Vested and Contingent Interest

The Transfer of Property Act deals with two kinds of interest:

1. Vested interest
2. Contingent interest.

Vested interest is to be distinguished from contingent interest. When an interest is vested, the transfer is complete but when the interest is contingent, the transfer depends upon a condition precedent. When the condition is fulfilled the transfer takes effect and that the interest becomes vested.

Vested Interest:

A transfer of property involves transfer of interests. From the point of view of the quantum (quantity) the interest may be either absolute or partial. From the point of view of the time of accruing (i.e., when the transferee gets the interest) the interest may either be vested or contingent.

Where the interest transferred is vested, the transferee gets that interest immediately. In other words, as soon as the transfer is complete, the interest accrues to the transferee with immediate effect and the transferee’s title is complete. Section 19 defines vested interest as :

The interest created in favour of the transferee is said to be vested where-

• No time has been specified as to when it is to take effect, or
• It is specified that it shall take effect immediately, or
• It is to take effect upon the happening of an event which must happen.

Normally, when a property is transferred, the transferor simply affects it according to procedure prescribed for the same. He may not mention the date as to when the interest shall pass on to the transferee. In such cases, the intention of the transferor is that the transferee shall get the interest forthwith. Such intention is presumed by law if the transferor does not specify as to when the interest shall accrue to the transferee. On the other hand, in order to be more specific, the transferor may express his intention that interest shall accrue to the transferee with immediate effect.

In both the cases the interest transferred is a vested interest. Where the transferor provides that the transfer shall take effect upon the happening of an event of ‘must’ nature which is bound to occur in future, the interest of the transferee is a vested interest. For example, any future date or year.

For example, A transfers property to B, saying the property is yours upon the death of C. At that moment only the property becomes A’s, as death is a certain event. A gifted a property X to B, with a condition that if he remains unmarried till he attains the age of 35 years, the property will be forfeited. This creates a vested interest in favour of B and he would be divested of his interest if he remains unmarried on attaining the age of 35 years.

Death of Deceased Person:

Death of the person who is having this interest will not have any effect over that interest as after the deceased, the interest will vest in his legal heirs.

For example, in the above example, if B dies at the age of 21, then the interest vested in B will pass on to the legal heirs of B and they will be entitled to the property in the prescribed time period.

Explanation: 

The explanation of Section 19 makes it clear that vested interest is not affected by the fact that the right of enjoyment has been postponed. The vested interest remains unaffected also when the title is to pass on to another person on the happening of a particular event in future. The explanation provides that in the following situations, although it may appear that the transferee has no vested interest, nevertheless the interest is vested:

Postponement of Enjoyment:

Postponement of the enjoyment of property does not mean that the interest of the transferee is not vested. In a transfer of property, the primary thing is the transfer of interest of title. Possession of the property is secondary. Therefore, from the fact that the right of enjoyment has been postponed, it cannot be inferred that vested interest has not been given. Possession or enjoyment of property, being secondary, it may be postponed for some time. 

Where A transfers his properties to B to be given to B upon B‘s attaining the age of majority, the interest of B is vested although he is to get the possession and enjoyment of property only on attaining the age of majority. As soon as he attains the age of majority, he is to get possession and enjoyment.

In the Case of Lachhman vs Baldeo : A made a gift of his property to B and directed that B was to take possession of a portion of the property only after the death of A and A‘s wife. It was held that the interest of B was a vested interest.

Sundar Bibi vs Rajendra Narayan [ AIR1925 ] : In this case the Allahabad High Court held that in a vested interest the title passes absolutely from the transferor to the transferee at the date of the transfer, though the enjoyment may be postponed.

Prior Interest: 

Where a prior interest is created in the same transfer, there is postponement of the enjoyment of property. The vesting of interest is not postponed.

For example, A transfers property to B for life and then to C the interest of C is a vested interest. It may be noted that here, C has a vested interest immediately when the transfer was made but his right of enjoyment is postponed till the life of B.

Direction for Accumulation of Income:

Direction for accumulation of income is valid provided it is within the period prescribed in Section 17 of the Act. Where a property is transferred with such direction, the interest of the transferee is nevertheless vested. In such cases too it is only the right of enjoyment which is postponed; vesting is not postponed. However, when in a transfer of property if the direction is that right of enjoyment is terminate only on the death of the transferor does not create a vested interest.

