An Agreement to Sell (“ATS”) is a memorandum of agreement, wherein the terms and conditions of a prospective sale deed are enumerated, along with proposed consideration and other key terms. ATS paves the way for the actual sale of an immovable property and lays the foundation of a sale deed.
The Transfer of Property Act, 1882, which regulates matters dealing with the sale and transfer of property, defines the contract for sale or an ATS as under:
Section 54-”A contract for the sale of immovable property, is a contract that a sale of such property shall take place on the terms settled between the parties.” Section 54 further provides that “It does not, of itself, create any interest in or charge on such property.”
Difference between an ATS and Sale Deed
A sale deed is a contract wherein the seller either transfers the ownership of property and whereas ATS is an agreement where a seller agrees to transfer the property, subject to certain pre conditions and agreed covenants. The vital differences between the two are as follows:
When the seller sells a property to the purchaser for a price, and transfer of the property takes place from seller to the purchaser, it is acknowledged as sale transaction. In case where the seller agrees to sell the property to a prospective buyer at a future specified date or after the necessary conditions are fulfilled then the same qualifies as ATS;
The nature of sale is absolute while an ATS is conditional, and does not grant any title to the buyer;
Risk and rewards are transferred with the transfer of property to the buyer in sale, in a sale deed. In case of ATS, the risk and rewards are not transferred as the property is still in possession of the seller; and Mandatory, tax and stamp duty/registration fee are imposed at the time of sale, not at the time of ATS.
Key ingredients of an ATS
ATS is a legally binding document providing security to the prospective parties. There is no prescribed format for an ATS. However, to protect the interest of parties it is essential that ATS is legally binding and enforceable.
It is essential that an ATS should contain clauses, which provide security to both buyer and seller. ATS should include details of the parties, description of the property, provisions for requirement of clear and valid marketable title, payment details, method of delivery of possession, refund of earnest money in case of defective title, remedies for non-completion of sale (including specific performance and bearing of expense of proceedings), forfeiture of earnest money. The recommended clauses to an ATS are suggested below:
There is a probability that the property may come under dispute for reasons such as disputed title/previous arrears/default in payment of tax etc. An indemnity clause secures the interest of the buyer and provides the buyer protection from any such dispute arising in future. Indemnity clause, in an ATS is drafted specifically to seek compensation from the seller should there be any losses or expenses/dues incurred by the buyer in the future, for non-compliances prior to sale. It is prudent to take note of such circumstances prior to drafting of the indemnity clause.
The buyer pays an advance on the sale price to the seller to assure his interest in buying the property. However, there have been numerous scenarios wherein the seller refuses to the sale. In such a scenario it is essential to secure the interest of the buyer by ensuring a substantial penalty is put upon the seller for not honoring the ATS.
On the contrary, there are several scenarios, wherein the buyer repeatedly delays the date of execution of the sale deed, hence it is recommended to impose penalty on the buyer, in case of unnecessary delay, caused in execution of the sale deed. The presence of such clause provides security and safeguards to the seller.
Right to terminate the ATS
There can be multiple reasons to rescind the ATS, ranging from defect in title or existing encumbrances/charges on the property or financial constraints, in the event of loan refusal. The right to terminate the same should be an essential part of ATS and the same may be subject to financial implications.
It is suggested that the seller’s liability to clear all outstanding dues should be clearly specified. The said clause protects the interest of the buyer, as it prevents the seller from passing its outstanding dues to the buyer.
Timeline for execution of Sale Deed
As ATS precedes the execution of a sale deed, it is of paramount importance to provide specific timeline for execution of sale deed. It is vital to protect the interest of the seller by inserting clause(s), which entitle seller to forfeit the advance paid by the buyer (in case the timeline is exceeded). On the contrary, if the timeline is exceeded by the seller, the seller ought to be penalized and the buyer’s right to seek refund of the advance along with damages should be clearly specified.
Complete history/chain of the property
An ATS should elaborate upon the complete history/chain of the property, which validates the clear title, thereby giving the buyer a reasonable opportunity to carry out due-diligence and verify the ownership.
Key covenants for sale of property
In an ATS, the seller pledges to transfer the property free from all encumbrances, and the buyer promises to bear the cost of transfer of the property. The document should be dated and executed by the parties in the presence of two witnesses.
Stamp Duty on an ATS
As per Section 17 of the Registration Act, 1908, all transactions that involve the sale of an immovable property, for a value exceeding Rs 100 (Rupees Hundred Only) should be registered. This effectively means that all transactions for sale of immovable property have to be registered, as no immovable property can be purchased for merely Rs 100 (Rupees Hundred Only).
In States, such as Delhi and Haryana, it is not compulsory to register an ATS. However, in Delhi if the parties so desire 90% (Ninety) of the stamp duty has to be paid at the time of registration of ATS and the balance 10% (Ten) is to be paid at the time of execution of Sale Deed. The parties to an ATS can execute the same by executing the same in presence of two witnesses and getting the same notarized on a Rs. 50 (Rupees Fifty Only) stamp paper in Delhi and on a Rs. 10 (Rupees Ten Only) stamp paper in Haryana.
In the State of Maharashtra, the Maharashtra Stamp Act, considers an ATS for immovable property on the same footing as a deed of conveyance/sale and therefore, the same is subject to the same stamp duty, as applicable on the deed of conveyance or sale deed of an immovable property.
An ATS is not an actual sale, but a written promise to carry out the contract at a future date and it is imperative to execute an ATS prior to execution of a sale deed.
It acts as a roadmap for execution of a sale deed and helps record the intent of the parties to avoid disputes at a later stage.
It is imperative to note that an ATS is the most essential part of a sale transaction and it is vital that the same is drafted by experienced professionals which inturn would provide utmost security and protect the interest of both, the buyer and seller.
By: Sumes Dewan, Managing Partner, Lex Favios