Auction Property and the Old Owner's Dues: What Passes to the Buyer

A bank auction can feel like a discounted purchase of a flat. In truth you buy the borrower's property along with part of the borrower's debt. The bank settles its own loan from your money. It does not settle with the municipality, the power utility or the housing society, and their bills can reach you weeks after you have paid the full auction price.

Summary (2026)

Buying at a bank or SARFAESI auction does not hand you a blank slate. Against you, the sale wipes out the borrower's loan and the bank's mortgage. Nor can anyone make you answer for the borrower's personal unsecured debts. What stays is the set of statutory dues tied to the property: municipal property tax, water charges, electricity arrears (where the supply code or the sale notice attaches them) and society maintenance. How much lands on you turns on the type of due and on what the sale notice discloses. The safe course is to study the encumbrance clause in the notice and run the dues searches first, before you part with the earnest money deposit (EMD).

Auction guides usually miss one point. The loan is gone, yet charges on the land remain. Some guides promise a spotless title; others warn that you take on everything. Neither is right. What you take on depends on the type of due, and every part of it can be checked before you bid.

Does buying at a bank auction give you clean title?

Look at any sale notice and you will see the line "as is where is, as is what is, whatever there is and without recourse." Readers tend to dismiss it as legal padding. In fact it is the notice's most important sentence. It is not loose banking jargon either; it is taken from the sale notice format laid down in the Security Interest (Enforcement) Rules, 2002.

Those Rules sit under the SARFAESI Act, 2002 (its full name is the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act). What the bank sells is only the borrower's right, title and interest. It offers no warranty on the asset's physical state or legal encumbrances. Rule 9(10) obliges the sale certificate to record whether the buyer receives the asset free of encumbrances that the secured creditor knows about. Rule 8(6)(f) requires the authorised officer to disclose any material fact that a bidder needs. Courts have rebuked banks that hid a known encumbrance behind "as is where is", so the bank must share what it knows. It gives no assurance that nothing unknown exists, and it will not settle third-party dues for you. The rule that governs is caveat emptor: buyer beware.

In plain words: you receive the property with whatever is attached to it on auction day, apart from the bank's own secured debt, which is what the auction is designed to strip away. You must find every other item yourself, and later pay for it.

What the sale removes: the loan and the bank's mortgage

First the good news, which is genuine. SARFAESI allows a bank to enforce its security without a court. After the sale is confirmed and you receive the certificate under Rule 9(6), your purchase money discharges the mortgage or charge behind the loan. The borrower loses the ability to take the property back from that bank. The loan does not pass to you, and you do not become the borrower.

Other debts of the borrower also stay where they were, so long as they are personal and unsecured. Take a credit card default, a personal loan, or a business guarantee that the earlier owner signed. None of these is a charge on the flat, so none travels to you. They stay with the individual, and that individual's other creditors have to chase him or her, not the building.

Many buyers stop their analysis here, and that is the error. There is another class of debt. It is not the bank's loan, and it is not a personal debt of the borrower. The law itself fixes it on the property as a statutory due.

What stays with the property: statutory dues follow the land, not the person

Auction buyers lose money on this class after the sale. A statutory due arises when a statute turns an amount into a charge on the property, or into a condition for using the property. Since it belongs to the asset and not to the previous owner personally, a change of owner does not remove it. You end up holding it.

People often misquote Section 26E of SARFAESI at this point. The section provides that a bank which has registered its security interest with the Central Registry (CERSAI) is repaid before other creditors, among them government revenues, taxes and rates owed to the Centre, a state or a local body. Section 26D makes CERSAI registration a pre-condition; a charge that is not registered cannot claim that rank. Now consider what the priority covers. It settles the order of payment out of the sale money, putting the bank in front of the tax department. It does not promise that you get the property free of every statutory charge. Who is paid first from the proceeds, and whether the asset itself still carries a charge, are separate questions. Section 26E deals with the first only.

Do not mix the two ideas. The bank being paid ahead of the government does not mean the government has been paid at all. A government charge that sits on the property lets the government go after the property, and that property is now yours.

Property tax and water charges owed to the municipality

Property tax arrears are the textbook case, with clear statutory backing. Several state municipal laws declare unpaid property tax a first charge on the property. The Delhi Municipal Corporation Act, 1957 does so in Section 123, and the Kolkata Municipal Corporation Act, 1980 in Section 232. A first charge goes wherever the property goes, so a new owner does not shed the arrears. The Calcutta High Court dealt with this on 14 October 2025 in Cotton Casuals India Pvt. Ltd. v. State of West Bengal. It said the KMC Act makes property tax a first charge, and a buyer at auction must pay it if he or she had adequate notice of the liability beforehand.

You usually face this at the mutation stage. The municipality refuses to record the khata or property tax entry in your name while old dues are open. Water charges typically follow the same path. Among the three dues that go with an auction property, property tax is on the strongest footing, since the municipal law itself creates the charge. Keep money aside for it. Ask the municipal corporation for a dues certificate before the bid, not once you have won.

Electricity arrears: why a clean meter is a myth

Electricity is the most contested of the dues, and rival guides tend to describe it least accurately. The rule is that liability is conditional and not automatic.

On 1 June 2020 the Supreme Court decided Telangana State Southern Power Distribution Company Ltd. v. Srigdhaa Beverages, where the purchaser had bought through a SARFAESI auction. The court allowed the utility to recover the earlier owner's electricity dues from that purchaser. Its reasons are worth noting. The e-auction notice had specifically named the electricity dues as a liability to be borne by the buyer, and under the Electricity Act those dues were statutory. The court distinguished earlier cases where the notice was silent on electricity, since those would have ended differently.

