation of Section 10 of the Act

Section 10 of the Act emphasizes that the right to transfer property is inseparable from property ownership.[2] Section 10 of the Act prohibits absolute restraints on transferring property. It states that any term in a transfer deed that completely prevents the transferee from transferring their interest is void. The rationale behind this provision is  that if the transferor is free to dispose of their property, the transferee should have the same freedom. Absolute restraints would eliminate this freedom, which is against public policy.[3]

The rule in Section 10 of the Act that a condition of absolute restraint on alienation is void is founded on the principle of public policy allowing free circulation and disposal of property.[4] However, this section only prohibits absolute restraint on the transfer of property. The Indian Judiciary has reinterpreted this section and recognized the concept of partial restraint.

Partial Restraint on Alienation

The Law Commission, in its 70th Law Commission Report, observed that the true test to determine whether a condition places an absolute or partial restraint on the transfer of property is to check if such condition substantially removes the transferee’s power to transfer the property. If it does, the condition is void. However, if it only partially restrains but allows substantial power to transfer, then it is considered valid.[5] 

In the case of Gayasi Ram v. Shahabuddin[6], the Allahabad High Court established that (i) a restraint on property transfer is absolute under Section 10 the Act, if it practically prohibits all alienation, and (ii) the mere possibility of transfer under remote contingencies does not make it a partial restraint. This analysis highlights the court's focus on the practical implications of the restrictions and their impact on the freedom of the contracting parties to transfer property.

Reasonable Restraints

The Indian Judiciary has upheld various restrictions on the transfer of property, balancing the need for reasonable restraints without substantially limiting the power of alienation. These restrictions are primarily upheld on certain grounds, such as the doctrine of first refusal, time-based restraints, community-based restrictions, etc.[7] 

The doctrine of first refusal grants the original owner of a property the right to be the first to purchase the property if the current owner decides to sell. This means that before the property can be offered to any other potential buyers, it must first be offered to the original owner. If the original owner declines to buy it, the property can be sold to a third party. The court has assessed and upheld such a clause on the transfer of property in the case of Debi Dayal v. Ghasita.[8] basing its decision on the particular circumstances and facts of the case, including the precise terms of the agreement and the purchaser's prior knowledge of the restriction. 

Time-based restraints on property transfers are generally considered void. However, the Allahabad High Court, in the case of Loknath Khound v. Gunaram Kalita[9] made an exception to this rule and held that such conditions can be valid if they include provisions allowing the original owner to repurchase the property within a specified period. 

Community-based restrictions, such as those preserving property within a family or community, are upheld to maintain sentimental attachment and community integrity. Restrictions on property alienation within a family or community were first upheld in the Mohd. Raza case[10], where the court ruled that such agreements do not violate the principles of justice, equity, and good conscience. The validity of these restrictions is often based on sentimental attachment or the desire to preserve family esteem and dignity. In more recent cases, such as Zoroastrian Coop. Housing Society Ltd. v. Registrar, Coop. Societies (Urban)[11] The courts have allowed the preservation of property within a community to protect minority rights, as enshrined under Article 29 of the Constitution. 

However, it is crucial to understand that these grounds are not exhaustive, and courts evaluate the validity of such restrictions on a case-to-case basis. 

Conclusion

The development of the concept of partial restraint on transfer of property through these cases shows a nuanced and pragmatic approach by the Judiciary. However, the concept is still evolving, as there is no definitive method to determine what constitutes a partial restraint, leaving room for case-to-case interpretation. As the law evolves, it will continue to refine the boundaries of such restraints, balancing individual rights with public policy interests in property transactions.

References

[1] Mohd. Raza v. Abbas Bandi Bibi, 1932 SCC OnLine PC 23. 

[2] Section 10, Transfer of Property Act 1882. 

[3] Law Commission of India, Report No. 70 on The Transfer of Property Act, 1882 (1977). 

[4] Jatru Pahan v. Ambikajit Prasad, AIR 1957 Patna 570. 

[5] Law Commission of India, Report No. 70 on The Transfer of Property Act, 1882 (1977).

[6] Gayasi Ram v. Shahabuddin, 1935 SCC OnLine All 41.

[7] Rakshit Agarwal, Re-examining the Interpretation of Section 10 of the Transfer of Property Act, 1882 (December 23, 2022), https://www.scconline.com/blog/post/2022/12/23/re-examining-the-interpretation-of-section-10-of-the-transfer-of-property-act-1882/. 

[8] Debi Dayal v Ghasita, AIR 1929 All 667. 

[9] Loknath Khound v. Gunaram Kalita, 1984 SCC OnLine Gau 24. 

[10] Mohd. Raza v. Abbas Bandi Bibi, 1932 SCC OnLine PC 23. 

[11] Zoroastrian Coop. Housing Society Ltd. v. Registrar, Coop. Societies (Urban), (2005) 5 SCC 632.