Vested Interest (Section 19) and Contingent Interest (Section 21) in the Transfer of Property Act,1882

Vested Interest (Section 19) and Contingent Interest (Section 21) in the Transfer of Property Act,1882

Bare Law

Section 19. Vested interest — Where, on a transfer of property, an interest therein is created in favour of a person without specifying the time when it is to take effect, or in terms specifying that it is to take effect forthwith or on the happening of an event which must happen, such interest is vested unless a contrary intention appears from the terms of the transfer. A vested interest is not defeated by the death of the transferee before he obtains possession. 

Explanation - An intention that an interest shall not be vested is not to be inferred merely from a provision whereby the enjoyment thereof is postponed, or whereby a prior interest in the same property is given or reserved to some other person, or whereby income arising from the property is directed to be accumulated until the time of enjoyment arrives, or from a provision that if a particular event shall happen the interest shall pass to another person. 

Section 21. Contingent interest — Where, on a transfer of property, an interest therein is created in favour of a person to take effect only on the happening of a specified uncertain event, or if a specified uncertain event shall not happen, such person thereby acquires a contingent interest in the property. Such interest becomes a vested interest, in the former case, on the happening of the event, in the latter, when the happening of the event becomes impossible. 

Exception — Where, under a transfer of property, a person becomes entitled to an interest therein upon attaining a particular age, and the transferor also gives to him absolutely the income to arise from such interest before he reaches that age, or directs the income or so much thereof as may be necessary to be applied for his benefit, such interest is not contingent. 

Bare Law Explanation 

A vested interest is a fully accomplished and complete transfer of property, barring one aspect of it- transfer of possession. Except for this one aspect, which is deferred for the time being, a vested interest in property consists of all rights that a transferor is capable of transferring to the transferee.

This is reflected in the fact that the owner of a vested interest in property is capable of transferring it to another party, or to his heirs before dying. 

In contrast to this, a contingent interest is not a completed transfer. It does not become complete till a precedent condition is fulfilled. And, the nature of this condition is such that it may or may not get fulfilled. This element of uncertainty makes a contingent interest dicey; an interest based on chance. It is for this reason that a contingent interest cannot be transferred. 

Both, contingent interest and vested interest imply a deferral of the enjoyment of the property; but the crucial difference is that the transfer of a vested interest is a certainty, whereas the enjoyment of a contingent interest is based on chance. It may or may not materialize. Put differently, vested interest is property/wealth in the real sense, whereas a contingent interest is a promise of property/wealth in the future, which may or may not get fulfilled. If, when the condition precedent to a contingent interest is fulfilled, it becomes a vested interest. 

Let us understand this through an example- If I say that I will give a person ‘A’ a certain house when his father passes away, this is a vested interest. There is a condition involved, but since the passing away of a person is not an uncertain thing, it is certain that eventually, one day the house will pass on to ‘A’. Since this is a vested interest, ‘A’ is at liberty to transfer this interest to his children or any other party during his lifetime.

Now, suppose I tell the same person ‘A’ that I will transfer another house to him if and when he becomes an IAS officer. Needless to say, it is a contingent interest that I have passed to him. He may work hard and employ the best teachers, but clearing the exam is by no means a certain event. This is also the reason why this interest is almost worthless unless the condition precedent is fulfilled. Nor can a contingent interest of such nature can be transferred; 'A' cannot get the house till he clears the exam.

In Usha Subbarao v BN Vishveswaraiah, the Supreme Court defined these terms succinctly, ‘An interest is said to be a vested interest when there is an immediate right of present enjoyment or a present right for future enjoyment; whereas, an interest is said to be contingent if the right of enjoyment is made dependent upon some event or condition which may or may not happen.’

So, what are the main differences between vested interest and contingent interest: firstly, as we saw in the foregoing a vested interest implies an immediate right of present enjoyment or a present right for future enjoyment. Whereas, a contingent right is no more than a promise for the enjoyment of property if and when some condition attached to the transfer is fulfilled. Secondly, a vested interest can be transferred, as well as passed on to successors through a will; a contingent interest, though transferable, cannot be inherited. Since, no person can transfer a better title than what he himself has, the transferee of a contingent interest must hope that the condition attached to the original transfer is fulfilled so that he is able to enjoy the property. Till then, the transfer remains little more than a potential that may or may not bear fruits.

It is not always clear from a title deed whether it confers a vested interest or a contingent one. When such cases come before courts, they try to glean the motive and underlying import behind the transfer deed. The substance expressed by its overall reading is preferred to the mere form or language in it.  

Section 20 of the Transfer of Property Act, talks about situations where a vested interest is created in favour of an unborn person. It says that such an unborn person acquires a vested interest as soon as he is born; although, he may be barred from enjoying it till he comes of age. When we read this section along with Section 13 of the transfer of property act, we understand that the transferor is at liberty to specify the date or age when the property transferred would be vested in the unborn child.

Section 22 of the transfer of property act deals with situations wherein property is transferred to a class of transferees whose status as transferees is contingent. This section says that where, on a transfer of property to a class of persons, an interest therein is created in favour of only such persons within the class who shall attain a certain age, such interest does not vest in any member of the class who has not attained that age. Put differently, if they live till that age then the interest passed becomes vested in them, but till then it remains a contingent interest.

Section 23 deals with a particular kind of contingent transfer- if a property interest is to accrue to a person when a specified uncertain event happens, and the transfer deed does not mention any time for its occurrence, the transfer fails unless that event happens before the death of the person presently holding the property.

Example- Suppose, I prepare a transfer deed that specifies that the day my brother is able to pass the UPSC exam he will get a certain house that is currently under my ownership. If he is unable to fulfil the condition before I die, the contingent transfer of the house to him fails. 

Section 24 pertains to another kind of contingent interest that names a group of persons as future transferees of a property, without specifying a date when such transfer is to take place. In such cases when the person(s) currently holding property dies, it goes to such members of the group who are still alive.

Section 24 is better understood through an example- Suppose that I transfer my property to my wife, and after her death to my two brothers, to be equally divided between them. If one of my brothers passes away before my wife’s death, then upon my wife’s death, the property would pass to my other surviving brother.