In the case of Kokilambal vs N Raman Kokilambal, there was a deed of family settlement in which the settlor created a limited interest (right to receive the income from rents). The property of the settlor was to vest in the settlee (brothers of the settlor) only on death of the settlor. The Supreme Court held that the family settlement did not create a vested interest in favour of the settlee (i.e., brothers of the settlor) and the settlee could not be the absolute owner during the life of settlor. Therefore, the settlee (the brothers of settlor) could not succeed the property on the settlor’s death.

Conditional Limitation:

A condition that upon the happening of a particular event the interest vested in a person shall pass on to another person is called a ‘conditional limitation’ under English law. In India, this provision is contained in Section 28 of the Transfer of Property Act. In a transfer of property, a conditional limitation does not prevent the vesting of the interest. Rather, it is implied that the interest which had already been vested may be divested and may vest somewhere else.

For example, A transfers his house to B with a condition that if B does not take possession of this house within six months from the date of the transfer, the house shall belong to C. The interest of B is a vested interest although it is likely to be divested in case B does not fulfil the condition within six months.

Characteristics of Vested Interest :

1. Vested interest does not depend upon the fulfilment of a condition. It creates a present and immediate right though the enjoyment may be postponed to a future date.
2. A vested interest is not defeated by the death of the transferee before obtaining possession, it will pass on to His heirs.
3. Vested interest is Transferable and heritable.

Rajesh Kanta Roy vs Shrimati Sunita Debi : One Ramani Kanta Roy executed a registered trust deed in respect of his properties. The eldest son Rajesh was appointed the sole Trustee to hold the properties under the trust subject to certain power and obligation. After his death his two sons Rajesh and Ramendra got interest in the property. There was a clause in the trust deed that both of them was to get interest in the properties allotted to each other happening of the two events –

1. Discharge of all the debts specified in the schedule and death of the settler himself.
2. The trust was to come to an end on the death of the settler and the sons were to get properties allotted to them thereafter.

The issue before the court was whether the interests created by the trust were vested or contingent.

A Supreme Court held that the interest taken by the two brothers under the trust deed was vested and not contingent because it was certain event Vested interest does depend upon fulfilment of a condition and takes effect from the date of the transfer. In vested interest there is present, immediate right even if the enjoyment is postponed. A vested interest is heritable and transferable. A contingent interest depend solely upon the fulfilment of the condition. In contingent interest there is no present right, there is a promise to give right upon the fulfilment of a condition. A contingent Interest is inalienable and not transferable.

Contingent Interest :

Where the interest is contingent, the transferee gets the interest only upon the happening of an uncertain future event specified in the transfer. In a transfer of property if the interest transferred is contingent the title of the transferee is not complete unless the specified event happens.

Contingency means an uncertain future event. In a transfer of property where the vesting of interest depends on any contingency i.e. uncertain future event, the interest is contingent. In the case of Chinna Reddy vs Pujari Keshanna In a transfer of property where the vesting of estate is dependent upon an event that may or may not happen the interest is contingent.

A contingent interest is an interest which is created to take effect only when

1. some specified uncertain future event happens or;
2. the specified uncertain event does not happen.

For example, where A makes a gift to B provided X survives (i.e. lives up to) the age of 20 years, the interest of B is contingent.

Similarly, where A makes a gift to B provided X does not survive (v.e dies before the age of 20 years, here too the interest of B is contingent.

In both the examples, the vesting of interest in favour of B depends on an event which is uncertain. In the first, the vesting would take effect on the happening (i.e. survival) of that event whereas in the second, it depends on ‘not happening’ of that event.

Essential Elements of Contingent Interest :

Section 21 of Transfer of Property Act, 1882 explains contingent interest as:

• Transfer of property takes place
• The transfer creates an interest in favour of a person
• Such transfer is to take effect on:
  • Happening of a specified uncertain event, or
  • Not happening of a specified uncertain event.
• The interest created here is a contingent interest.
• The contingent interest turns into a vested interest when:
  • The transfer is to take effect on happening of a specified uncertain event, the event takes place, or
  • The transfer is to take effect on not happening of a specified uncertain event, that event doesn’t take place

Usha Shubarao v. B N Vishewaraiah : The Supreme Court, in this case, observes that: interest is a vested interest when there is an immediate right of present enjoyment or a present right for future enjoyment. An interest is a contingent one when the right of enjoyment is dependent upon some condition that may or may not happen.

Contingency or specified uncertain event may be of two kinds :

• where the happening or not happening of the event depends upon the will and desire of the parties e.g. marriage, payment of a sum of money or execution of a deed etc.
  
  For example, A makes a gift to B provided C marries within one year of the transfer. The interest of B until C marries is a contingent interest.

• where specified event does not depend on the will or desire of the parties e.g. death of a person on or before a certain age.
  
