Does Bank's Property Title Check Before Housing Loan Assure Purchasers Of Clear Title? Karnataka HC Explains

The Karnataka High Court has held that a bank's scrutiny of property documents before sanctioning a housing loan does not, by itself, amount to certification of title in favour of the purchaser.

Justice Suraj Govindaraj observed that a bank examines title documents primarily to assess the property offered as security and protect its own financial interests. Such scrutiny cannot substitute the independent legal due diligence that a purchaser is expected to undertake.

“The fact that the legal department of the Bank examined the documents and thereafter sanctioned the loan does not, by itself, amount to a certification of title in favour of the purchaser,” the court held.

The court was considering a petition filed by HDFC Bank seeking to quash criminal proceedings arising from allegations that it failed to properly verify the title of a property before sanctioning a housing loan.

The complainant, Latha Jacob, had entered into an agreement for sale on August 7, 2017, with Eveline Patricia Santhini Maxime to purchase a flat at S.V. Heritage, Bengaluru. She subsequently obtained a housing loan from HDFC Bank, which was sanctioned on September 12, 2017.

The seller had earlier obtained a housing loan from the State Bank of India (SBI), with ₹11.89 lakh remaining outstanding as of January 11, 2017. SBI had issued a certificate on August 2, 2017, stating that it was holding the original sale deed and certain encumbrance certificates.

A discharge deed is stated to have been executed by SBI. Subsequently, the seller executed a sale deed in favour of the complainant on September 27, 2017.

After the sale, SBI allegedly initiated proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act. Its officials reportedly visited the property and asserted that a loan remained outstanding and recovery proceedings had been initiated.

The complainant alleged that HDFC Bank's legal department had scrutinised the property documents before approving her housing loan, thereby giving her confidence that the title was clear. She accused the bank of failing to properly verify the title, resulting in financial loss.

Following her private complaint, Cubbon Park Police registered a case under Sections 34 and 420 of the Indian Penal Code (IPC), naming HDFC Bank among the accused.

The bank approached the High Court seeking to quash the proceedings, contending that sanctioning a housing loan after scrutinising the documents did not amount to certifying or guaranteeing the property's title.

The court framed the question as whether sanctioning a housing loan after scrutinising title documents for the purpose of the loan transaction would, by itself, amount to certification or assurance of title in favour of the purchaser, making the bank criminally liable if the title subsequently turned out to be defective.

Referring to the principle of caveat emptor, or buyer beware, the court observed that a purchaser is expected to undertake appropriate due diligence and satisfy themselves regarding the vendor's title before proceeding with the transaction.

“A purchaser is expected to undertake appropriate due diligence and satisfy himself or herself regarding the title of the vendor before proceeding with the transaction,” it observed.

The court clarified that this principle did not, by itself, determine the criminal liability of other persons involved in the transaction. The question was whether the complaint attributed any act or omission to HDFC Bank that satisfied the ingredients of the alleged offences.

It found no material to indicate that HDFC Bank had agreed or represented to the complainant that it would certify or guarantee the property's title. There was also no specific allegation that the bank had independently represented that the title was free from encumbrances or that she should proceed with the purchase solely on the basis of its scrutiny.

The court further held that the bank's examination of documents for its own lending purposes could not automatically be treated as an assurance to the purchaser that the property's title was free from defects or encumbrances.

“The opinion or scrutiny undertaken by the Bank cannot substitute the independent legal due diligence which a purchaser is expected to undertake to protect his or her own interest unless there being an agreement to the contrary,” it added.

The court observed that the allegations primarily concerned the seller's earlier housing loan from SBI, the outstanding dues, the documents issued by SBI, the alleged execution of a discharge deed and SBI's subsequent recovery proceedings.

It found that the complaint did not disclose any specific act by HDFC Bank amounting to fraudulent or dishonest inducement to purchase the property or part with money. There was also no material to indicate that the bank had entered into an arrangement with the seller or SBI to deceive the complainant or knowingly participated in any such arrangement.

“The mere fact that HDFC Bank sanctioned a loan after examining the documents furnished to it cannot, without further material, establish the dishonest intention or common intention required to sustain the allegation of cheating under Section 420 read with Section 34 of the IPC,” it held.

The court further observed that any grievance arising from the outstanding loan, discharge of the mortgage, custody of original title deeds, or subsequent recovery proceedings would have to be examined with reference to the acts and responsibilities of the concerned parties.

Finding no material to indicate that HDFC Bank had committed cheating or shared a common intention with the other accused to deceive the complainant, the court held that continuation of the criminal proceedings against the bank would amount to an abuse of the process of law.

Accordingly, it quashed the FIR and consequential proceedings against HDFC Bank, which had sanctioned the complainant's housing loan. It clarified that the proceedings against the other accused would continue in accordance with law and that its observations would not influence the investigation or proceedings against them.

For Petitioner: Advocates Ganapati Bhat Vajralli and Bhat Ganapathi Narayana

For Respondents: Advocates Rashmi Patel, HCGP and Shreya S Kumar