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October 26, 2016

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Legality And Usage Of Nomenclatures


- Chetan Prabhakar, Assistant Vice President-Legal [ Max Life Insurance Company Limited ]

Chetan-Prabhakar

All nomenclatures are instruments by which some right/liability purports to be created, transferred, limited, extended, extinguished or recorded; all of them are forms of agreements and contracts; and are hence, enforceable in law...

I n real estate transactions, there are many nomenclatures such as Memorandum of Understanding (MoU), Letter of Intent (LoI) and Agreement to Lease/Sell (ATL/ATS) which are currently in use in the market and there is always a dilemma as to which nomenclature is to be used while entering into a real estate transaction and, what difference does it makes to a particular transaction?

To answer, it is imperative to bring clarity and understanding around the usage and legality of these nomenclatures. These nomenclatures do not have any definition in law; however, the usage seems to have come through practice and various interpretations by legal eagles.

legality_nomenclatures3

Legally, all documents having these nomenclatures are some kind of agreements and contracts, because, as per the Indian Contract Act, 1872, the key ingredients for an agreement are proposal, acceptance & consideration; and the key ingredients for a contract are free consent, competence, lawful consideration, lawful object and enforceability by law.

By way of all these documents, some promises are made to transfer or create rights and liabilities, as such, all these agreements become Instruments. The Indian Stamp Act, 1899 provides definition of Instrument as "Instrument" includes every document by which any right or liability is, or purports to be created, transferred, limited, extended, extinguished, or recorded.

Further, provisions of the Transfer of Property Act, 1882 give much wider scope to these transactions, and provide that a transfer of property can take place by way of an Instrument of transfer, registered and unregistered both. If Transferee has paid consideration and taken possession, even with a simple instrument of transfer, then as per Section 53A, transferor is debarred from enforcing against the transferee any right in respect of the property of which the transferee has taken or continued in possession, other than a right expressly provided by the terms of the contract.

It is also essential to understand, what if these documents are not duly registered? And what will be the consequences of non registration?

The answer is provided by Section 49 of the Registration Act, 1908 that "an unregistered document affecting immovable property and required by this Act or the Transfer of Property Act, 1882 (4 of 1882), to be registered may be received as evidence of a contract in a suit for specific performance under chapter II of the Specific Performance Act, 1877 (3 of 1877), or as evidence of any collateral transaction not required to be effected by registered instrument."

In view of the above discussion, it may be concluded that:

  • all the nomenclatures such as MoU, LoI and ATL/ATS are instruments by which some right or liability is, or purports to be created, transferred, limited, extended, extinguished, or recorded;
  • all these instruments can be considered forms of agreements and contracts, as they have the key ingredient, which are proposal, acceptance, consideration, free consent, competence, lawful consideration, lawful object and enforceability by law;
  • if these instruments are executed creating a future promise for delivery of possession, by payment of part of consideration, these instruments have created reciprocal promises, and as such, these documents become enforceable in law and the parties shall have the right to seek specific performance of the contract in case of dispute.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.

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