Section 101 of the Transfer of Property Act, 1882 is the primary clause dealing with restrictions imposed upon the alienation of property. The Act prohibits restraints on parties from “absolutely” alienating their property. However, partial restraints on the alienation of property have been held to be legal and valid in India.2 The meaning and definition of what constitutes a valid restraint has been a subject of judicial debate and deliberation, with considerable variation across time. For instance, community-based restraints and more recently, restraints based on public interest have been held to constitute valid restraints on the alienation of property.
This article will examine valid restraints placed on alienation. It will be divided into three sections. The first section will examine the need for Section 10 and analyse the judicial interpretation of what constitutes a valid restraint. The second section will look at a new and emerging defence of public interest used to justify the restrictions placed on the alienation of property. The last section will lay down a test to ensure the cautious use of the public interest defence, considering its impact on the freedom of contract and other rights associated with a property transfer.
Nullifying restraints on alienation
A property transfer includes transferring rights associated with the property’s use, enjoyment, disposal, and alienation.3 These rights are colloquially referred to as the “bundle of rights” associated with the property. The right to transfer the property is “incidental to, and inseparable from, the beneficial ownership of property”.4 Thus, a condition restraining alienation goes against the very purpose for which the transfer was intended.
Public policy in India is founded on the free alienation and use of the property.5 It can be attributed to the grave consequences the accumulation of property can have on the socio-economic growth of a country. The restrictions on alienation prevent the property from being put to its most efficient use, thus obstructing commerce and productivity.6 Without transactions and exchanges being conducted, the resources remain almost permanently with those who may not want the property.7 The limits on alienation concentrate wealth in the hands of a few individuals, who could substantially impact public affairs in the absence of any regulatory control.8 Although public policy dictates the free disposal of property, it must be balanced with the freedom to contract which includes placing restraints on alienation during the process of bargaining.
In an attempt to secure a balance between the two, judiciaries worldwide have permitted reasonable restrictions on the transfer of property that do not substantially take away the power of alienation.9 Although the judiciary in India has upheld restraints on a wide range of grounds that cannot be consolidated into definite categories, restrictions have been upheld on four main grounds that will be elaborated on below.
The doctrine of first refusal
The doctrine of first refusal provides the transferor with the first claim over the property. This implies that if the transferee chooses to sell the property, he should first make an offer to the transferor. If the transferor decides not to purchase the property, the transferee can make the offer of sale to whosoever he chooses. The Courts have assessed this to constitute a partial restraint on the transfer of property in Debi Dayal v. Ghasita.10 The Court upheld the validity of a clause in the property transfer that the transferee would first offer to sell the house to the transferor and would offer it for sale if the transferor refused.
The general trend towards restrictions on the time-frame within which a transfer can be affected has been to declare them void.11 However, an exception to this effect was created in Loknath Khound v. Gunaram Kalita.12 In this case, the transferor restricted alienation for five years. However, he added a clause that he would have an option to repurchase it within this time-frame and if he did not, the transferee was free to sell it beyond the fifth year.13 The Court upheld this condition due to the limited period within which the restrictions were imposed.14
Infringement on autonomy
The most typical way restrictions are interpreted is by looking at how the autonomy of the contracting parties is curbed. The judgment of Gayasi Ram v. Shahabuddin15 laid down a two-pronged test to determine partial restraints. First, the transfer will be absolute if alienation cannot be undertaken for all practical purposes. Second, the existence of remote contingencies where the transfer can occur does not negate the fact that the transfer is absolute.16 An analysis of these conditions highlights that the courts look at the implications of the constraints on the freedom to contract.
The restrictions imposed on alienation within the family or community were first declared valid in Mohd. Raza case17, where it was held that such agreements do not go against the spirit of justice, equity, and good conscience. The validity of such a restriction can be attributed to either a sentimental attachment or the preservation of family esteem and dignity within the community. More recent cases such as Zoroastrian Coop. Housing SocietyLtd. v. Registrar, Coop. Societies (Urban)18 allow the preservation of property within the society to preserve minority rights enshrined under Article 2919 of the Constitution.20 A restriction thus imposed on the transfer of property outside the community was valid as its members shared everyday habits, customs, usages, and neighbourly feelings towards one another.21
Public interest: An emerging ground
Having analysed how the judiciary has determined valid restraints in the past, this article will examine the emergent ground of public interest as a condition restricting alienation. The definition of partial restraint has changed over time. In most recent times, the defence of public interest emerged as a ground justifying restraint in Gurgaon Institutional Welfare Assn. v. Haryana Urban Development Authority.22 In this case, the Haryana Urban Development Authority (HUDA) imposed restrictions on the sale, gift or mortgage of property sold without prior permission. Arguing against the Section 10 challenge, HUDA raised the defence of public interest as a ground justifying alienation.23 It argued that these restrictions were imposed to prevent the commercial exploitation of property because these plots were initially assigned to further societal welfare. This was done through the construction of research and development centers, post offices, religious places, and police stations.24 The Competition Commission of India (CCI) thus upheld the validity of the restrictions as HUDA sought to achieve a public goal with a legitimate purpose in mind.25
The Commission’s verdict raises a larger question concerning the validity of such ground in imposing restrictions. If tested on the anvils of Gayasi Ram case26 test, the above limitation would be void as it absolutely abridges the right to transfer. It raises more significant concerns regarding the judiciary’s approach towards the freedom to contract. However, this phenomenon is not unique to India. Courts of law in Australia and the United States have used this ground to recognise restraints that substantially detract from the power to alienate.
