Vested and Contingent Interests Explained

I. Vested interest

Vested interest depicts an interest in a property that represents that the property belongs to that particular person. Vested interest is explained under Section 19 of the Transfer of Property Act, 1882. According to it, an interest in a property is said to be a vested interest, unless a contrary intention appears from the terms of the transfer,

When:

1. Transfer of property takes place, and

2. It doesn’t specify when the transfer is to take effect

or it specifies that the transfer is to take effect:

• forthwith, or
• on the happening of a certain event,

3. Such transfer creates an interest in favour of a person.

4. Provisions of the transfer as to

• Postponement in the enjoyment of the transferred property,
• Creation of prior interest of some other person in the same property,
• Accumulation of the income arising out of the property till the time of enjoyment arises, or
• The transfer of the same interest to another person on the happening of a particular event

Do not infer that the intention of the transfer was not to create a vested interest.

Examples:

1. A transfers property to B, saying the property is yours on the death of C. At that moment only the property becomes A’s, as death is a certain event.
2. A gift a property X to B, with the condition that if he remains unmarried till he attains the age of 35, 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 upon attaining the age of 35 years.

Characteristics of Vested interest:

1. It’s a present fixed interest.
2. It’s transferable and inheritable.
3. It can be attached and sold in execution.
4. The mere fact that the transferee did not obtain possession of the property before his death doesn’t defeat a vested interest.

Example: A transfers property X to B and creates a life interest in favour of C. Now, the property is to be enjoyed by C till he’s alive and after his death would go to B. Here the vested interest is created at the time of the transfer but the enjoyment of the property is postponed. B dies during the lifetime of C. B’s heirs have a claim over property X, as B had become the owner of the property.

5. There might be cases where the vested interest is subject to a condition that is to be performed after the transfer has taken place. If the condition is not fulfilled, the vested interest will come to an end. Hence, the transferee can be divested of the vested interest subsequently.

Section 20 further tells about when an unborn person, for whose benefit a transfer has taken place, acquires a vested interest in the property. According to Section 20:

1. The transfer takes place,
2. That transfer creates an interest in favour of an unborn person.
3. He acquires a vested interest in that property upon his birth unless the terms of the transfer provide a different intention.

The postponement in the enjoyment of property doesn’t affect the interest created.

This section has to be read with Section 14 of TPA. Section 14 provides the time of vesting. According to it the time of vesting in the case of an unborn child can be between his birth to till he attains the age of majority. If the time of vesting is beyond that (in most cases, beyond 18 years), then the transfer would be void under Section 14.

II. Contingent Interest

Contingency depicts uncertain future events. So, if the transfer is to take place depending upon some uncertain future events, then the interest created in the transferee is contingent interest.

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

1. Transfer of property takes place
2. The transfer creates an interest in favour of a person
3. 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:

1. The transfer is to take effect on happening of a specified uncertain event, the event takes place, or
2. The transfer is to take effect on not happening of a specified uncertain event, that event doesn’t take place.

Example: a gift to B on the birth of his son is a contingent interest. As soon as his son is born it becomes a vested interest.

Section 21 further provides an exception to the cases of contingent interest. It says:

When a transfer creates an interest in favour of a person, to which he is entitle on attaining a particular age and the transferor has also provided the person with either the absolute income arising out of that interest, or provides the income necessary for his (person’s) benefit, before attaining the provided age, then such interest is not a contingent one.

There can be 2 cases or the contingency can be of 2 types:

1. When the event depends upon the wish of the party. Example: A’s gift to B of property X on the condition that he marries W.
2. When it depends upon nature. Example: A’s gift to B of property X on the condition that it must rain on B’s next birthday.

Difference between Vested Interest and Contingent Interest:

1. Vested Interest depicts that the ownership is with the transferee. Hence, it shows that the transfer is complete. Whereas in the contingent interest, the completion of the transfer is dependent upon the fulfilment of the precedent condition, which is not certain. And when the condition precedent happens, the contingent interest converts into the vested interest.

Usha Subbarao v. BN Vishveswaraiah[1]

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. Interest is a contingent one when the right of enjoyment is dependent upon some condition that may or may not happen. The contingent interest becomes vested one on fulfilment of the specified condition.

1. It was further observed that the answer to the question – whether the interest created is vested or contingent depends upon the intention which is to be gathered from the comprehensive view of the terms of the documents creating that interest.
2. A vested interest may come to an end subsequently if the condition specified is not fulfilled. Hence, here the transfer is completely first, and at a later time, the transferee can be divested of the interest created. But in the case of contingent interest, the transfer is not complete until the condition precedent is fulfilled.
3. Vested Interest is a present fixed interest, whereas Contingent interest is a future possible right.
4. Vested Interest is transferable and inheritable.
   Contingent Interest is not heritable but can be transferred. But in the case of the transfer, the transferee merely steps into the shoes of the transferor and would be able to take the contingency only.
5. A decree of the court can attach a Vested Interest which means a court decree can be executed against it. But a Contingent Interest is not attachable because it is an imperfect title.

Kokilambal v. N Raman[2]

A settled the property in favour of B. According to the settlement, both A and B were to enjoy the property during A’s lifetime. B was to collect the rent of the house, make necessary repairs, and pay the taxes to the relevant authorities. And the remaining amount was to be divided between A and B jointly. A also relinquished the right to alienate the property. Though, A and B could alienate the property jointly.

B died during the lifetime of A. A revoked the settlement (between A and B) and executed a fresh settlement in favour of D. Meanwhile B’s legal heir instituted a suit claiming the right over the property on the ground that B had gained a vested interest in the property through the settlement that took place between A and B, therefore it devolved on his legal heirs. And also that A had created a life interest in the property for herself and had no right to revoke it.

Supreme Court held: A had retained some right in the property and there was no complete relinquishment of rights. Hence, it means that no absolute ownership of B was created during her life. Thus, the rights created in favour of B were not heritable, and the claim of B’s heirs was dismissed.

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[1] Usha Subbarao v. BN Vishveswaraiah, AIR 1996 SC 2260: (1996) 5 SCC 201

[2] Kokilambal v. N Raman, AIR 2005 SC 2468 : (2005) 11 SCC 234

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