While purchasing any land or property, there are several factors to consider, especially if the seller had previously mortgaged the land or property before selling it to you. Recently, a case in the Supreme Court highlighted this issue, where a land seller signed a sale agreement with a buyer on September 10, 2008 to sell his land for Rs 4.45 crore.
To confirm the deal, the buyer paid Rs 50 lakh and an additional Rs 5 lakh in cash as advance earnest money. The seller however, deceitfully concealed the information about an existing loan against the property, leaving the buyer in the dark about this obligation. As a result, the property remains mortgaged with the bank.
Eventually, the buyer discovered that there was a substantial loan against the property and that an equitable mortgage existed. The buyer claimed that the seller deliberately suppressed this fact, which contradicted the explicit statement in the sale agreement that the property was free from all liabilities and encumbrances.
When the buyer raised this issue, the seller promised that necessary actions were being taken to clear the outstanding debt; but , he kept on delaying the matter. Consequently, the buyer genuinely believed that the problems would be resolved and awaited for the seller’s response.
In 2009, the land seller approached the buyer with some mediators and claimed that requisite steps had been taken to settle the outstanding liability with the bank and the land would soon be free from mortgage. Based on these reassurances, the buyer paid another Rs 5 lakh in cash on August 17, 2009, and also handed over a post-dated cheque for Rs 3.55 crore drawn on the Federal Bank to the seller.
Later, the buyer found out that the seller had not taken any steps to clear the mortgage and realised he was being tricked. So, he did not arrange funds for the encashment of the post-dated cheque, which consequently came to be dishonoured for lack of funds. Eventually, the buyer filed a court case which dragged on for years until the Supreme Court settled it in 2025.
On December 15, 2025, the land buyer won the case in the Supreme Court. The Supreme Court ruled that if a seller has fraudulently concealed important information about existing debts like bank loan against the property and sold it to a buyer, the buyer is entitled to get their deposit back.
Necessary due diligence steps land and property buyers can take to avoid such disputes
Adnan Siddiqui, Partner, King Stubb and Kasiva, said to ET Wealth Online that property buyers must obtain an Encumbrance Certificate covering at least 13-30 years from the Sub-Registrar’s office, this is the first and non-negotiable step.
Siddiqui says: “Equally important is a CERSAI search, which specifically captures equitable mortgages pledged against bank loans that often escape EC searches, precisely the kind of encumbrance involved in this case.”
Siddiqui says that revenue records including mutation entries at the Tehsildar’s office should be verified to uncover co-ownership claims, government acquisition notices, or tenancy disputes. The agreement to sell must include an explicit warranty clause holding the seller personally liable for any undisclosed encumbrance, with automatic entitlement to refund with interest.
According to Siddiqui, there are three lessons from this Supreme Court judgement:
- First, sellers have a legal duty to disclose all material facts; concealing a mortgage or encumbrance in an agreement to sell constitutes fraud, vitiates the contract, and the buyer’s right to refund of advance is well protected.
- Second, buyers cannot be faulted for not physically inspecting original title deeds, since it is common practice for sellers to keep originals with banks against loans, ignorance induced by the seller’s own fraud cannot be used against the buyer.
- Third, isolated admissions during cross-examination cannot override clear documentary proof of fraud. Courts will look at the totality of conduct, including the seller’s silence in response to a direct notice.
—
aniltikotekar4sme.com 