By Selling a commercial establishment involves two distinct legal transactions wrapped in one deal: the transfer of immovable property and the liquidation of movable inventory. A standard brokerage contract often fails to address this duality, leaving sellers exposed to tax inefficiencies and valuation disputes. The shop structure falls under the Transfer of Property Act, 1882, while the unsold stock is governed by the Sale of Goods Act, 1930.
This protocol outlines the legal architecture required to appoint a broker for this composite transaction. It addresses the friction points—specifically commission triggers on “Earnest Money” versus final registration, the valuation of “dead stock,” and the limitation of broker authority. Whether dealing with perishable goods or commercial leases in jurisdictions like West Bengal, this framework ensures the agreement protects the principal’s assets before the first buyer walks through the door.
Appointing a Broker for Shop & Stock Sales: A Drafting Protocol
Selling a shop is a real estate transaction. Selling the unsold inventory inside is a commercial trade. When you hire a broker for both, the contract must bridge the gap between the Transfer of Property Act and the Sale of Goods Act.
Why This Matters
- Risk of Unauthorized Sale: Brokers might exceed their mandate without strict authority limits.
- Tax Inefficiency: Incorrect structuring can trigger higher tax rates on stock sales.
- Lost Commission: Vague “Effective Cause” clauses lead to disputes if a buyer returns later.
1. The Legal Hybrid: Real Estate vs. Goods
The primary challenge in this agreement is the dual nature of the assets. The shop is immovable property governed by the Transfer of Property Act, 1882. The stock is movable property governed by the Sale of Goods Act, 1930. A single blanket clause covering “assets” is insufficient.
The sale of the shop requires a registered deed. The sale of stock happens upon delivery or appropriation. If your broker finds a buyer who wants the shop but not the old stock; your agreement must specify if the broker gets paid on the partial sale.
| Asset Class | Governing Law | Risk Transfer | Broker’s Duty |
|---|---|---|---|
| The Shop (Immovable) | Transfer of Property Act, 1882 | Upon Registration of Deed | Verify Title; Disclose material defects (Sec 55 TPA) |
| Stock-in-Trade (Movable) | Sale of Goods Act, 1930 | Upon intent/delivery (Sec 26 SGA) | Ensure accurate valuation; Prevent perishability loss |
2. Defining Authority: Negotiate vs. Conclude
A critical distinction exists in Indian agency law regarding a broker’s power. Does hiring a broker to “sell” a shop give them the power to sign the sale deed? The Supreme Court answered this in Abdulla Ahmed v. Animendra Kissen Mitter.
The Court ruled that a broker authorized to “negotiate a sale” does not have the authority to conclude a binding contract. They find the buyer; they do not sign for the seller. Your agreement must be explicit. If you use loose language like “authorize the agent to sell,” you risk the broker signing a binding agreement with a buyer you have not vetted.
Drafting Tip: The Exclusion Clause
“The Broker is appointed solely to solicit offers and introduce prospective buyers. The Broker shall have no authority to accept offers; receive consideration (except as a custodian if specifically authorized); or execute any binding agreement on behalf of the Principal.”
3. The Exclusivity Trap: Sole Agency vs. Sole Selling Rights
Many standard agreements (including the one attached) create time-bound mandates (e.g., 10 days). It is vital to define the nature of this exclusivity. In English and Indian law, these two terms mean very different things:
Sole Agency
The broker is the only agent allowed to sell. However, if the Owner finds a buyer themselves (e.g., a neighbor or relative), the broker gets no commission.
Sole Selling Rights
The broker gets commission on any sale during the period, even if the Owner finds the buyer entirely on their own without the broker’s help.
Recommendation: If you are the Owner, explicitly state: “This appointment is on a Sole Agency basis. No commission is payable if the Principal effects a sale to a party not introduced by the Broker.”
4. The Commission Split: Earnest Money vs. Registration
Standard templates often split the commission. For example: 0.5% upon receipt of Earnest Money and 1.5% upon Registration of Sale Deed. This structure, while popular, introduces significant risk.
