Conditions Restraining Alienation, and Restrictions Repugnant to the Interest Created

Absolute against partial restraint

This is the distinction the whole section turns on, and section 10 does not define it. Only an absolute restraint is void. A partial restraint, one that limits but does not effectively destroy the power of disposal, is valid.

The working test is whether the condition leaves the transferee a substantial power to alienate. Ask whether there is a real market left.

Restraints treated as absolute, and so void:

• A condition that the transferee shall never sell the property at all.
• A condition that he may sell only to a named person, or only to one of two named persons. The transferee is at that person's mercy on price, so the power is nominal.
• A condition that he may sell only for a fixed price far below the market, which achieves the same result by another route.
• A condition postponing alienation for an unreasonably long period, for example a lifetime.

Restraints treated as partial, and so valid:

• A condition that the property shall not be sold outside the family. The class of permitted buyers is limited but genuine, and the transferee still has a market.
• A condition restraining alienation for a short and reasonable period.
• A condition giving the transferor or his family a right of pre-emption, that is a right of first refusal at a fair price. The transferee may still sell; he must simply offer it first.

Notice how those two lists differ. A restraint that narrows the field of buyers is usually partial. A restraint that leaves the transferee with one buyer, or none, or a price nobody would accept, is absolute in substance whatever it says on its face.

Section 11: a direction as to enjoyment

Section 11 provides that where, on a transfer of property, an interest is created absolutely in favour of any person, but the terms of the transfer direct that the interest shall be applied or enjoyed by him in a particular manner, he is entitled to receive and dispose of the interest as if there were no such direction.

Section 10 strikes at restraints on transfer; section 11 strikes at directions about enjoyment. The principle is identical. An absolute interest carries the right to use the property as the owner pleases, and a direction telling him how to use it contradicts the absolute interest already given.

The words "created absolutely" are the gateway. If the interest given is not absolute, section 11 has nothing to bite on. A transferor who gives a life interest, or an interest for a limited purpose, has given a smaller thing, and its limits are part of what was given rather than a direction added to something larger.

The second paragraph, and why it matters

The paragraph substituted in 1929 provides that where such a direction has been made in respect of one piece of immoveable property for the purpose of securing the beneficial enjoyment of another piece of such property, nothing in the section affects any right the transferor may have to enforce the direction, or any remedy for its breach.

This is the exception that connects section 11 to section 40. A transferor who sells one plot and keeps the neighbouring plot may validly direct that the plot sold shall not be built on above a certain height, or shall be used only as a garden, if the direction is for the beneficial enjoyment of the plot he kept. That is not a busybody controlling another man's property; it is a landowner protecting his own. The enforcement of such covenants is the subject of [Restrictive Covenants: When an Obligation Runs with the Land].

Section 12: conditions determining an interest on insolvency or attempted alienation

Section 12 provides that where property is transferred subject to a condition or limitation making any interest in it, reserved or given to or for the benefit of any person, to cease on his becoming insolvent or endeavouring to transfer or dispose of the same, the condition or limitation is void. Nothing in the section applies to a condition in a lease for the benefit of the lessor or those claiming under him.

This section closes a loophole. Sections 10 and 11 attack a direct prohibition. A clever drafter might avoid them by saying instead: "the interest shall determine if he tries to sell". That is a restraint on alienation dressed as a defeasance clause, and section 12 makes it void as well.

The reference to insolvency attacks the same trick from the creditors' side. If an interest could be made to vanish the moment its holder became insolvent, his creditors would find nothing to attach, and the transferee would enjoy property that was beyond the reach of the people he owed. Section 12 refuses that.

The lease exception is the same as in section 10 and rests on the same reason: the lessor keeps a reversion and has a legitimate interest in his tenant.

An important limit: section 12 strikes at a condition making the interest cease on the holder's own insolvency or attempted alienation. It does not touch a condition making an interest cease on some other event, which is an ordinary conditional limitation governed by sections 25 to 34 and taught in [Conditional Transfers: Conditions Precedent and Subsequent].

A worked example

Ravindra transfers his flat at Andheri absolutely to his nephew Sameer by a registered gift deed. The deed contains four clauses.