In Australia, the Court of New South Wales upheld a restriction imposed in public interest in Bondi Beach Astra Retirement Village Pty. Ltd. v. Gora.27 In this case, the appellants operated a retirement village. If the appellants chose not to repurchase the property, it could be sold only to those eligible to reside in the retirement village.28 Despite the almost absolute restriction placed on alienation, the condition was upheld as it sought to facilitate the accommodation of the elderly within the community and provide them with services that were substantially important for their well-being. Relief for the elderly was regarded as vital to the public interest, and considering this covenant had a legitimate interest in mind; it was upheld.29
Another instance of this doctrine being used in Australia is the case of Wollondilly Shire Council v. Picton Power Lines Pty. Ltd.30 In this case, the appellant Council sold land to the defendants to erect industrial premises on the ground and retransfer the land back to them on completion at the end of two years. The defendants argued that they would not need to perform their obligations under the contract because there was an absolute restraint on alienation. The Court held that this transfer was in the public interest with the legitimate purpose of promoting industrial development. It would have a positive impact in the form of increased employment and a rise in business activity.31
The doctrine has been applied by the courts in the United States in a similar fashion as Australia, City of Oceanside v. McKenna32 is one such case in point. A restriction on renting or leasing the condominium units constructed for those in the low to moderate income category was upheld as it sought to achieve a public purpose by providing a stabilised community.33 Such a restriction on leasing or renting would prevent investor fluctuation, inflation, and a supply shortage in subsidised housing. It would further the city’s goals of redeveloping the area.34
Although public interest has been widely used across jurisdictions, the possibility of its misuse is a matter of concern because of its volatile nature. The following section will lay down a test for the courts to determine whether a restriction is indeed imposed in the public interest.
Determining public interests
As observed by the Law Commission, the power to impose terms on the enjoyment of the interest in property transferred is a power granted by the Act under Section 735.36 Transfers should occur when the set terms do not destroy or impair the freedom of the parties to enter into contracts. A fundamental facet of the freedom to contract involves bargains and negotiations, which is possible only if a party can alienate his property. Restraints on alienation infringe substantially on the transferee’s freedom to contract by preventing alienation. Public policy also recognises the free alienation of property.
On the other hand, there might occur certain demanding circumstances that may compel the State or a property owner to prevent the free alienation of property. An example of the same can be the Karnataka Scheduled Castes and Scheduled Tribes (Prohibition of Transfer of Certain Lands) Act, 1978.37 This legislation prohibited the transfer of property granted to the Scheduled Castes and Scheduled Tribes community with an intent to prevent the exploitation of the weaker sections of society. The ground of public interest cannot thus be outrightly rejected as a valid ground on the alienation of property. However, securing a balance between the freedom to contract and public interest is imperative because of the sanctity and necessity of allowing the free alienation of property as illustrated above.
While no argument is made for the absolute freedom to contract, it is acknowledged that the restrictions highlighted in above severely take away the power to contract. There is great potential for misuse of the public interest ground because the interest aimed to be achieved may be secondary to the freedom to contract. A three-pronged test is thus proposed to determine whether conditions restricting alienation are valid. It combines two prongs which have been implicitly applied by the courts, namely, legitimate purpose and positive impact. The need to fulfil public policy also stems from the fact that agreements in conflict with public policy are void under Section 23 of the Contract Act, 1872. This test makes the application of the ground more certain by bringing about uniformity besides restricting the scope of its application.
Firstly, the restrictions must serve a legitimate collateral purpose. As seen in the last section, a determining factor used by courts has been whether the restriction so imposed aims to achieve a legitimate purpose for the benefit of society. It has also been implicitly applied in Bhavani Amma case38, where the transferor argued that the construction of a college would be beneficial as it would bring about an enhancement of the land value. From the final verdict, we can infer that this argument was not considered as constituting a legitimate purpose for imposing restraints. Thus, the courts should investigate whether the restriction is bona fide with a legitimate object in mind.
