Vested and Contingent Interest

Introduction:

Transferring estate occurs by an act of two or more parties or by operation of law such as forfeiture, failure to repay debt or sale in execution of an order. The TP Act, 1882 is related to a movement or transfer in the form of exchange, sale, gift, mortgage or lease. Exchange, sale and gift convey complete title, while lease and mortgage convey limited title or interest. This transfer is between the living persons only i.e. intervivos. The Transferring property also occurs under the Indian Succession Act. It controls or maintains testamentary and intestate succession that is when any individual who makes a will before his/her death for the distribution of his/her estate or when he dies by not making a will. A will comes into functioning just on the eventuality of death of that person. Interests are of five types, Contingent, vested, Conditional, conditional limitation and accelerated interest. Vested interest grants authority or power and conditional or contingent interest are when in a certain situation, the power or authority is granted.

Concept of Vested Interest

Section 19 and 20 of the Transfer of Property Act, 1882 defines vested interest.

Section 19 states about the vested interest. Vested interest is an entitlement that is generated in the preference of an individual where the time is not stated or the circumstances of the occurrence of a specific event. An individual with a vested interest doesn’t get the control of an estate but has expectations to receive or accept the estate on the occurrence of a specific event.

Illustration: A promises to D to convey his estate to him, attaining 22 years of age. D will now have a vested interest in A’s property until the duration he doesn’t get the control of it.

Vested entitlement can be in two stages:

1. When the transferee (an individual to whom the estate is conveyed) is currently in charge of the property.
2. When the transferee (an individual to whom the estate is conveyed) has obtained an interest in the estate but currently is not in possession of property which implies the entitlement to the enjoyment of the property is delayed to a future date.

The interest of the property remains vested in the receiver of the property even though when the right to the enjoyment of that property is delayed.

Characteristics of Vested Interest

There are three main characteristic of vested interest:

1. Vested entitlement doesn’t rely upon an unsure event to occur. It relies on a particular event which should happen. It makes a current or immediate right though the entitlement of enjoyment is delayed.
2. Vested entitlement will not get affected or destroyed by the occasion of death. On the occasion of the death of the receiver, then the vested entitlement is passed to the heir of the receiver.
3. Vested entitlement is a transferable right and a heritable right.[1]

“The postponement in the enjoyment of property doesn’t affect the interest created.”[2]

Section 20 of the Transfer of Property Act, 1882, is related to the conveying of the vested entitlement in the estate to an unborn child.

When does an Unborn child Obtains Interest in an Estate?

When an exchange of estate takes place in the favour of an unborn child, the interest in an estate is bestowed in the unborn child at the hour of child’s birth itself. The child may be at that point of time where the enjoyment of the estate entitlement is not possible but the conferred interest in the property is conveyed at that time only. 

The vested interest remains vested in the receiver in the following situations even though:

• When the enjoyment of estate is delayed or postponed.
• When there is the prior formation of entitlement in the estate.
• The income appearing from the estate is collected until the entitlement to the enjoyment of the estate.
• When on the occurrence of a specific event like demise, the entitlement passes on to the beneficiaries of that individual but not defeated.

Illustration: A, who is the father of B, conceded to the exchange of an ancestral estate in favour of B just after the event of his death. The interest in the preference of Y is only on the state of the occasion of the death of A, which is definite. Hence on the demise of A, Y will have vested or bestowed entitlement in the estate.

Case Law

Lachaman Lal Pathak v. Baldeo Lal Thatwari[3]

Facts

• A plaintiff transferred a deed of gift in the inclination of another individual (defendant).
• The plaintiff stipulates that he will only get control of that estate when the transferor himself dies.

Issue

Whether the transferee will have the personal stake in the property?

Judgement

The court held that the defendant will have a vested entitlement even though his entitlement of enjoyment is delayed until the death event.

Concept of Contingent Interest

Section 21 of the Transfer of Property Act, 1882 defines the Conditional Interest. The unforeseen interest is which is made in the favour of an individual on circumstances of the occurrence of an identified uncertain event. An individual who has the contingent interest doesn’t get the control of the estate but has the expectation to get it on the occurrence of that uncertain event but will not receive the estate if that event does not occur as the state prescribed is not been fulfilled. The movement of interest of an estate is resolved on a contingent or unexpected event. Contingent interest is totally dependents on the condition foisted on that transfer.

The arrangement of interest of an individual’s right to enjoyment, control or ownership in the estate depends on the occurrence of circumstances that may take or not take place.

Illustration: X agrees to transfer his house in preference of Y, on one state that Y should marry his daughter Z. Hence such a transfer of an estate in preference of Y depends on that circumstance if Y marries X’s daughter ‘Z’. Y would or would not marry ‘Z’. If Y marries to Z, interest in X’s property transfers to Y on the occurrence of the stated occasion that is getting married.

