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VESTED AND CONTINGENT INTEREST
(Ss. 21 and 25)
QUESTION BANK
Q.1. Define the terms ‘vested interest’ and ‘contingent interest’. Distinguish between them.
Q.2. Distinguish between ‘vested interest’ and ‘contingent interest’.
SHORT NOTES
1) Vested and contingent interest.
SYNOPSIS
Section 19 of the Transfer of Property Act, 1882, defines 'vested interest' as follows:
Notes--
V. Conditional Transfers
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A transfer of property essentially involves the transfer of an interest or a bundle of rights. In other words, the transfer of property is nothing but the transfer of interests in the property. The transfer of such property or interest is either (i) absolute or (ii) partial, depending upon the quantity of the interest; alternatively, it may be (iii) vested or (iv) contingent, depending upon the time of the vesting of the interest.
In a 'sale', all rights as to the property are transferred (i.e., an absolute transfer), whereas, in a 'mortgage', only limited rights—such as the right to enjoy the property or to keep it as a security—are transferred. Therefore, a mortgage is a transfer of a limited interest (i.e., a partial transfer).
In this topic, we will comprehensively discuss Vested Interest and Contingent Interest.
An interest vests when the transferee acquires a right in the property as soon as the transfer is made, even though the right to immediate enjoyment may be postponed. The transaction becomes complete by the creation of a vested interest. Thus, in point of time, as soon as the transaction takes place, the property vests in the transferee without any delay.
Conversely, in a contingent interest, the transferee gets the vested interest only upon the happening or non-happening of an uncertain future event specified in the transaction. It is a conditional transfer, and the vesting of the property depends entirely upon a future uncertain event. Thus, in a contingent interest, the actual vesting occurs subject to the fulfillment or failure of the condition. The vesting itself is conditional.
Section 19 of the Transfer of Property Act, 1882, defines 'vested interest' as follows:
"Where, on a transfer of property, an interest therein is created in favour of a person—
Thus, a gift to 'A' on the death of 'B' creates a vested interest in 'A' even during 'B’s' lifetime, because the death of 'B' is an event that is certain to happen. However, a gift to 'A' on the marriage of 'B' creates only a contingent interest (because 'B' may or may not marry). This contingent interest, however, converts into a vested interest as soon as 'B' marries.
The first part of the definition lays down that an interest vests where, on a transfer of property, an interest is created in favour of a person without specifying the time when it is to take effect. Generally, when a transferor effects a transfer, he may not mention the specific date on which the interest shall pass to the transferee. In such cases, the law presumes the immediate intention of the parties to vest the property.
However, the proviso to Section 19 clarifies that if a contrary intention regarding the vesting appears from the terms of the transaction, this presumption cannot be drawn.
Illustration:
A makes a gift of his land to B. He executes the gift deed but does not specify any date on which the ownership is to be transferred. The law presumes that the property is vested in B immediately.
The second part of the definition states that the interest vests where, on a transfer of property, an interest is created in favour of a person and the terms specifically state that it is to take effect “forthwith” (immediately). Thus, there is no ambiguity or scope for interpretation as to when the property vests, since it is explicitly mentioned.
The third part of the definition states that an interest is vested where it is created in favour of a person upon the happening of an event that must happen. This part clarifies that even though the actual physical possession or enjoyment may take place at a future time, if the future event is absolutely certain to happen, the right or interest vests in the transferee immediately. This is a classic instance where the property vests in interest, but the enjoyment of it is postponed.
1. A makes a gift of ₹1,00,000 to B on the death of C. The interest in the money vests in B immediately, even before C’s death, because the death of C is certain. However, the actual physical transfer of the money takes place only upon C’s death. Even if B dies before C, the ₹1,00,000 shall be paid to B’s legal heirs because a vested interest is heritable.
2. A bequeaths to B ₹100, to be paid upon his attaining the age of 18. On A’s death, the legacy becomes a vested interest in B, even though the actual payment is postponed until he turns 18.
3. A fund is bequeathed to A for life, and after his death to B. On the testator’s death, the legacy to B becomes a vested interest in B.