Clause 1: "Sameer shall never sell or mortgage the flat." An absolute restraint on alienation. Void under section 10. Sameer takes the flat and may sell or mortgage it freely.

Clause 2: "Sameer shall not sell the flat to anyone outside the family." A partial restraint. The class of buyers is narrowed but Sameer retains a real power of disposal within a genuine class. Valid.

Clause 3: "Sameer shall use the flat only as his residence and shall not let it out." A direction as to the manner of enjoyment of an interest created absolutely. Void under section 11, and Sameer may let the flat. It would be different if Ravindra owned the flat next door and the direction had been imposed to protect the enjoyment of that flat, because the second paragraph of section 11 would then apply.

Clause 4: "If Sameer becomes insolvent, or attempts to sell the flat, the flat shall revert to Ravindra." Void under section 12, on both limbs. The interest does not cease, and the flat remains available to Sameer's creditors.

Ravindra therefore achieves exactly one of the four things he wanted. Had he wished to retain real control, the answer was to transfer a life interest to Sameer with a remainder over, rather than an absolute interest with strings.

What it does NOT mean

It does not mean the transfer fails. Only the offending condition is void. This is the single most common error on this topic. The transferee takes the property freed of the condition.

It does not make every restraint void. Only absolute restraints under section 10. Partial restraints, including a right of pre-emption and a bar on selling outside the family, are valid.

Section 11 does not apply to a limited interest. It requires an interest created absolutely. A life interest is a smaller grant, not an absolute grant with a direction attached.

The lease exception is not general. In both sections 10 and 12 it applies only where the condition is for the benefit of the lessor or those claiming under him.

Section 12 does not invalidate every determinable interest. It strikes only at conditions keyed to the holder's insolvency or his attempt to alienate.

Distinctions

Quick revision

• Section 10: an absolute restraint on alienation is void; a partial one is valid.
• The transfer survives; only the condition dies.
• Two exceptions to section 10: a lease condition for the lessor's benefit, and the proviso for a married woman not being a Hindu, Muhammadan or Buddhist.
• Test for absoluteness: is a substantial power of alienation left?
• Sell only to a named person: absolute, void. Do not sell outside the family: partial, valid. Right of pre-emption at a fair price: valid.
• Section 11: a direction as to the manner of enjoyment of an interest created absolutely is disregarded.
• Second paragraph of section 11: a direction protecting the beneficial enjoyment of the transferor's other immovable property is enforceable, and links to section 40.
• Section 12: a condition making an interest cease on insolvency or attempted alienation is void, save in a lease for the lessor's benefit.

Test yourself

1. A gifts land to B on condition that B shall never sell it. What is the position of the land and of the condition? The condition is an absolute restraint on alienation and is void under section 10. The gift itself stands, so B takes the land absolutely and may sell it.

2. Is a condition that the transferee shall not sell outside the family valid? Yes. It is a partial restraint. The class of buyers is limited but the transferee keeps a substantial power of disposal within a real class.

3. Why is a condition permitting sale only to one named person treated as absolute? Because the transferee is left with a single possible buyer who can dictate the price. The power of alienation is nominal rather than substantial, so the restraint is absolute in substance.

4. A transfers a shop absolutely to B, directing that the rent shall be used to maintain a temple. Can B use the rent as he likes? Yes. The interest was created absolutely and the direction concerns the manner of enjoyment, so section 11 entitles B to receive and dispose of the interest as if there were no such direction.

5. When can a direction as to enjoyment be enforced? Under the second paragraph of section 11, where the direction is made in respect of one piece of immovable property for the purpose of securing the beneficial enjoyment of another piece of such property. The transferor's rights and remedies in respect of a breach are then unaffected.

6. A settles property on B with a clause that B's interest shall end if he is declared insolvent. Is the clause good? No. Section 12 makes void a condition making an interest cease on the holder becoming insolvent. The clause fails and the interest remains available to B's creditors.

7. Why is a covenant against subletting in a lease valid when a similar restraint in a sale is not? Because both sections 10 and 12 except a condition in a lease which is for the benefit of the lessor or those claiming under him. A lessor retains a reversion and so keeps a genuine interest in who holds and occupies the property.