6 reasons why you should not buy property via Power of Attorney

Pune-based businessman Ameya Deshmukh was looking to buy a decent accommodation for his family. A broker told him that a Maharashtra Housing and Development Authority (MHADA) apartment was available at a dirt-cheap price in Kharadi. But there was a catch. The property was available through an irrevocable power of attorney (PoA). Deshmukh consulted his lawyer who advised him against buying any such property.

What is a PoA?

Governed under the Contract Act and read with the Power of Attorney Act,1882, a PoA (Power of Attorney) is a legal document through which a person (principal) nominates another person (agent) to act on his behalf. A PoA is of many types, including the Special Power of Attorney (SPA) and the General Power of Attorney (GPA). For transfer of title through PoA, buyers generally insist on GPA.

Can PoA be used to transfer property?

In October 2011, in Suraj Lamp & Industries Pvt Ltd vs the State of Haryana, the Supreme Court of India had termed the PoA as a non-valid instrument to transfer properties. “A power of attorney is not an instrument of transfer in regard to any right, title or interest in an immovable property,” the bench had said. As a result of the order, a majority of states banned the use of PoA in property transactions but it is still being rampantly used by conmen to cheat credulous buyers.

Elaborating on ‘genuine cases’, the apex court said a person may give a PoA to his spouse, child, sibling or a relative, to manage his affairs or to execute a conveyance deed. However, it also warned municipal bodies not to entertain mutation requests for properties sold through PoAs. So, this means that even where PoA is given in ‘genuine cases’ as mentioned above, the transfer of property title via registration cannot happen in municipal records.

How and why are PoAs being misused in buying/selling property?

Under the impression that a PoA gives them ownership rights, many people replaced sale deeds with these. “A very old practice of taking possession of property after signing an agreement to sell, PoA and a Will without a conveyance deed and without the payment of stamp duty or registration as per law is totally irregular,” says Akshat Pande of Alpha Rajan & Partners, a Delhi-based law firm.

Often, with the intention to hoodwink the system and evade taxes, buyers and sellers enter into an elaborate three-step strategy to carry out the sale.

Firstly, an agreement for sale is created, thus, laying down the rules for the sale. After this, the seller creates an irrevocable PoA, putting the buyer in absolute charge of managing the property. In the final step, the seller bequeaths his property to the buyer through a Will.

In the case of subsidized housing provided by government agencies, the law mandates a lock-in period of 3 to 5 years under which the property can’t be sold. To circumvent the system, such properties are often sold through PoAs only.

Thus, PoAs are commonly exploited in the real estate sector, especially to park black money, brokers say.

However, due to the financial benefits it provides to both the buyer and the seller, selling a property through a PoA has become a common practice in Indian cities.

However, the Supreme Court ruled in 2019 that property transfers made through a PoA are not valid. As a result, if you buy a property from someone who has a PoA the previous owner will still be considered the titleholder. The top court has also ruled that sales conducted under a GPA are not protected by the law and property can be lawfully transferred only through registered sale deeds.

“This often led to massive revenue loss for the government and increased litigation as one property was being sold multiple times to different people,” says partner of Khaitan and Co. Sudip Mullick.

Lawfully, agricultural land can’t be sold for residential use without converting its land use. “In order to side-step the system, many landowners sell their land without paying the conversion charges through PoAs,” says lawyer Saravpreet Singh of the Punjab and Haryana High Court.

The four statutes that govern the PoA law in India are — Indian Contract Act, 1972, Power of Attorney Act, 1882, Registration Act, 1908 and Indian Stamp Act, 1899 (and the corresponding state Acts).

“The Registration Act,1908, mandates that any immovable property must be compulsorily registered else it will be illegal. But out of ignorance or greed, people want to save money without realizing that their property would be at risk,” says Nitin Bhatia, a real estate expert.

Can a PoA holder transfer property?

“Having said that, an attorney-holder may still execute a deed of conveyance in exercise of the power granted under the power of attorney and convey title on behalf of the grantor,” Bharat Chugh, former Judge and advocate, Supreme Court. It is not illegal for an authorized PoA holder to transfer the property but the legality of the transfer will be governed by the apex court judgement.

Problems for the buyer of property via PoA

1. First of all, mutation will not take place in municipal and revenue records on the basis of PoA as it doesn’t give ownership rights to the agent in whose favour the instrument has been made.
2. “Any person who buys a property through a PoA may have the ‘possession’ of the property but in the absence of a genuine registered sale deed he would not be considered as the rightful legal owner of the said property. Owing to the absence of a valid property title, it would become difficult to sell the property at a later stage,” warns Mullick.

3. “There have been instances where people have bought properties through PoA. Later, when they tried to register their property by paying the full stamp duty, the original seller charged a hefty amount to come to the registrar’s office and sign the sale deed,” warns Bhatia.

4. In addition, a potential buyer would also find it extremely difficult to get finance from a bank or NBFC (non-banking finance company) to buy a property via a PoA. This is because banks do not finance property transactions performed through PoAs.
5. PoA purchase of property without registration exposes buyer to chances of fraud

Singh says that there have been many cases in Delhi and neighbouring cities where buyers entered into a transaction with the sellers through PoA but later found many others claiming a stake in the property, thus, leading to protracted court battles. This mostly happens when the property transacted via PoA is not registered.

“When we give power of attorney to someone, it’s like giving your locker keys to that person. If one wants to look for past transactions of a particular property at a registrar’s office, the ownership of only those properties is reflected on which stamp duty and registration has been paid,” says Singh.

6. Can irrevocable PoA still be revoked ?

Yes and no. If the agent has a financial interest in the property, say commission to get the job done, then the PoA is irrevocable because then it comes under the Contract Act,” says Pande. Section 202 of the Contract Act states that if the agent in a principal-agent relationship has an interest in the agency then, the power of attorney cannot be revoked without the consent of the agent.

“But if the principal finds that there is a gross mismanagement on the agent’s part, including the agent breaching the contract terms, or acting beyond the scope of powers then the irrevocable POA can be revoked through a revocation notice,” sums up Mullick.

Cases where practically only sale via PoA possible

1. Adds Singh, “In many unregularised colonies, the sale-purchase agreement is done through GPA. If a colony is regularized by the government at a later stage, then all the incumbent must do is to pay the stamp duty on the property and get it registered. The process would vary from case-to-case basis but would give a legal sanction to the property.”

2. Bhatia says that apart from unauthorized colonies where PoAs is the only way to sell properties, there have been numerous cases, where after the India-Pakistan Partition, people started living in unoccupied houses in India. They had no record of the property to prove their ownership. These properties sell on PoA even today, say real estate experts.

Is there a way out?

However, what happens if you have already bought property via PoA. Can you resolve the above problems. There is a way out . “If one is doing the GPA and paying the entire stamp duty applicable on conveyance then the sale deed being registered is not required to be stamped again,” says Pande. However, getting the property registered in your name may pose certain problems and certain conditions will have to be complied with.

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