  Thus, where A makes a transfer of his property to B provided C dies at the age of 40 years, the interest of B is contingent. It may be noted that death of a person is a certain event therefore where property is transferred with a condition precedent of the death of any person, the interest of the transferee is vested. But when and at what age does a person die, is an uncertain future event.

Exception :

Exception to Section 21 provides that where a transferee is to get the interest at a particular age but is entitled to get absolutely the income of that interest before attaining that age, the interest given to him is a vested interest. It may be noted that where an interest is created in favour of a person on attaining a particular age, his interest is contingent. But, if the transferor gives to the transferee also an absolute right in the income arising out of that interest (property) or, directs that so much of such income as is necessary for his benefit be applied with immediate effect, the interest of the transferee is a vested interest.

Nature of Contingent Interest :

(a) Future possible interest-Contingent interest is a future possible interest. In a transfer of property where the transferee’s interest is contingent, he has only a future possible right in respect of property transferred to him. It is neither a present right nor a certain right. Since the happening or not happening of the event is uncertain, the interest dependent on it is also uncertain. In a contingent interest, the right of enjoyment is also dependent on some event or condition which may or may not happen or be performed.

(b) Not heritable – A contingent interest is not a heritable interest. Where a person having contingent interest dies (i.e. dies before vesting) his legal heirs do not get anything, not even the contingent interest. After the death of a person his legal heirs are entitled to inherit only those properties in which he had a vested interest at the time of his death.

In the case of Rajesh Kanta Roy v. Smt. Shanti Devi the Supreme Court observed thus : “In the case a contingent interest, one of the features is that if a person dies before the contingency disappears and before the vesting occurs, the heirs of such a person do not get the benefit of the gift (transfer).”

(c) Transferable interest -Contingent interest is a transferable interest. However, since a contingent interest is itself an uncertain interest in the property and the transferor’s own title is not perfect, the transferee too gets an imperfect title.

Distinction Between Vested and Contingent Interest:

• When it is accrued : On a transfer of property, a vested interest accrues immediately to the transferee. A contingent interest does not accrue to the transferee until the specified uncertain event happens or does not happen.
• Nature of title: A vested interest confers complete and perfect title.In contingent interest the title is dependent on uncertain future events which may or may not occur; the title is therefore imperfect. Vested interest is owned absolutely, whereas, contingent interest is owned conditionally.
• Transferee’s right in property: In a vested interest the transferee has a present fixed right in property. In contingent interest the transferee has merely a future possible right in the property. A vested interest confers a present right to property even if the enjoyment is postponed or suspended whereas in a contingent interest all the rights of property, including the enjoyment, are dependent on an event which may or may not occur.
• Transferability: Vested and contingent interests both are transferable. But, in a vested interest the transferee gets complete title whereas, in contingent interest the transferee takes an interest which may be defeated by non-fulfilment of condition precedent or non-happening of the event.
• Attachment and sale in execution of decree: A vested interest is capable of being attached or sold in execution of a decree whereas, a contingent interest cannot be sold in execution of any decree. A merely contingent or possible interest is not liable to attachment and sale in execution of a decree.
• Heritability. A vested interest is property of the transferee, therefore, it may be inherited by his heirs even though he could not obtain possession at the time of his death. A contingent interest confers no title, therefore, it is not heritable.

Illustrations of Contingent Interest :

1. A makes a gift of his property to B when he attains the age of 18 years or, marries under that age with the consent of C with a condition that if B neither attains that age nor marries with the consent of C the property shall go to D. B and D both take a contingent interest in the property.
2. A will transfer his farm in Sultanpur Khurd to B if B shall convey his own farm in Sultanpur Buzurg to C. Interest of B in the farm in Sultanpur Khurd is contingent. It may become vested if B conveys his farm in Sultanpur Buzurg to C.
3. A bequeaths to B Rs. 500/- when B shall attain the age of 18 years and directs that a certain sum, out of another fund shall be applied for his maintenance until B arrives at that age. The legacy in favour of B is contingent. But, in this illustration if A directs that the interest of Rs. 500/- or a component part thereof shall be applied for B‘s benefit until he reaches that age, the legacy in favour of B would be vested under the exception to section 21.
4. A deed of settlement gave life-estate to X with remainder to his children not in existence at the time of the settlement. The interest of the children before the death of the holder of life-estate is contingent. The interest of the children would become vested after the death of the holder of life estate.

Section 22 Transfer to members of a class who attain a particular age—Where, on a transfer of property, an interest therein is created in favour of such members only of a class as shall attain a particular age, such interest does not vest in any member of the class who has not attained that age.