Another hidden risk in buying property is something many buyers may never consider. You may carefully examine the title deed, obtain an Encumbrance Certificate (EC), check the revenue records and verify the previous sale deeds, and still miss an arrangement that has created rights in the property outside the usual chain of registered property transactions.
Please also read: The underestimated risk of encumbrance in real estate investing (which equity doesn’t have)
About the author: Manmohan Sethumadhavan is a freelancer, investor, and personal finance enthusiast “in search of the absolute truth.” You can follow Manu on Twitter @ManuTsr. He is the author of the popular Revised Capital Gains Taxation Rules Ready Reckoner for FY 2025-2026.
Normally, when ownership or an interest in immovable property is transferred, the transaction has to be registered under section 17 of the Registration Act, 1908. This is one reason why an Encumbrance Certificate can be useful. But rights relating to property can arise without a corresponding conveyance appearing in that registered chain. One such route involves a partnership.
A owns a property. A, B and C start a partnership business. A introduces his property into the partnership as his capital contribution as per Section 14 of the Partnership Act, through a partnership deed and thus it becomes the property of the firm. This need not involve a separate instrument of transfer requiring registration under section 17 of the Registration Act. A loses his exclusive right over that property and it becomes part of the partnership firm.
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Consider what this means from the point of view of a prospective buyer. A may continue to possess the original title deed. The revenue records may continue to show A as the owner. The Encumbrance Certificate may show the earlier purchase by A and no subsequent registered transaction affecting the property. There need not be a registered document in favour of the partnership firm. On the face of the ordinary property records, everything may appear perfectly clean.
A partnership need not necessarily be registered immediately. Under section 58 of the Indian Partnership Act, 1932, registration of a firm may be effected at any time later. Non-registration does not make the partnership itself illegal or invalid, though it imposes certain restrictions. Even if the partnership is registered, such a registration under the Partnership Act is a different process. The firm is recorded with the Registrar of Firms, and the particulars maintained there are not the same as the land-registration records maintained by the Sub-Registrar. Registration of the firm therefore does not, by itself, create an entry in the property’s Encumbrance Certificate showing that A has brought the property into the partnership. The exact procedure differs between States, but the two systems are legally distinct.
Now suppose A subsequently sells the property to X without disclosing anything about the partnership. The sale deed is registered. X may now possess what appears to be everything a careful buyer normally looks for: a registered sale deed from the registered owner, a clean-looking chain of registered documents, an Encumbrance Certificate without any obvious adverse entry, and revenue records standing in the seller’s name.
Yet the partnership still exists. Obviously, other partners could come forward, dispute the sale, and raise a claim in the property. Whether the buyer is ultimately protected will depend on the exact facts of the case.
Therefore, a property’s registered title history can look completely clean even though an earlier partnership arrangement has created rights in the property outside the registered conveyancing chain. If those rights later surface, the buyer can face a title dispute, litigation, delay and potentially a loss of the property or substantial litigation costs.
Note that there may be State-level amendments and varying court decisions, and therefore the applicability of this particular risk can depend on the law and judicial decisions applicable in the State where the property is situated.