Exception

However, when a person who has a chance of becoming the owner of a specific property and before the uncertain event takes place if such a person receives any income arising from such a property, this interest in the property is not a contingent interest. Hence such interest is an exception under section 21.[4]

Characteristics of the Contingent Interest

The three important characteristic of contingent or unforeseen interest are:

1. The interest in a particular estate conveyed will be dependent on a state which is unforeseen, it may take place or possibly do not occur. Only on fulfilling of that circumstances will the unforeseen interest in the property becomes vested in the receiver.
2. If the recipient dies before obtaining the entitlement in the estate, the contingent or unforeseen entitlement will fail and an individual transferring will still remain the proprietor of the estate.
3. The contingent interest can be conveyed, it is a transferable right. However, if the unforeseen entitlement is heritable or does not relies on the unanticipated event.

Section 22 of Transfer of Property Act, 1882 states that a contingent or unforeseen interest in an estate is conveyed to a class of individuals on the circumstances that individual who have achieved a specific age on a particular date will obtain an entitlement in the estate. That interest will only be conveyed in the preference of the people who satisfy the required circumstances.

Illustration: X announced that the interest in an estate will be transferred in preference of a class of 20 people. This transfer will only rely on the condition that individuals who are above the 18 years of age on the date of transfer will only have vested entitlement in the estate. Hence all individuals above 18 years will get vested entitlement in the estate and the others will not get any entitlement in the estate as they do not satisfy the condition prescribed by X.

Section 23 of Transfer of Property Act states that when a transfer of entitlement in an estate depends on an occurrence of an uncertain event like death and the point of time in which such an occasion is to occur is not stated. Such an unforeseen interest fails unless such an occasion or event takes place before or at that time as the intermediate interest end to exist.

Illustration: A transfers property for life as a gift to B and then it is conveyed to C only if he comes back from Canada, now the unforeseen is whether C comes back from Canada as this event can occur or it cannot take place and no prescribed time to return was mentioned if C returns from Canada before the death of A then the estate will be transferred to B.

Section 24 of Transfer of Property Act states the transfer of entitlement in an estate to those individuals who are alive at that particular time.

What is the Main Difference Between Contingent and Vested Interest?

Vested entitlement conveys that the control is with the receiver. Hence, it manifests that the transfer is absolute or complete. But in the contingent or unforeseen interest, the overall completion of the transfer relies upon the satisfaction of the previous condition which is not certain. And when the condition occurs before, then the contingent interest becomes the vested interest.

Case Law

Kokilambal v. N Raman[5]

Facts

• A transferred an estate to B.
• According to that, both the individuals were to enjoy the estate during A’s lifetime.
• B was prescribed to collect the rents of the estate, make repairs, and pay taxes to the related authorities.
• And the remaining amount was to be divided between both equally and jointly. A also give away the entitlement to convey the estate. Both could transfer the estate jointly between each other.
• B died. A cancelled the transfer which was between A and B and implemented a fresh transfer in favour of D.
• B’s legal beneficiary filed suit holding the entitlement over the estate on the basis that B had obtained a vested entitlement in the property through the transfer which took place between both of them, therefore it delegated on his beneficiaries. And that A had made a life entitlement in the estate for herself and had no right to cancel it.

Judgement

The Supreme Court held that A had held on some entitlement in the estate and there is no complete giving up of rights. Hence, it implies that no complete control of B was made during her lifetime. The entitlements made in preference to B were not heritable and the hold of B’s beneficiaries was dismissed.

Conclusion

These conditions regarding the interest in an estate are needed to be satisfied and they have to importantly follow the rules of the preamble that states justice, equity and good conscience, the three important rules of the natural law on which this whole act is based. The TP which involves Contingent interest takes effect just after the states are fulfilled which the title itself says if the conditions are not satisfied then the transfer will not take place. And the vested entitled is the basic entitlement which is granted to an individual, which does not include any conditions.

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References:

[1]Nishant Vimal, Understanding the concept of Vested and Contingent Interest, IPLEADERS, (May 25, 2019)  https://blog.ipleaders.in/property-law-vested-contingent-interest/

[2] Ina Pant, Vested and Contingent Interest, LEGAL BITES, (August 11, 2019) , https://www.legalbites.in/vested-and-contingent-interest/

[3] Lachaman Lal Pathak v. Baldeo Lal Thatwari, (1919) 21 OC 312

[4] Dhruvi Dharia, Contingent and Vested Interest, LAW TIMES JOURNAL,(February 6, 2020), http://lawtimesjournal.in/contingent-and-vested-interest/#_ednref4

[5] Kokilambal v. N Raman, AIR 2005 SC 2468