abdul rashid
Asked August 24, 2016

Right to first refusal in property sale

  • 1 Answer
  • 444 Views

is Right to first refusal applicable in india. If a owner of a property wants to sell his rented property to other person than it is obligatory for the owner to ask the tenant first to purchase the property at market value. If the tenant refuse to do so than he can sale the said property to the third party. Is this law applicable in india/Delhi or not?

Answer 1

Answer by Sammanika Rawat, Lawfarm Researcher:

Dear Sir

Thank you so much for writing to us.

For the benefit of our fellow readers, we would like to brief the concept of Right to First Refusal. Right to First Refusal is a contractual right. It allows A (the holder of the right) to enter into a transaction with B (the owner of the property), before B enters into a transaction with C (a third party). A is not obliged to enter into a transaction with B. However, only when A turns down the offer, may be enter into a transaction with C. The rights are limited to the terms of the contract.

 

With regards to the first part of your question: Yes, Right to First Refusal has been recognized by the Hon'ble Supreme Court[1]. Since Right to First Refusal is mostly related to the 'free transfer of shares', Court had held in the particular case that such an arrangement does not violate S. 111A of the Companies Act 1956 which talks about the 'free transferability of shares'.

 

However, after reading the second part of your question, we get an impression that you are looking for whether Right to first refusal can be applied in property matters. Indian Courts have not recognized such a right expressly. The Madras High Court had held that though the right of pre-emption may arise out of the personal law or custom or contract, the Courts have always found the right to be a very weak right, since it operates as a clog on the right of the owner to alienate his property....[2] It referred to an earlier judgment[3] which said there should exist some superior right which must subsist at the time the preemptor exercises his right and that that right is lost if by that time another person with equal or superior right has been substituted in place of the original vendee.... 

 

One of the most important para of the judgement says

To summarize : (1) The right of pre-emption is not a right to the thing sold but a right to the offer of a thing about to be sold. This right is called the primary or inherent right. (2) The preemptor has a secondary right or a remedial right to follow the thing sold. (3) It is a right of substitution but not of re-purchase, i.e., the preemptor takes the entire bargain and steps into the shoes of the original vendee. (4) It is a right to acquire the whole of the property sold and not a share of the property sold. (5) Preference being the essence of the right, the plaintiff must have a superior right to that of the vendee or the person substituted in his place. (6) The right being a very weak right, it can be defeated by all legitimate methods, such as the vendee allowing the claimant of a superior or equal right being substituted in his place."

 

We would highly recommend you to read the 25 page judgement. In this case the court has cited various precedents as well as constitutional bench judgements with respect to pre-emption rights related to property. The court has also emphasised on the 'ownership right' as a pre-requisite for the enforcement of this right as the very object of the right is to prevent strangers, from acquiring ownership of an adjoining property, thereby making the enjoyment of the property already owned, difficult.

 

Here, in your case, the tenant must first show the ownership right in the property. Though the law has not expressly favoured Right to First Refusal in Property and Tenancy cases, following the concept, the owner is being advised to ask the tenant to buy the property and if he refuses to buy, the seller is free to sell the property to a third party because the court shall, while granting a relief in favour of a pre-emptor must bear it in mind about the character of the right vis-a-vis the constitutional and human right of the owner thereof.[4]

 

Hope it helps. Feel free to write back, for any clarifications.

 

 

[1] Messer Holdings Limited and another v Shyam Madanmohan Ruia and others [2010 (5) Bom.C.R. 589]

[2] F. J. Irani and others v Hajee Sir Ismail Wakf Estate and others (2010 Indlaw MAD 1911)

[3] Bishan Singh v. Khazan Singh [AIR 1958 SC 838 1958 Indlaw SC 183]

[4] Lachhman Dass v. Jagat Ram ((2007) 10 SCC 448; 2007 Indlaw SC 176)

 

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