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- Vanshika Agrawal
- 2024-04-25
Terrain of Legal Due Diligence in Indian Real Estate Transactions
Introduction:
In the realm of real estate transactions, the adage "knowledge is power”. Legal due diligence, a meticulous investigation of real estate property records and pertinent aspects influencing its sale, purchase, lease, or mortgage, has become a crucial compass for both buyers and sellers navigating the complex landscape of the Indian real estate market.
The process of legal due diligence is essentially a pre-emptive strike against potential risks associated with a real estate transaction. It involves a comprehensive examination of factors ranging from ownership titles and the legality of development to encumbrances and permitted uses. This proactive approach aims not only to illuminate the risks involved but also to chart a course that aligns with the specific requirements of the parties involved, ultimately minimizing potential pitfalls.
In the current scenario, legal due diligence has assumed a central role, especially in transactions involving the sale, purchase, or mortgaging of immovable property to financing institutions. However, in India, this process is far from a mere formality; it is a labyrinthine journey marked by the involvement of various regulatory authorities, state-specific laws, and the weight of judicial precedents. Unraveling the complexities inherent in property acquisition and land due diligence becomes paramount, considering the time-consuming and intricate nature of these procedures.
This article delves into the critical aspects of legal due diligence in the Indian real estate landscape, shedding light on issues such as ownership titles, the legality of development and construction, permitted uses, easements, and encumbrances. These facets, if left unexamined, possess the potential to significantly impact the essential attributes of a real estate property and its suitability to a transaction.
Checkpoints
The process of due diligence regarding the property is done as to safeguard the interest of the purchaser from any malicious intent and fraud. The process of due diligence can be done through various checkpoints as discussed below:
1. Ownership Acquisition/Title search: The acquisition of ownership rights for a real estate property can be traced through the following means:
If ownership is acquired through a sale or purchase, the recipient must authenticate the legitimacy of the transfer by scrutinizing the registered sale deeds and title documents of previous owners. As a title to the property in case of sale of the property can only be effected by a registered sale deed and by no other means which was highlighted by the SC in the case of Suraj Lamp & Industries (P) Ltd. v. State of Haryana (Suraj Lamp I), a two-judge Bench of the Supreme Court declared “power of attorney” sales to be an invalid mode of property transfer.1 A three-judge Bench issued a clarificatory judgment substantiating this point in 2011 in Suraj Lamp & Industries (P) Ltd. v. State of Haryana (Suraj Lamp II).2 The Court conclusively stated that the parties could not effectuate a valid sale by executing a power of attorney, nor by entering into a sale agreement (SA) which was followed by a power of attorney (GPA).
If ownership is obtained through a gift, a thorough examination of the registered gift deed and any relevant document is imperative to validate the transfer of ownership rights for the said real estate property.
In cases where ownership is derived through a will or inheritance, the appointed executors are responsible for scrutinizing the will document. This scrutiny ensures that the conditions outlined in the will do not contravene any statutory laws and confirms the legality of the will through an order from a competent court as well as ensures that the will deed is an uncontested one and not a disputed one.
For the above purpose you [the proposed buyer] can engage a property lawyer via an agreement to act as your representative in doing the title search and submit a “TITLE SEARCH REPORT [TSR]” including:
(i) Full description of the property.
(ii) Full description of the title holder including his name, address, and proofs related to these like Aadhar card.
(iii) Any municipal or other taxes paid/pending including their receipt.
(iv) Chronological description of all the titles going back to at least 30 years including obtaining a declaration of acquisition from previous owners.
(v) During this check, whether all of the title deeds were available or not? Whether the original copies were available or photocopies or certified copies?
(vi) Whether the title chain was intact or was it broken somewhere? If yes then what was the reason? If not having the original title deed is the reason then how was the title deed owner verified? Here the lawyer's opinion will be stated.
(vii) The date and details of when the lawyer visited the sub registrar's office to carry out this title search and also the receipt which he has got with respect to this.
(viii) Final certificate from the lawyer regarding whether the property is marketable or not? Marketable means whether the buyer has the right to sell or not and after buying the property whether you will have the absolute right to sell it or not.
2. Power of Attorney [POA]
POA is a legal document used to give authority to another person [Authorised Agent] by the property owner on his/her behalf. Authorizing the agent by either giving a Special Power of Attorney (SPA) or a General Power of Attorney (GPA) to transfer one’s rights over one’s property. A SPA will give the agent some specific power in relation to a certain property mentioned in it. But a GPA will a broad spectrum of power in relation to a certain property.
But in the case of a GPA the proposed purchaser needs to be extra careful to make sure that not only the person who is executing the POA has the right to make the POA regarding the said property but also the person acting as the authorized agent has right to sell the property on owner’s behalf, right to sign the sale deed on owner’s behalf, and right to do all necessary act to ensure legitimate title transfer from owner of the property to the purchaser.