4. A fund is bequeathed to A until B attains the age of 18, and then to B. The legacy of B is a vested interest from the moment of the testator’s death.
Thus, from the above examples, it is clear that the vesting of interest becomes perfect in the transferred property even though its actual enjoyment is deferred to a future date.
The Explanation to Section 19 clarifies that a vested interest does not get affected or delayed merely by the fact that:
1. The right of enjoyment is postponed; or
2. A prior interest in the same property is given or reserved to some other person; or
3. The income arising from the property is directed to be accumulated until the time of enjoyment arrives; or
4. A condition is attached stating that if a particular uncertain event happens, the interest shall pass to another person (vested interest liable to be divested).
This last clause requires careful interpretation, as settled by the judiciary:
Facts: In this case, a compromise decree was entered into between the parties. The terms of the compromise provided that 'A' should have a life estate in the property, and after his death, 'B' was to be the absolute owner of the estate if he survived 'A'. However, if 'B' did not survive 'A', the estate would pass to the lineal male descendants of 'B'.
Issue: Whether 'B' had acquired a vested interest or a contingent interest during 'A's' lifetime?
Held: The Allahabad High Court held that the interest of 'B' was a vested interest. However, it was a vested interest liable to be divested if he failed to survive 'A'. In English law, this is known as a 'conditional limitation'.
Section 21 of the Act defines Contingent Interest. Where, on a transfer of property, an interest is created in favour of a person to take effect only:
i. on the happening of a specified uncertain event, or
ii. on the non-happening of a specified uncertain event,
such a person acquires a contingent interest in the property.
If the transfer is subject to a condition precedent, there is no transfer of interest at all until that condition is fulfilled. The transfer takes effect only when the condition is satisfied, at which point the contingent interest matures into a vested interest.
An important exception to Section 21 states that where a transferee becomes entitled to an interest upon attaining a particular age, and the transferor also directs that the income arising from such interest be applied for the transferee's benefit (e.g., for their maintenance or education) until they attain that age, such an interest is presumed to be vested and not contingent.
1. A legacy is bequeathed to D in case A, B, and C shall all die under the age of 18. D has a contingent interest in the legacy until A, B, and C all die under 18, or until any one of them attains that age.
2. A sum of money is bequeathed to A "in case he shall attain the age of 18" or "when he shall attain the age of 18". A’s interest in the legacy remains contingent until the condition is fulfilled by his attaining that age.
3. An estate is bequeathed to A for life, and after his death, to B if B is then living; but if B is not then living, to C. A, B, and C survive the testator. B and C each take a contingent interest in the estate until the event occurs which vests it in one or the other.
4. An estate is bequeathed as in the previous case. B dies during the lifetime of A and C. Upon the death of B, C's interest ceases to be contingent and becomes a vested right, giving him the absolute right to obtain possession of the estate immediately upon A’s death.
The fundamental differences between a vested interest (governed by Section 19 of the Transfer of Property Act) and a contingent interest (governed by Section 21 of the Act) are broken down below into specific legal categories:
Vested Interest: Accrues immediately upon the execution of the transfer. It confers a complete and perfect title on the transferee right from the outset, establishing a certain legal right.
Contingent Interest: Does not accrue immediately. The title remains inchoate, imperfect, and incomplete until the specified uncertain condition is fully fulfilled.
Vested Interest: Confers an immediate, present right to the property. Even if the actual physical enjoyment or possession of the property is postponed to a later date, the underlying right is already secured.
Contingent Interest: Does not confer a present right. It is a mere expectancy of a right—a possibility that may be completely defeated if the underlying condition fails to occur.
Vested Interest: Follows the general legal rule of "once vested, cannot be divested," unless a specific and valid condition subsequent operates to take it away.
Contingent Interest: Remains conditional until the specified uncertain event occurs, at which exact moment it automatically converts and matures into a vested interest.
Vested Interest: It is fully transferable both inter vivos (between living persons) and by operation of law. The transferee receives a clear, unencumbered title.
Contingent Interest: It is technically transferable, but the transferee takes it subject to the exact same uncertainty. If the condition fails later on, the entire transfer fails along with it.
Vested Interest: It is strictly heritable. If the transferee dies before taking actual physical possession of the property, the interest automatically passes down to their legal heirs.
