The difference between Sale and Agreement to Sell

Understanding the difference between ‘sale’ and ‘agreement to sell’ is crucial as they impact ownership, risk and legal rights. These concepts are particularly relevant in real estate, business dealings and daily transactions involving goods and property. Knowing how these legal frameworks operate can protect parties from disputes and financial loss. 

In this blog, we will dive deeper into understanding the distinctions between a sale and agreement to sell, explore their legal implications, risk transfer and how they relate to property transactions. 

What is sale? 

A sale occurs when ownership of a good, property or asset is immediately transferred from the seller to the buyer. In this case, both ownership and risk pass on to the buyer at the time of the sale. So, if the buyer purchases a house, they immediately become the legal owner and bear all associated risks from that moment. 

What is agreement to sell?

The agreement to sell meaning entails a contract for the future sale of a property. In this scenario, the ownership and risk remain with the seller until certain conditions are met or at a specified future date. Thus, a developer like Raymond Realty may agree to sell an apartment once the project is completed but will retain ownership until then. 

Difference between sale and agreement to sell in business law

The legal framework governing sales and agreements to sell can be found in two main statutes: The Indian Contract Act of 1872 and the Sale of Goods Act, of 1930. These laws define the rights and obligations of the parties involved and ensure fairness in commercial transactions. 

• Indian Contract Act, 1872: 
  This act governs contracts, including the agreement to sell. It outlines how and when agreements become legally enforceable and the remedies available for breach of contract. 

• Sale of Goods Act, 1930: 
  This act specifically addresses the sale and agreement to sell goods. It highlights the conditions under which a sale or agreement to sell is valid and enforceable, including the duties of the seller and buyer. 

Section 4 of the Sale of Goods Act, 1930, lays out the difference between contract of sale and agreement to sell. It states that a contract of sale is formed when the seller transfers the ownership of goods (or as in this case, property) to the buyer for a price. If ownership is transferred immediately, it’s a sale. If the transfer is set to take place on a future date or is subject to conditions, it is an agreement to sell. 

Key implications: 

In a sale, the ownership passes immediately, which means that the risk also shifts to the buyer. In an agreement to sell, the seller retains ownership and bears the risk until the contract is fully executed.

Sale V/S Agreement to Sell

• Ownership Transfer:
  • Sale: Ownership is transferred to the buyer immediately
  • Agreement to sell: In an agreement to sell, the transfer of ownership is done after the agreed-upon conditions are met. 

• Risk Transfer:
  • Sale: The buyer assumes the risk once the sale is completed. 
  • Agreement to sell: The seller continues to bear the risk until ownership is transferred. 

• Contract Type:
  • Executed (Sale): The contract is completed, and the buyer becomes the owner upon the sale. 
  • Executory: The contract is yet to be executed, and ownership remains pending certain conditions.

Sale vs. Agreement to Sell in Property Law:

In real estate, the distinction between a contract of sale and agreement to sell becomes more critical. 

• Sale: When a property is sold, the buyer gains immediate ownership, along with all associated rights and risks, such as market fluctuations and maintenance responsibilities. 
• Agreement to sell: In many real estate transactions, especially for under-construction properties, buyers enter into agreements to sell. Ownership is transferred only upon completion of the project, and until then, the risk lies with the developer. 

Difference between sale and contract of sale in TPA

The Transfer of Property Act, 1882, (TPA) governs the transfer of property in India and deals with the sale of immovable property. Under this act, the sale of a property involves the transfer of ownership and title, whereas an agreement to sell creates a contractual obligation, not an immediate transfer. 

Sections 54 and 55 of the act also detail the sale process for immovable property. A sale must be registered, and the agreement to sell must fulfill certain conditions for the sale to be legally enforceable. 

The Sale of Goods Act of 1930, while primarily concerned with the sale of goods, also applies to the sale of movable property in business transactions. It specifies how and when ownership and risk are transferred in both sales and agreements to sell. 

Comparison with other contracts

The differences between a Sale, an agreement to sell and a Hire Purchase: 

• Sale: Immediate transfer of ownership and risk upon payment. The buyer takes full ownership of the property. 
• Agreement to sell: The ownership is retained by the seller until conditions are met or the project is complete. In comparison with hire purchase, the difference lies in how the payments are structured; for an agreement to sell, a single payment may lead to the ownership transfer.
• Hire Purchase: Under a hire purchase agreement, ownership is only transferred after the last payment is made, although the buyer still enjoys the possession and usage of the goods from the beginning. Risk remains with the seller until all instalments are paid. 

The key differences between a sale and a hire purchase fall into two categories: 

• Ownership: In a sale, ownership transfers immediately, while in a hire purchase, this happens after all payments are made. 
• Risk: In a hire purchase, the seller bears all risks until the final payment, while in a sale the buyer assumes all risks after the transaction. 

Difference between sale and agreement to sell with example:

Sale:
A completed property sale, say for a flat in Ten X Habitat, involves an immediate transfer of title and risk, where the buyers assume all responsibilities. The owner is now responsible for property taxes, maintenance fees and any insurance requirements starting from the date of the sale. They also bear the risk of any damage such as a water leakage or a fire. Additionally, the owner can also resell, modify or rent out the property. 