If the deal collapses after the Earnest Money is paid but before Registration, is the broker entitled to keep the 0.5%? Under the Indian Contract Act, if the broker has performed their duty (finding a willing buyer), they may claim the fee even if the sale falls through due to the seller’s fault. However, if the buyer defaults, the situation becomes complex.
The “Earnest Money” Trap
Avoid paying commission on Earnest Money unless there is a “Clawback Clause.” If the buyer backs out and forfeits the earnest money, the broker typically keeps their share. But if the seller has to refund the earnest money due to a title defect, the broker’s commission should also be refundable.
Visualizing Commission Risk & Trigger Points
The chart below illustrates the accumulated risk for the Seller based on when commission is paid. Paying early (at Earnest Money) increases “Unrecoverable Cost” risk if the deal fails.
5. Termination & Expense Reimbursement
Your RTF template contains a clause: “If the owners cancel the broker’s authority within the period of 10 days, the broker shall be entitled to get reimbursement of the expenses (not exceeding Rs….).”
This acts as a Liquidated Damages clause. However, to be enforceable under Section 74 of the Indian Contract Act, it must represent a genuine pre-estimate of loss.
Drafting the “Receipts Rule”
Do not treat the reimbursement cap as a flat fee payable upon cancellation. It is a maximum limit for actual expenses.
6. Reality Check: The 10-Day Mandate
The RTF template specifies a “10-day” authority period. In a real-world commercial context, selling a shop with inventory in 10 days is rare unless a buyer is already lined up.
The Risk: A 10-day deadline pressures the broker to:
- Submit unverified offers just to “lock in” the commission claim before expiry.
- Rush the “stock-taking” process, leading to valuation errors.
- Pressure the seller to accept a lower price to close quickly.
Recommendation: Consider a 30-day “Exclusive Period” followed by a 60-day “Open Listing” period. This gives the broker time to market the asset properly without panic-selling.
7. Confidentiality: The “Silent Sale”
Unlike residential homes, putting a “For Sale” sign on a running shop can destroy its value. Employees may quit, and creditors may panic.
Non-Disclosure Clause
“The Broker acknowledges that the sale of the Shop is confidential. The Broker shall not advertise the name of the Shop, its exact location, or the reason for sale in any public media. Marketing materials shall use generic descriptions (e.g., ‘Established Stationery Shop in [Locality]’). The identity of the Shop shall only be disclosed to prospective buyers who have signed a Non-Disclosure Agreement (NDA).”
8. “As Is, Where Is” & Furniture
The agreement includes “furniture” as part of the goods. Used furniture invites disputes about scratches, wear, and tear.
You must protect the seller with a robust “As Is, Where Is” clause. This legal doctrine shifts the burden of quality inspection to the buyer (Caveat Emptor).
9. Valuation Mechanics for Unsold Stock
Valuing a shop is straightforward. Valuing “unsold stock” is volatile. Inventory depreciates, expires, or becomes obsolete. If the agreement pays the broker a percentage of the “Total Sale Price,” the broker has an incentive to inflate stock value; potentially killing the deal.
The agreement must define the valuation date. Stock count varies daily. A “Joint Physical Verification” clause is necessary. This requires the broker and seller to audit stock 48 to 72 hours before closing.
The Tax Impact: Slump Sale vs. Itemized Sale
How you bundle the assets affects the tax rate. A “Slump Sale” (Lump Sum) attracts Capital Gains tax. An “Itemized Sale” treats stock profit as Business Income.
Figure 1: Comparative Tax Impact on Sale Structure (Illustrative Rates)
10. The “Second Schedule”: Inventory Management
Most brokerage agreements have a “First Schedule” for the property. For shop sales, the “Second Schedule” (the Goods) is where disputes happen. You cannot simply list “All Stock.” The agreement must categorize stock into:
-
1.
Salable Stock: Goods in prime condition, valued at cost or market.
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2.
Slow-Moving Stock: Goods older than 6 months, often valued at a discount (e.g., 50%).
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3.
Dead Stock: Damaged or expired goods. These must be excluded from the broker’s valuation mandate.
Handling “Rolling Stock”
If the shop continues to operate while on the market, the inventory levels change daily. The agreement must state that the “Second Schedule” is indicative and subject to final reconciliation.