Secondly, the restriction so imposed must further a public policy objective. This prong is in accordance with Section 23 of the Contract Act, which voids agreements going against public policy.39 It is essential to recognise that public policy is a vague and ambiguous concept that has been left to judicial interpretation. However, Gherulal Parakh v. Mahadeodas Maiya40 sheds some light on what constitutes public policy. It declares principles laid down by statutes and precedents to be valid constituents of public policy.
For example, a restriction catering to the differently abled individuals of a society by increasing accessibility to homes on the ground floors of apartments would constitute a valid public policy objective as it is in line with the theory of reasonable accommodation laid down by the Supreme Court.41 Although courts caution against creating new heads of public policy, there also may be new public policy heads that may emerge. In such cases, the courts should look at the restriction with greater suspicion and analyse whether the remaining two prongs are fulfilled.
Thirdly, the restriction so imposed must positively impact the public by ensuring their welfare or the disposal of benefits to them. The impact prong is the primary test used in the third type of legitimate restraints (infringement on autonomy), where courts look at the ultimate impact of the constraint imposed on the individual. For instance, the restrictions imposed in Wollondilly Shire Council case42 would have a positive impact on the industrial development and employment in the region.43 The Courts should look at the broad implications of the restriction on the public and decide its validity.
An understanding of the test will be possible when it can be applied to an already decided precedent. This article will analyse whether HUDA case44 satisfies the three-prongs mentioned above.
Step one: Legitimate purpose. —The primary goal of HUDA in implementing the restriction was to prevent the commercial exploitation of land for profit making. The bona fide intent of HUDA can be inferred from the persons the property was initially allotted to — NGOs, bodies and corporations engaged in research and education.45 Considering that these bodies cater to the larger societal good, this purpose sought to be achieved is legitimate.
Step two: Public policy. —The restriction from alienation achieves a reasonable policy goal in this regard. Promoting research and development by setting-up research centers and training centers fulfils the constitutional duty enshrined under Article 51-A that calls for the development of scientific temper and the spirit of inquiry.46 Thus, it is a restriction that fulfils a valid public policy goal.47
Step three: Positive impact. — Using the sites for the object sought to be achieved would be instrumental in providing facilities to citizens. This, in turn, promotes the creation of a holistic society.48 The impact of the restriction outweighs the restriction imposed on the parties’ free will to contract as the social goal accomplished has a higher utility for society. Considering the restriction satisfies all three prongs of the test, it is a valid restraint imposed in the interests of the public.
In the absence of any test to determine valid restraints under the Act, the meaning of a reasonable restriction has been a subject of judicial interpretation over time. Having undergone multiple changes, public interest is among many grounds now used in India to justify restraints. In an attempt to highlight the same, this article has proceeded to analyse the use of public interest as a justification across Australia and the United States and the emphasis placed on a legitimate purpose to justify the same. It then laid down a three-pronged test to determine what constituted a valid restraint. While public interest is a proper ground for the imposition of restrictions, it needs to be applied with caution.
† 2nd year law student, BA LLB (Hons.), National Law School of India University, Bangalore. Author can be reached at email@example.com.
3. Poonam Pradhan Saxena, Property Law (3rd Edn., 2017) p. 101.
6. Herbert A. Bernhard, “The Minority Doctrine Concerning Direct Restraints on Alienation” (1959) 57(8) Michigan Law Review 1173, 1179.
7. Richard A. Epstein, “Why Restrain Alienation?” (1985) 85(5) Columbia Law Review 970, 972.
8. Herbert A. Bernhard, “The Minority Doctrine Concerning Direct Restraints on Alienation” (1959) 57(8) Michigan Law Review 1173, 1180.
11. Poonam Pradhan Saxena, Property Law (3rd Edn., 2017) pp. 101, 104-105.
27. Bondi Beach Astra Retirement Village Pty. Ltd. v. Gora, (2011) 82 NSWLR 665 (Court of Appeal, New South Wales).
28. (2011) 82 NSWLR 665, 671-72 (Court of Appeal, New South Wales).
29. (2011) 82 NSWLR 665, 740 (Court of Appeal, New South Wales).
30. (1994) 33 NSWLR 551 (Court of Appeal, New South Wales).
31. (1994) 33 NSWLR 551, 556 (Court of Appeal, New South Wales).
32. (1989) 215 Cal App 3d 1420.
33. (1989) 215 Cal App 3d 1420, 1427, 1429.
34. (1989) 215 Cal App 3d 1420, 1427, 1429.
42. (1994) 33 NSWLR 551 (Court of Appeal, New South Wales).
43. (1994) 33 NSWLR 551, 556 (Court of Appeal, New South Wales).
47. DTC v. DTC Mazdoor Congress, 1991 Supp (1) SCC 600, para 292. Anything in derogation of the Constitution is opposed to public policy. Thus, promoting a constitutional goal is in consonance with the same.