Agreement to sell: 

Let’s say that an individual has bought an apartment at the Address by GS, Bandra. They sign an agreement to sell. Now, until the construction is finished and the final sale deed is signed, the ownership and risk will remain with the developer. This means that the individual doesn’t own the flat yet, and the developer will bear the risk for any issues that arise before completion. Contingent Property Transfers:
In cases where a sale is contingent upon the buyer securing or fulfilling certain legal formalities, the risk and ownership transfer occur only after these conditions are satisfied. For instance, the sale of a commercial property may be contingent on receiving zoning approval, with ownership remaining with the seller until approval is obtained.

Case law analysis: 

Let’s take the case of Cehave N.V v Bremer Handelsgesellschaft mbH (1976). This landmark case, also known as the Hansa Nord, is an important precedent in the interpretation of contracts involving the sale of goods. The case revolved around a contract for citrus pulp pellets, where the goods delivered were not of agreed quality. The court ruled that the breach was not serious enough to terminate the contract, as the goods could still be used, although at a reduced value. 

How is this relevant to the Sale and Agreement to Sell? The case highlights how breaches of contract are interpreted differently in a sale versus in an agreement to sell. 

Sale: Since the ownership and risk transfer immediately upon the completion of the sale, this case demonstrates how even after the sale is completed, if goods do not fully comply with the contract, the buyer cannot always reject the goods outright unless the non-conformance is a breach of the condition. In this case, since the court ruled that the term ‘in good condition’ was a warranty and not a condition, the buyer (Cehave) could not reject the goods, but only claim damages for the diminished value. 

Agreement to sell: Here ownership and risk remain with the seller until certain conditions are fulfilled. In the context of the case, had the court determined that the term ‘in good condition’ was a condition, it would have been a fundamental breach of contract, allowing the buyer to terminate the agreement before the final transfer of goods. 

Contingent and Conditional Contracts

A contingent contract, as defined under section 31 of the Indian Contract Act 1872, refers to a contract where the performance depends on the occurrence or non-occurrence of an uncertain future event that is collateral to the contract. These contracts become enforceable only when the specified event happens or when it becomes impossible for the event. (Source: iPleaders)

An agreement to sell is often a form of contingent contract: the transfer of ownership is deferred until a future date or the fulfilment of certain conditions. The contract is dependent on these conditions being met. 

For example, say a residential developer promises to finish and give possession of an apartment to you within six months in exchange for money. This is a contingent contract. Here are three ways how it can play out: 

1. The flat is completed within that time, and you get possession. The contract becomes enforceable and you need to pay the money. 
2. The flat is not completed within six months, so the contract becomes non-enforceable, and you don’t have to pay. 
3. A legal issue leads to the cancellation of the entire residential project, thus making it impossible for you to get possession of the flat. This will make the contract void, and you don’t have to pay. 

Contingent contracts and sale: A sale occurs when the property’s ownership, title and risk transfer happens immediately, with no pending conditions. Once every condition is met, this contingent contract (agreement to sell) becomes a sale. 

Transfer of Risk and Ownership: 

The transfer of risk and ownership is one of the most important legal distinctions between sales, agreements to sell and other contract types. 

Transfer of risks in sales: In an outright sale, the buyer assumes the risk immediately upon ownership transfer. If the property is damaged after the sale but before the buyer takes possession, the buyer generally bears the loss. 

Transfer of risks in agreement to sell: In an agreement to sell, the risk remains with the seller until the conditions for ownership transfer are met. For example, if the house is under construction and is damaged by a natural disaster, the seller/developer retains the risk until the buyer formally takes ownership. 

Gaps in Property Agreements: 

• Contingent events in Real Estate: Many existing legal sources fail to delve into the relevance of contingent events in real estate agreements. An in-depth analysis of how events like construction delays, regulatory approvals or environmental clearances affect agreements to sell can offer valuable insight for both buyers and sellers. 
  Example: In many large-scale real estate developments, agreements to sell are made contingent on the completion of the building and the receipt of a certificate of completion from local authorities. Failure to meet these contingencies can delay or nullify the sale, protecting the buyer. 

• Interplay with International Law: In international business law, the concepts of sale and agreement to sell can be treated differently. For instance, under the United Nations Convention on Contracts for the International Sale of Goods (CISG), the risk transfers to the buyer once the goods are handed over to the carrier, even if the ownership hasn’t been transferred. This contrasts with Indian Law, where risk typically remains with the seller until the ownership passes. 
  Example: A multinational corporation buying equipment from an overseas supplier might face different legal standards regarding risk transfers. This could affect insurance, transportation and financing decisions. 

• Practical Tools: Including checklists for drafting agreements to sell could be highly practical for real estate professionals, lawyers and business owners. The checklist could include: 

1. Conditions for the transfer of ownership
2. Conditions for risk transfer
3. Payment Schedule
4. Statutory approvals
5. Penalties for breach. 

Conclusion: 

Understanding the difference between agreement to sell and sale is crucial for avoiding legal disputes in both business and real estate. Recognising the conditions for ownership transfer, risk and statutory provisions helps individuals and businesses protect their interests during transactions. These concepts affect the transfer of ownership and risk. Knowing how risk and ownership transfer can protect both buyers and sellers from unforeseen losses. Understanding the legal framework, including key statutes and cases helps parties navigate complex transactions confidently, and apply them in both local and international transactions, ensuring that businesses remain compliant and secure in a wide range of legal environments.