11. The “Effective Cause” Doctrine
A common dispute arises when a Broker introduces a buyer, the deal stalls, and then the buyer returns months later to deal directly with the Owner. Is commission due?
Indian courts follow the English principle of causa causans (the immediate cause). The Broker must prove they were the “Effective Cause” of the sale, not just a casual introducer.
To protect the Broker (and clarify liability for the Owner), the agreement should include a “Tail Period” clause.
The Tail Period (Safety Net)
“If, within [6] months of the termination of this Agreement, the Property is sold to any person introduced by the Broker during the term of the Agreement, the Broker shall be entitled to full commission.”
12. Closing Protocol: The Handover
The final act of the broker is facilitating the handover. This is not just handing over keys.
- Stock Audit Sign-off: Both buyer and seller sign the final stock list.
- Key Handover Memo: A formal document acknowledging receipt of all keys (shutters, safes, storerooms).
- GST Invoice: The broker must issue a valid GST invoice for the commission to allow the Principal to book it as an expense.
13. Dispute Resolution
Commercial disputes in civil courts can drag for decades. An Arbitration clause is standard for business transfers.
“Any dispute arising out of this Agreement shall be referred to a sole arbitrator appointed by mutual consent in accordance with the Arbitration and Conciliation Act, 1996. The seat of arbitration shall be [City], and the language shall be English.”
14. West Bengal Specifics: Stamp Duty & Registration
For transactions in West Bengal; specific amendments apply. The West Bengal Real Estate Regulatory Authority (WBRERA) requires agents dealing in project resales to be registered.
Furthermore; the stamp duty on the brokerage agreement itself is nominal under Article 5 of the Schedule IA. However; if the agreement mistakenly grants a Power of Attorney to the broker to sell; it attracts the same duty as a Conveyance (approx 6-7%). This is a costly drafting error. Ensure the agreement remains a service contract; not a power of attorney.
15. Interactive Clause Builder
Select the characteristics of your transaction to see which clauses are mandatory for your agreement.
Transaction Filters
Pre-Signing Readiness Checklist
Ensure these items are ready before the broker signs the agreement.
Document Health Check
Before printing your agreement, verify these three critical failure points often missed in standard drafts.
Does clause 6 (Consideration) explicitly say “plus GST as applicable”? If not, the 18% tax is deemed included in your fee.
Does the Second Schedule exclude expired goods? Without this, you may be legally forced to buy garbage inventory.
Does the agreement explicitly say the broker CANNOT sign the Sale Deed? Crucial for Section 53A TPA protection.
16. Template Clauses
Commission Trigger (The “Tail” Period)
Valuation of Stock
Indemnity
17. Template: Joint Physical Verification Form
Use this form 48-72 hours before the final closing date to audit the shop assets and stock. This document should be attached to the final Sale Deed.
Joint Physical Verification Report
(Inventory & Stock-in-Trade)
Part A: The Premises (Shop)
| Item | Status / Reading | Verified? |
|---|---|---|
| Shop Keys (Main Shutter) | Set of ______ keys | [ ] Yes |
| Electricity Meter Reading | Reading: ____________ KWH | [ ] Yes |
| Maintenance Dues | Cleared up to: ____________ | [ ] Yes |
Part B: The Stock-in-Trade
| Category | Definition | Agreed Value (Rs) |
|---|---|---|
| Category A | Salable Stock (Good condition, < 6 months old) | __________________ |
| Category B | Slow-Moving / Display (Discounted @ ___%) | __________________ |
| Category C | Dead / Expired / Damaged (Excluded) | NIL |
| TOTAL STOCK VALUATION | __________________ | |
Part C: Furniture & Fixtures
The Buyer acknowledges that all furniture and fixtures are accepted on an “AS IS, WHERE IS” basis. No warranty is provided for wear and tear.
(Handing over)
(Taking over)
(Witness to Handover)
Final Considerations
Drafting this agreement requires precision. You are effectively writing two contracts in one: a real estate listing and a commercial consignment. The agreement must respect the distinct transfer mechanisms of the TPA and SGA while protecting the commercial interests of the principal.
