Rights of the agent in a power of attorney
A power of attorney is an instrument by which a person (principal) may assign responsibilities to another person (agent/constituted attorney) to act on their behalf. But what happens to the rights of the agent if the principal dies or decides to revoke such authority? Section 202 of the Indian Contract Act, 1872 (Act) addresses this concern by offering special protection to agents who have a personal stake in the subject matter of their agency such as an interest in the property or transaction in respect of which the agency has been created.
Section 202 prohibits the termination of an agency involving the personal interest of the agent without a written contract between the principal and the agent. Thus, if an agent has a financial or personal interest in the property or transaction that it is managing, the power of attorney remains valid even if the principal dies, unless there is a specific clause in the contract that allows for termination under such circumstances. The salient features of Section 202 of the Act are:
- Agency with interest: The provision applies only when the agent has a direct interest in the property or transaction, such as a financial investment, profit share, or other tangible benefits.
- Irrevocability: The principal cannot unilaterally revoke the agreement if it would harm the agent's vested interest. Even in the event of the principal's death, the agency remains intact.
- Binding on legal heirs: The legal heirs of the principal are required to honour the agreement unless the original contract explicitly allows for termination.
Courts have dealt with the scope of protection granted to agents under Section 202 on several occasions:
- Seth Loon Karan Sethiya v. Ivan E John:1 The Supreme Court held that an agency created for valuable consideration and coupled with the agent's interest cannot be revoked even after the principal's death, ensuring protection of the agent's financial rights.
- Bhagwanbhai Karambhai Bharvad v. Arogyanagar Co-op Housing Society Ltd:2 The Gujarat High Court ruled that an irrevocable power of attorney granted for valuable consideration remains binding on the legal heirs of the deceased principal.
- P Seshareddy v. State of Karnataka:3 The Supreme Court examined whether an agent had a substantial interest in the property, and concluded that the agency did not terminate with the principal's death as the agent's stake was crucial for protecting its rights.
- MS Ananthamurthy v. J Manjula:4 The Supreme Court held that merely labelling a power of attorney as 'irrevocable' does not prevent its revocation without the creation of an interest in the agency while clarifying that mere remuneration/commission does not constitute interest and that even the execution of an agreement to sell alongside the power of attorney would not prevent its revocation on the death of the owner of the subject property.
Section 202 is a crucial provision that balances fairness and security in contracts and ensures stability and predictability in commercial and property-related transactions by safeguarding the agents' rights and investments. The provisions of Section 202 are particularly relevant in the real estate sector. For instance, if a landowner executes a revenue-sharing Joint Development Agreement (JDA) with a developer involving an advance payment by the developer (consideration) and the issuance of a power of attorney in favour of the developer to develop and sell the constructed spaces on the land and derive its share of revenue from such sale, in the event the landowner (principal) were to pass away during construction of the project, Section 202 would ensure the developer (agent) could continue its work and claim its rightful share. As such, the power of attorney remains valid and the legal heirs of the landowner would be bound to honour it.
To minimise the risk emanating from such unforeseen developments, we advise our real estate clients to ensure that powers of attorney are drafted with clear and express terms regarding the agent's interest in the transaction. This includes incorporating explicit clauses on irrevocability, specifying the agent's financial stake, and detailing the binding effect on legal heirs. Additionally, agreements should be structured with adequate safeguards to prevent potential disputes, such as ensuring proper registration and legal validation of the power of attorney. In cases where significant financial investments are involved, it may also be prudent to execute supplementary agreements reinforcing the agent's rights and obligations.
Navigating insolvency in the real estate sector
The Indian real estate sector has witnessed substantial legal reforms to address the rights of homebuyers caught in insolvency proceedings. With increasing cases of delayed or stalled projects, Courts have clarified the legal standing of homebuyers under the Insolvency and Bankruptcy Code, 2016 (Code). This article highlights the evolving jurisprudence, particularly regarding homebuyers' claims, joint insolvency proceedings, and the treatment of developers and landowners.
Status of homebuyers as financial creditors
Homebuyers are classified as 'financial creditors' under Section 5(8)(f) of the Code, enabling them to initiate insolvency proceedings and participate in Committee of Creditors (CoC) meetings. This includes homebuyers who have sought alternative remedies and/or obtained relief under the Real Estate (Regulation and Development) Act, 2016 (RERA) or the Consumer Protection Act, 2019 (CPA), before approaching the National Company Law Tribunal (NCLT).5 However, under the Code, homebuyers cannot claim specific performance of unregistered or unstamped agreements unless the development of the project and allotment of apartments is part of the approved resolution plan. Instead, homebuyers are entitled to monetary claims based on the resolution plan.
Impact of resolution plans on homebuyers' claims
Homebuyers' claims are treated as unsecured financial debts, ranking fourth in priority under the waterfall mechanism prescribed in Section 53 of the Code. Courts have upheld the CoC's authority to approve plans even if claims of homebuyers are reduced. Objections by individual homebuyers are not maintainable once homebuyers as a class have voted in favour of a resolution plan.6 In Capri Global Capital Ltd v. Monarch Brookefields LLP,7 NCLT Mumbai dismissed the objection by an individual homebuyer and upheld a resolution plan reducing homebuyers' claims by 40%, emphasising the CoC's discretion in plan approval.
Joint insolvency proceedings of developers and landowners
Complexities arise when developers collaborate with landowners for real estate projects. Recognising the need for joint Corporate Insolvency Resolution Processes (CIRPs) to streamline resolutions and maximise asset value by including the project land in the asset list, Tribunals have taken an active step in bridging the existing legislative gap on joint CIRP provisions, necessitating developers and landowners to be mindful while forming joint ventures.
