A landmark ruling by the Madras High Court has clarified the rights of subsequent purchasers in property disputes involving unregistered sale agreements. The judgment reinforces that mere existence of an unregistered prior agreement does not automatically invalidate a later registered sale, especially when the subsequent buyer acts without notice and in good faith.
Background & Facts
The Dispute
The dispute arose from a conflict between a plaintiff who claimed a prior oral and unregistered sale agreement with the first defendant, and a second defendant who purchased the same property through a registered sale deed. The plaintiff alleged that the first defendant colluded with the second defendant to defeat his rights by selling the property after receiving an advance payment of Rs.20,000. The second defendant asserted he was a bonafide purchaser unaware of any prior agreement.
Procedural History
- 2013: Plaintiff entered into an unregistered Agreement of Sale with the 1st defendant for Rs.1,01,000, paying Rs.20,000 as advance.
- 2013: 1st defendant executed a registered sale deed in favor of the 2nd defendant on 20.08.2013 for Rs.65,700.
- 2013: Plaintiff issued legal notice demanding performance; suit filed for specific performance.
- 2019: Subordinate Court decreed the suit in favor of the plaintiff.
- 2021: First Appellate Court confirmed the decree.
- 2023: Second Appeal filed before the Madras High Court under Section 100 CPC.
Relief Sought
The appellant (2nd defendant) sought to set aside the decree for specific performance, arguing he was a bonafide purchaser without notice. The respondent (plaintiff) sought enforcement of the prior agreement and specific performance of the sale deed.
The Legal Issue
The central question was whether a subsequent purchaser, who acquired property through a registered sale deed and had no actual or constructive notice of a prior unregistered agreement, can be denied protection under Section 19(b) of the Specific Relief Act, 1963, solely on the basis of the prior agreement’s unregistered status.
Arguments Presented
For the Appellant
The appellant’s counsel argued that the 2nd defendant was a bonafide purchaser who paid valuable consideration and registered the sale deed in good faith. He contended that the courts below erred in not framing an issue on bonafideness and in ignoring the contradiction between the plaintiff’s legal notice (claiming full payment) and plaint (claiming partial payment). He relied on Sukhwinder Singh v. Jagroop Singh, K.N. Nagarajappa v. H. Narasimha Reddy, and Narayan Sitaramji Badwaik v. Bisaram to establish that a subsequent purchaser’s rights must be protected unless notice is proven. He further argued that the plaintiff failed to establish readiness and willingness under Section 16 of the Specific Relief Act, a defense available to all defendants, including subsequent purchasers.
For the Respondent
The respondent’s counsel contended that the 1st defendant’s absence and the timing of the sale to the 2nd defendant indicated collusion. He relied on R. Hemalatha v. Kashthuri to argue that unregistered sale agreements are admissible in evidence for specific performance. He maintained that the courts below correctly found the 2nd defendant had constructive notice because he inquired about prior agreements, and that the plaintiff’s readiness and willingness were sufficiently established.
The Court's Analysis
The Court examined the interplay between Section 49 of the Registration Act and Section 19(b) of the Specific Relief Act. It held that while unregistered agreements are admissible as evidence of contract, their existence alone does not defeat a subsequent registered transaction. The Court emphasized that bonafide purchaser protection requires proof of notice - not mere inquiry.
"The mere fact that the 2nd defendant had enquired about the existence of a sale agreement cannot be construed as knowledge of the specific suit agreement between the plaintiff and the 1st defendant."
The Court found no evidence that the 2nd defendant had actual or constructive notice of the prior agreement. The trial and appellate courts failed to frame a specific issue on bonafideness, which was a substantial question of law under Section 100 CPC. The Court further held that the plaintiff’s contradictory statements regarding payment undermined his credibility and that the absence of the 1st defendant could not be presumed as collusion without corroborative evidence.
The Court also clarified that readiness and willingness under Section 16 is a defense available to any defendant in a specific performance suit, not merely the vendor. The failure of the lower courts to consider this defense constituted a legal error.
The Verdict
The appellant won. The Madras High Court held that the 2nd defendant was a bonafide purchaser without notice and entitled to protection under Section 19(b) of the Specific Relief Act. The decree for specific performance was set aside. However, in equity, the Court directed the 2nd defendant to pay Rs.1,50,000 to the plaintiff as compensation, inclusive of the advance amount, to avoid unjust enrichment.
What This Means For Similar Cases
Bonafide Purchaser Status Is Not Automatically Defeated by Prior Unregistered Agreements
- Practitioners must now prove actual or constructive notice to overcome Section 19(b) protection
- Mere inquiry about prior transactions does not equate to notice
- Registered sale deeds carry presumptive validity unless fraud or collusion is proven with evidence
Readiness and Willingness Is a Valid Defense for All Defendants
- Any defendant in a specific performance suit may challenge the plaintiff’s readiness and willingness under Section 16
- Courts must frame issues on this defense when raised, even by subsequent purchasers
- Failure to do so renders the decree liable to be set aside on second appeal
Compensation Over Specific Performance in Equitable Cases
- Where a bonafide purchaser prevails but the prior vendee suffered loss, courts may award monetary compensation instead of specific performance
- This balances equitable principles with property rights
- Practitioners should consider seeking compensation as an alternative remedy when specific performance is unlikely