Contingent Interest: Generally, it is not heritable if the transferee dies before the contingency happens, because the right has not yet come into existence. (An exception applies if the condition is entirely independent of the transferee's person).
Vested Interest: Because it represents a certain and existing right, it can be attached and sold in the execution of a court decree under Section 60 of the Civil Procedure Code (CPC).
Contingent Interest: It cannot be attached or sold in execution. The law treats it as a mere possibility of receiving property in the future, falling under the prohibitions of Section 6(a) of the Transfer of Property Act (TPA).
Notes--
V. Conditional Transfers
Property may be transferred absolutely or subject to certain conditions. When property is transferred absolutely without any conditions, the transferee gets the property with no strings attached. In contrast, when the property is transferred conditionally, the transferee's rights are subject to those conditions.
Such conditions may be classified as either a Condition Precedent or a Condition Subsequent.
Section 25 lays down the statutory grounds under which a conditional transfer fails and becomes void ab initio (void from the very beginning), namely:
1. If the fulfillment of the condition is impossible; or
2. Is forbidden by law; or
3. Is of such a nature that, if permitted, it would defeat the provisions of any law; or
4. Is fraudulent; or
5. Involves or implies injury to the person or property of another; or
6. The court regards it as immoral or opposed to public policy.
(a) A lets a farm to B on the condition that he shall walk a hundred miles in an hour. The lease is void (Fulfillment is physically impossible).
(b) A gives ₹500 to B on the condition that he shall marry A’s daughter, C. On the date of the transfer, C was already dead. The transfer is void (Impossible condition).
(c) A transfers ₹500 to B on the condition that he shall murder C. The transfer is void (Forbidden by law/Involves injury to a person).
(d) A transfers ₹500 to his niece, C, on the condition that she deserts her husband. The transaction is void (Opposed to public policy and immoral).
A 'condition precedent' is a condition that must be fulfilled before a person can take an interest in the property. In short, the condition precedes the vesting of the property. The transfer is entirely contingent upon the prior fulfillment of this condition.
Illustration:
A makes a gift of his house to B if B marries C. The condition is a condition precedent. The gift in favour of B shall take effect only if B marries C; if he fails to do so, the house cannot be transferred to him.
Section 26 clarifies that in the case of a condition precedent, the law does not look for literal compliance; it is deemed to have been fulfilled if it has been substantially complied with.
(a) A transfers ₹5,000 to B on the condition that he shall marry with the consent of C, D, and E. E dies before the marriage. B subsequently marries with the consent of C and D. B is deemed to have substantially complied with the condition, and the transfer takes effect.
(b) A transfers ₹5,000 to B on the condition that he shall marry with the consent of C, D, and E. B marries without the consent of C, D, and E, but obtains their consent after the marriage. B has not fulfilled the condition, as post-facto consent does not satisfy a condition precedent.
A 'condition subsequent' is a condition that is required to be fulfilled after the transfer of property has already taken place and the interest has vested. If the condition subsequent is broken or not complied with, the interest already vested in the transferee is divested or terminated.
Illustration:
A transfers a farm to B on the condition that B shall not go to England within three years from the date of the transfer; otherwise, his interest in the farm shall cease. B goes to England within two years. His interest in the farm ceases and is divested immediately.
As per Section 29, a condition subsequent (which operates to divest an already vested right) must be performed strictly. The rule of substantial compliance does not apply here.
(a) A transfers ₹500 to B to be paid to him upon his attaining majority or marrying, with a proviso that if B dies a minor or marries without the consent of C, the said sum of ₹500 shall go to D. B takes a vested interest in the money from the date of the transfer, but his right of enjoyment is postponed. If B marries without C's consent at the age of 17, he is strictly divested of his interest, and the transfer to D takes effect.
(b) A makes a gift to B with a proviso that if B marries without the consent of C, D, and E, the property shall go to X. Before the marriage of B, E dies. B subsequently marries without the consent of C and D. The property shall not go to X, because the condition subsequent—which divests the interest of B and vests it in X—cannot be performed strictly due to E's death. Hence, B retains the property absolutely.
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