Recent instances where the Tribunals have allowed joint CIRP are as follows:
- Mamatha v. AMB Infrabuild Pvt Ltd:8 National Company Law Appellate Tribunal, New Delhi (NCLAT) permitted CIRP jointly against the developer and the landowner who had collaborated to form a joint venture entity for a real estate project development.
- LIC Housing Finance Ltd v. SRS Real Estate Ltd:9 NCLT Chandigarh lifted the corporate veil and ordered joint CIRP against the developer and its subsidiary landowner.
- Jitendra Arora v. Tek Chand:10 NCLAT included the land owned by the holding company of the corporate debtor in the CIRP after finding evidence of fund diversion and fraud.
- Edelweiss Asset Reconstruction Co Ltd v. Sachet Infrastructure Pvt Ltd:11 NCLAT ordered group insolvency involving multiple landowners and developers in a township development project.
Reverse CIRP and project-wise resolution plan approval
To address insolvency issues in stalled real estate projects, the concept of reverse CIRP allows the developer to retain control over the construction and completion of the project under the supervision of the resolution professional, ensuring homebuyers' interests are protected. Courts have also endorsed project-wise resolution plans, where specific projects of a developer can be resolved independently without affecting the entire company. This approach provides flexibility for faster resolution and allows homebuyers to obtain possession of their properties or claim monetary settlements.
The evolving jurisprudence under the Code reflects an aim to draw a fine balance between protecting homebuyers' interests and facilitating project resolutions. While homebuyers have multiple alternative and parallel remedies available under the RERA, CPA, and the Code, in case of conflict between any judicial orders passed under different statutes, decisions taken in the CIRP (after approval by the NCLT) under the Code will prevail over other orders. This necessitates careful evaluation of the available remedies by the homebuyers before proceeding. Developers and landowners, on the other hand, need to ensure mutual compliance with agreements and financial disclosures to avoid the possibility of being roped into joint CIRP.
The doctrine of lis pendens in the transfer of immovable property
The Transfer of Property Act, 1882 (Act) is a legislation that governs the transfer of property in India, laying down the rules for the transfer of both immovable and movable property, to protect the rights of the parties involved in the transaction. One of the key provisions of the Act is Section 52, which prohibits transferring or otherwise dealing with an immovable property that is the subject matter of the pendency of a suit or proceeding except with the Court's authorisation and imposed conditions. It is based on the doctrine of lis pendens, derived from the Latin maxim 'pendente lite nikhil innovetur', which means nothing new should be introduced while litigation is pending. The underlying principle of this doctrine is that the property should remain unaltered from any transfer or encumbrance while the rights over it are being decided by a Court to prevent fraudulent transfers intended to defeat or delay justice. The Supreme Court of India in Siddamsetty Infra Projects Pvt Ltd v. Katta Sujatha Reddy,12 reaffirmed the objective of Section 52 of the Act.
However, in Thomson Press (India) Ltd v. Nanak Builders & Investors Pvt Ltd,13 the Supreme Court held that a transfer effected during the pendency of a case is not rendered automatically illegal by virtue of the law itself, and its validity instead remains contingent on the outcome of the litigation and the rights and title as determined by the Court. In other words, the effect of such a transfer is subject to the final decision of the Court.
The doctrine of lis pendens helps protect property disputes from fraudulent transfers, but its application creates challenges for real estate stakeholders. Litigation can lead to uncertainty in transactions, prolonged legal disputes, and financial strain on buyers, sellers, and developers. Additionally, financial institutions may hesitate to provide loans for disputed properties, restricting liquidity in the real estate market.
Remedies and recommendations
- Due diligence and legal scrutiny: Prospective buyers and developers must conduct thorough title verification and check for pending litigation before entering into transactions to mitigate risks.
- Court approvals and safeguards: In cases where a transfer is necessary, obtaining prior Court approval with appropriate conditions can help legitimise the transaction and protect the interests of all parties. In other cases where proceedings have already been initiated, third-party claimants must take steps to seek interim injunction on the transfer of property. Property owners may seek interim relief to enable them to continue with ongoing development while agreeing to deposit the accrued amount with the Court.
- Alternative Dispute Resolution (ADR): Arbitration and mediation should be encouraged to resolve property disputes faster, reducing prolonged litigation and unlocking property value.
- Financial risk mitigation: Real estate developers should work with legal and financial experts to assess potential risks and structure agreements with safeguards, such as escrow mechanisms or indemnity clauses.
While the doctrine of lis pendens ensures fairness in property disputes, its rigid application can create hurdles in real estate transactions. A balanced approach, combining legal diligence, structured safeguards, and dispute resolution mechanisms, is essential to protect property rights while maintaining market stability.
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Footnotes
1. AIR 1969 SC 73
2. AIR 2003 Guj 294
3. SLP (C) No. 6354 to 6356 of 2020
4. 2025 SCC OnLine SC 448
5. Vishal Chalani v. Debashis Nanda, 2023 SCC OnLine SC 1324; Tarun Ahuja v. Puri Construction Pvt Ltd, 2024 SCC OnLine NCLT 512
6. Jaypee Kensington Boulevard Apartments Welfare Association v. NBCC (India) Ltd, (2022) 1 SCC 401
7. IA No. 14 of 2022 in Company Petition (Insolvency) No. 2517 of 2018 (Mumbai)
8. Company Appeal (AT) (Insolvency) No. 155 of 2018
9. Company Petition (Insolvency) No. 86 of 2022 (Chandigarh)
10. Company Appeal (AT) (Ins) No. 1069 of 2020
11. Company Appeal (AT) (Insolvency) No. 377 of 2019
12. Review Petition (C) No. 1565 of 2022
13. (2013) 5 SCC 397
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
