The Karnataka High Court has reaffirmed that a transferee who purchases property with actual or constructive knowledge of a prior agreement of sale cannot claim protection as a bonafide purchaser, even if the sale deed is registered. The judgment underscores that readiness and willingness to perform a contract must be judged by conduct, not mere assertion, and that suppression of material facts defeats equitable relief.
Background & Facts
The Dispute
The dispute arose from an Agreement of Sale (AoS) dated 23.06.2006, executed by Gaviyappa and his family (defendants no.1 to 3) in favor of Bellamma’s husband (plaintiff), for the sale of two survey numbers in Belavadi village. The total sale consideration was Rs.3,95,000/-, with Rs.25,000/- paid as advance. The AoS stipulated a five-month period for payment of the balance and execution of the registered sale deed.
Less than a month later, on 07.07.2006, defendant no.1 sold the same properties to defendant no.4 - his sister - for Rs.1,00,000/-, a fraction of the agreed price. Defendant no.4 admitted in her written statement that she was aware of the AoS. The plaintiff issued legal notices on 24.07.2006 and 21.08.2006, but received no response. He filed a suit for specific performance on 01.09.2007.
Procedural History
- 2007: Suit filed by plaintiff for specific performance and declaration that the sale deed to defendant no.4 was void.
- 2010: Trial Court decreed the suit, holding plaintiff ready and willing, and defendant no.4 not a bonafide purchaser.
- 2012: First Appellate Court modified the decree, directing refund of Rs.25,000/- with interest, but this was later set aside by the High Court in RSA No.1311/2012.
- 2023: On remand, the First Appellate Court reaffirmed the trial court’s findings.
- 2026: Second Appeals filed under Section 100 CPC challenged the concurrent findings.
Relief Sought
The plaintiff sought specific performance of the AoS, declaration of the subsequent sale as void, and delivery of possession. The defendants sought dismissal on grounds of plaintiff’s lack of readiness, time being essence of contract, and defendant no.4’s status as a bonafide purchaser.
The Legal Issue
The central question was whether a transferee who purchases property with knowledge of a prior Agreement of Sale can claim protection as a bonafide purchaser for value without notice, and whether readiness and willingness to perform under a contract can be inferred from conduct, particularly when the seller breaches the agreement within days of execution.
Arguments Presented
For the Appellant/Petitioner
Counsel for defendants no.2 to 4 argued that:
- Time was essence of the contract, and plaintiff’s failure to pay the balance within five months constituted a breach.
- Defendant no.4, as a sister of defendant no.1, acted in good faith after learning of plaintiff’s default.
- The sale deed in her favor was registered and for consideration, making her a bonafide purchaser under Section 41 of the Transfer of Property Act.
- Plaintiff’s acceptance of refund of earnest money with interest in 2012 under the earlier appellate decree amounted to rescission of the AoS under Section 62 of the Indian Contract Act, 1872.
For the Respondent/State
Counsel for the plaintiff contended that:
- No notice of termination of the AoS was issued by defendants before selling to defendant no.4.
- Defendant no.4’s knowledge of the AoS was admitted, negating any claim of bonafide purchase.
- The sale to defendant no.4 at 1/4th the agreed price, coupled with familial relationship, indicated collusion.
- The refund of earnest money was not an acknowledgment of rescission but compliance with a court order, and could not override the substantive right to specific performance.
The Court's Analysis
The Court examined the principles governing specific performance under Section 20 of the Specific Relief Act, 1963, and the definition of a bonafide purchaser under Section 41 of the Transfer of Property Act, 1882. It emphasized that knowledge - actual or constructive - of a prior equitable interest defeats the claim of bonafide purchase.
"The fact that defendant no.4 was aware of the Agreement of Sale, yet proceeded to purchase the property at a substantially lower price from her brother, leaves no room for doubt that she was not a bonafide purchaser."
The Court held that the burden to prove readiness and willingness lies on the plaintiff, but it is not defeated merely by delay in filing suit. The critical test is whether the plaintiff took reasonable steps to perform, and whether the defendant’s conduct indicated an intention to avoid performance. Here, the defendants sold the property within 15 days of the AoS, without issuing any notice demanding performance or terminating the agreement.
The Court further rejected the claim of rescission under Section 62 of the Indian Contract Act, noting that acceptance of refund under a court order does not imply voluntary rescission. The plaintiff’s conduct was consistent with seeking enforcement, not abandonment.
The concurrent findings of the trial and first appellate courts were upheld as based on a proper appreciation of evidence. The High Court found no error in concluding that the sale to defendant no.4 was not in good faith and that plaintiff’s readiness was established by his prompt legal notices and timely filing of suit.
The Verdict
The plaintiff won. The Karnataka High Court held that a transferee with knowledge of a prior Agreement of Sale cannot claim bonafide purchaser status, and readiness and willingness to perform a contract may be inferred from conduct, including issuance of legal notices and absence of termination by the other party. Both appeals were dismissed.
What This Means For Similar Cases
Knowledge of Prior Agreement Defeats Bonafide Purchaser Claim
- Practitioners must now argue that actual or constructive notice of a prior contract is sufficient to negate bonafide purchaser status under Section 41 of the Transfer of Property Act.
- Even registered sale deeds will not protect transferees who purchase with awareness of an existing equitable interest.
- Evidence of familial relationship and undervalued consideration strengthens the inference of mala fide intent.
Readiness and Willingness Is Proven by Conduct, Not Just Testimony
- Legal notices sent before filing suit are critical evidence of readiness.
- Delay in filing suit alone is not fatal if the plaintiff acted promptly upon learning of breach.
- Courts will examine whether the seller took steps to terminate the agreement before alienating the property.
Refund of Earnest Money Does Not Automatically Rescind Contract
- Acceptance of court-ordered refund of earnest money with interest does not constitute voluntary rescission under Section 62 of the Indian Contract Act.
- To establish rescission, there must be clear mutual intent or express termination notice.
- Practitioners should avoid assuming that monetary settlement extinguishes equitable rights to specific performance.