K.C. Ninan v. Kerala State Electricity Board was decided on 19 May 2023, by a bench led by the Chief Justice of India, and is reported as 2023 INSC 560 (Supreme Court). It sets the general approach. Arrears of a past owner do not move to a new owner or auction buyer on their own. They move in two situations only: (a) a statutory Electricity Supply Code or regulation under the Electricity Act, 2003, says the predecessor's arrears must be paid before a new connection is given, or (b) the sale conditions name the arrears specifically as the buyer's burden. Without either, the utility has no power to make you pay the old bill in exchange for a new connection.

Be exact here. It is wrong to say you automatically take over an electricity bill, and equally wrong to say an auction erases it. Many states' supply codes do carry the condition, so the bill commonly goes with the meter. Do not guess. Before you commit, ask the discom for a dues certificate for the exact service connection number, and read the electricity clause of the sale notice.

Society maintenance arrears and the 2026 Bombay High Court ruling

If the unit being auctioned is a flat in a cooperative housing society, maintenance arrears raise a separate live question, and a new ruling is directly relevant.

Justice Sandeep V. Marne of the Bombay High Court decided Monarch Orchid Cooperative Housing Ltd. v. State of Maharashtra on 14 July 2026. He held that an auction buyer cannot avoid maintenance dues that relate to the period before taking possession, and that proceedings under SARFAESI do not lessen the obligation to clear them. The court relied on the Maharashtra Cooperative Societies Act, 1960, under which unpaid society dues are a charge attached to the flat, and a member's interest cannot be transferred before the society is paid.

The result is direct. A society may legally decline to take you in as a member, and decline a no objection certificate, until the old owner's arrears are paid. Membership matters in practice. Without it you have no vote, a parking allotment may be hard to settle, and you may find it hard to resell. Before bidding, get the society's statement of dues in writing and, if possible, a sign that it will admit you once the dues are cleared.

What do you really take over? A short table

• The borrower's loan and the bank's mortgage · Passes to you?: No · Why: The sale pays off the secured debt, which ends it
• The borrower's personal unsecured debts · Passes to you?: No · Why: They are personal to the borrower
• Municipal property tax and water arrears · Passes to you?: Yes, usually · Why: Many municipal laws create an explicit first charge on the property, and mutation stalls
• Electricity arrears · Passes to you?: Conditional · Why: Pass to you only when a supply code or the sale notice says so (see Srigdhaa 2020; K.C. Ninan 2023)
• Society maintenance dues · Passes to you?: Yes · Why: Treated as a charge on the flat, and it stops membership (Monarch Orchid 2026)
• A prior mortgage or encumbrance the bank knew of · Passes to you?: Depends · Why: The bank must disclose what it knew; anything else you must find by searching

How to check: read the notice, then search before paying the EMD

A simple routine separates a bargain from a liability. You can find every item above before you pay a rupee, yet most of them are absent from the document that buyers trust most.

• Read the encumbrance clause of the sale notice and of the draft sale certificate. Under Rule 9(10), the bank has to say whether the sale is free of encumbrances it knows of. A missing or hedged line is a warning, not reassurance. Also see if the notice mentions electricity or other dues. That mention is what made the buyer liable in Srigdhaa.
• Obtain an Encumbrance Certificate (EC), keeping in mind its limits. Drawn from sub-registrar records, an EC lists registered instruments and nothing more. Property tax arrears, electricity dues and society maintenance will not appear, because none is a registered instrument under the Registration Act, 1908. An equitable mortgage created by depositing title deeds, and any pending court case, will also be absent. A clean EC is needed but is not sufficient. Our complete guide to reading an Encumbrance Certificate gives the detail.
• Do a public CERSAI search (about Rs. 10). It picks up the equitable mortgage that an EC does not. Our walkthrough on how to check if a property is under mortgage or lien handles both searches in one place.
• Collect dues certificates from the municipality, the discom and the society. Each should refer to the exact property, service connection number and flat number. These are the three bills attached to the asset.
• Clarify possession. Holding a sale certificate does not mean you get vacant possession. Before you assume you can move in, see our note on symbolic and physical possession at auctions.
• Establish which law governs the auction. SARFAESI sales, Debt Recovery Tribunal recovery certificate sales, state revenue recovery sales and insolvency liquidation sales all follow separate rules on dues and priority. Do not carry a SARFAESI answer over to a different type of auction.

This is important for title too, and not only for arrears. An auction passes on the borrower's title in the state it was in. Defects such as a broken chain, a lis pendens or a co-owner who never signed the deed stay where they are. Our 30 year title search report format guide describes a proper chain investigation. An "as is where is" sale leaves precisely that work with you.

Related auction guides

This article is about dues. If you want the bigger picture, our library also has pieces on hidden liabilities for auction buyers, all Supreme Court rules on auction titles, the SARFAESI process, the legal checks before a bid, and the e-auction process step by step. Our state wise property tax payment guide covers property tax in each state.

Check first, then bid

The auction notice does not show where the dues and title defects sit. LegiScore runs the full search for you: registration chain, EC for the right survey number, CERSAI charge search, court case search and the statutory dues position. You receive one report to act on before the EMD deadline. Order a title search and legal opinion report, and learn what you are taking over before you pay for it.