Doctrine of Priority

Doctrine of Priority Under Section 48 of Transfer of property act

Introduction 

The concept of the doctrine of priority is regulated by the Transfer of Property Act, 1882 (TPA) under Section 48. This doctrine helps the court in determining the correct party to whom the rights are to be given priority over the other in a case where the court has conflicting interests. The need for this doctrine arises in a situation where the transferor of the property deals with the same property with two different people subsequently. Hence, this resolves the problem of the courts to a large extent. 

This doctrine is based on the Principles of Natural Justice which states that if the rights are made in favor of two different people at different times, then the one who has the advantage in time will also get the advantage in law. However, this principle applies only in the cases where the conflicting equities of the parties are involved are otherwise equal. The doctrine of priority under Section 48 is inspired from the legal maxim, qui prior est tempore potior est jure which ultimately means one who is first in time is better in law. 

Essentials of the doctrine of priority

1. There ought to be one owner or transferor of the property and more than one transferee. 
2. It is only applicable only to immovable property.
3. The transfer should be created at different times and at these different times there ought to be created rights to the transferee. 
4. This right cannot be exercised to the fullest at the same time. 

Illustration

A is the owner of the immovable property. He mortgaged that property to B in the month of August. Later, in July A transferred the same property to C. Here in this case all the essentials are satisfied and as per the rule of priority, B will get all the rights of the property prior to C. In case of default on the payment of the loan, the mortgagee can sell the property as the latter transfer is in accordance with the earlier transfer. 

Effect of the document registered under doctrine of priority

Under the rule of priority, registration of the document does not affect the rights of the prior transferee. That means if the document of the prior transferee is unregistered whereas the document of the subsequent transfer is registered, still the rule of priority would be applicable to the prior transferee and not the subsequent transferee unless and until the subsequent transaction is made with bonafide intention and without the knowledge of the prior transaction. Registration does not create any right in the property. It is merely proof of intention to transfer the title of the property. 

Illustration 

A mortgaged property to B where the deed is unregistered and will be registered at a later point in time. Later A transfers the same property to C where the deed is registered and was made with bonafide intention without the knowledge of the previous transfer. Here B’s right will have priority over C’s right as the registration of the document does not affect the rule of priority. 

Illustration

1. Amit is the owner of a 2-acre land and intended to transfer his piece of land to Xena without mandatory registration in January 2019. Subsequently, Amit transfer the same property in favour of Zubair by completing all legal formalities including mandatory registration in January 2020. According to the doctrine of priority, rights of the immovable property awarded to Zubair and the transfer of rights made to Xena in a void contract.
2.  Zain is the owner of Z&Z restaurant in New Delhi, India. Zain is going through some financial hardships and decides to mortgage the Z&Z restaurant. In order to cope with the financial troubles. Zain Mortgaged Z&Z restaurant to Jalal on 28 March 2020, but the situation got worse with the passing days. Zain decided to sell Z&Z restaurant to recover losses incurred in due course of time. On 1 January 2021, Zain completed the legal paperwork and sold Z&Z restaurant to Kabir. The conflict of interest arises between Jalal and Kabir over Z&Z restaurant. According to the doctrine, the rights of Z&Z restaurant were awarded to Jalal because there was a mortgage before the sale of Z&Z restaurant.

In the case of Duraiswami Reddi v. Angappa Reddi (1945), it was observed that the prior transferee would be entitled to enforce his rights though his documents were registered later. And even if the subsequent transferee’s documents were registered earlier and he entered into a transaction with bonafide intention and without the knowledge of the previous transaction, still he is not entitled to the prior rights.

Limitations And Exceptions To The Doctrine Of Priority

The doctrine is subjected to limitations and exceptions which resulted in the different outcomes of the cases. The analysis of the cases are based on the following exception such as-

1) Cancellation and postponement of mortgage: The cancellation and postponement of prior mortgages are covered under section 78 of the Transfer of Property Act, 1882. It deals with the mortgages which conduct fraud, gross negligence, misrepresentation, coercion, or use of any unfair means to obtain consent and security money from the mortgager. Such mortgagee was postponed and the subsequent mortgagees will have priority in the rights of the property over the prior mortgagee.

2) Estoppel: According to the exception of estoppel, if first, the transferee is aware of the subsequent transfer of property, then the subsequent transferee will get the opportunity to be in priority. It is not necessary to know the exact detail of the transfer.

3) Registration: The doctrine of priority depends upon the dates of execution of deeds and not on the dates of deeds registration.

4) Notice: It is a general exception where the holder of a registered deed holds priority over the unregistered deed holder at the time of execution of the deed. In such cases, the holder of the registered deed had notice of the prior unregistered deed at the time of execution. Section 50 of the Registration Act, 1908 provides various classifications of registered document for sale, purchase, or transfer of rights of immovable properties from one person to another which give priority against unregistered documents.

5) Court Orders: The court has the authority to pass an order or a decree to prioritize the subsequent transfer over the prior transfer of immovable property. In such cases, the doctrine of priority shall not apply to the concerned transfer of property.

6) Failed to comply with the procedure of law: The transfer of immovable properties must follow the procedure established by law for executing the decree. Any sort of failure to comply with or breach of law leads to the invalidation of the decree.

Case laws on the doctrine of priority

Chouth Mal v. Hira Lal

In this case, the sale of the land agreement was executed in favor of one defendant in January 1932 however, the sale deed was executed in May 1932. During the period of execution that is somewhere in February 1932, the owner of the property executed a usufructuary mortgage of the same land in the favor of the plaintiff. The court, in this case, held that the usufructuary mortgage will be given priority over the subsequent sale deed. It was observed by the court that if the parties intended and delivered the possession of the properties to the transferee, then the mere omission of the sale deed will not have any effect or consequence. It was opined that only transfer does not confer any right or title in the property. It depends upon the date of execution of the deed. It is also not mandatory to have a deed registered as it does not create any rights.

SFL Industries Ltd. v. Reliance Capital Ltd. (2015)

In this case, the court ordered the petitioner company to wind up on the recommendation of the Board of Industrial and Financial Reconstruction (BIFR). The question that arose, in this case, was whether the provision of the Companies Act shall have the effect of the doctrine of priority which includes whether the claim of the first charge holder would prevail over the claim of the second charge holder.  The court held that there is no specific provision for the right of priority in the Companies Act. In such cases, the rule of priority under Section 48 of the Transfer of Property Act can be made applicable. Hence, in the present case, the court ordered that the claim of the first charge holder would prevail over the claim of the second charge holder. 

Conclusion 

Section 48 determines the priority when there is more than one transferee. It safeguards the rights of the first transferee in absence of a special contract or reservation. It describes the essential principle that no person can carry their rights and titles better than himself. Thus, the transferor cannot harm the rights of the transferee by making any further transactions with the property. It cannot ignore the rights created by the earlier transfer. Also, the rule of priority has expanded its scope of relevance to the Registration Act and Insolvency and Bankruptcy Code.