3. Encumbrance Certificate [EC]
Encumbrance means charges in the ownership or liabilities created on a property that is held against any loan as security. An EC consists of all the registered transactions done on the property during the period for which the EC is sought. Simply put, it is a certificate sought for a particular period evidencing the property purchase/sale, the presence of any transaction or mortgage. A person applying for an EC should fill in Form 22, affix a non-judicial stamp, and submit it to the jurisdictional sub-registrar’s office [JSR Office]. Complete residential address, property survey number, property location, the sought period, property description, its measurements, and boundaries should be mentioned in the Form. A nominal fee amount will be charged for the EC. The EC provided by the JSR will verify whether there are any pending dues /liabilities on the property or not. This is to check the property so you don’t buy a property that has government or other dues pending on it as it could lead to seizure or foreclosure of the property.
4. Land Survey and Physical Visit
A land survey can be conducted to ascertain exactly what part of the land you are paying for as to avoid any confusion post-sale and final payment in the future You should appoint a land surveyor to physically visit the site and measure the exact position of the property. An official surveyor can be requested from the local tehsildars.
The surveyor will measure the exact plot of land and verify whether the dimensions match the original sale and title deeds or not. The property description in each transfer document needs to be checked to ensure that the same exact property has been transferred each time. Any discrepancies in this can cause disputes on the title in relation to the portion and dimension of the land as well as your right to fully enjoy that property as its legal owner. The Floor Space Index [FSI] also known as the Floor area ratio should also be checked.
The FSI is the ratio of a building's total floor area to the size of the piece of land upon which it is required to be built. This is defined by the local town or state's planning department and hence must be checked through the lawyer as to avoid any legal disputes in the future. If you are buying land from a developer or in a place that is not yet fully developed with roads, be sure to check the local development plan to understand exactly where the roads are and how much is their minimum width will be as to know your rights.
5. Change of Land Use And Conversion Certificate
With a vast amount of land in India being agricultural in nature i.e. 60% of India’s Land, a Conversion Certificate is mandatory to be obtained from the legal body for the property. A Conversion Certificate is issued to change the use of the land from agricultural to non-agricultural purposes by the competent revenue authority. So, if you are planning to use the land for any non-agricultural purpose such as building a house then ask the seller to obtain a Change Of Land Use [CLU] approval as well as a Non-Agricultural Certificate. Further, the competent revenue authority requests the Department of Town and Country Planning to issue an NOC for the conversion of land for residential purposes. This will allow you to protect your property from any legal complication regarding of non-agricultural use of agricultural land.
6. Prevention of Transfer of Certain Lands Act [PTCL] Endorsement
You can ask your builder and seller to get a Prevention of Transfer of Certain Lands Act (PTCL) endorsement. It is a document to ascertain that the property that is being purchased is not on land granted to person/persons belonging to the SC/ST communities. A sale made to a non-SC/ST individual from an individual of the prescribed category is not valid for PTCL Lands.
7. Mutation Certificate
Property mutation is the process of transferring the "Title" to the new owner of the property. This also implies that the new owner will be responsible for paying the relevant property taxes going forward. It is also Referred to as "7/12 Dakhil Kharij", property mutation involves the transfer of title ownership from one individual to another, typically occurring when an asset is sold or transferred. Those who purchase land or inherit property through a will or gift deed must carry out the mutation of property.
1. Property mutation takes place at the municipal office of the respective area. 2. Applying for the mutation process can also be done online.
3. The fee for property mutation varies from state to state.
4. Property mutation is distinct from property registration and occurs subsequent to property registration.
5. It typically takes around 30 days from the submission of all documents to obtain a new mutation certificate.
While the Government of India mandates property mutation, understanding its benefits is crucial. Updating land mutation records provides the following advantages:
● Proof of Ownership: As the mutation of property alters the title entry in the municipal corporation's revenue records, it serves as conclusive proof of ownership.
● Government Compensation: The inclusion of mutation in government-maintained land records acts as a legal document for obtaining government compensation. Failure to complete property mutation may render the property owner ineligible for such compensation.
● Access to Utilities: Residential properties can only receive water and electricity services after the completion of the mutation process.
● Avoidance of Property Tax Penalties: Property owners can only pay property tax after the mutation is complete. Timely payment of property tax is essential to prevent severe repercussions.
8. Occupancy Certificate
In the effort to perform property due diligence, it is advised by every lawyer to vet the occupancy certificate of a constructed property ex. Flat. When the builder applies for the Certificate of Occupancy, authorities conduct an inspection to ensure that the construction complies with all specified norms. This certificate is acquired upon the completion of construction and holds significance when purchasing a property from a builder or a seller as before the builder allows possession and transfer of Khata. Essentially, it confirms that the project is ready for occupancy. It is crucial for potential buyers to request the occupancy certificate from the builder or seller. Without this certificate, the property is at risk of being demolished without prior notice, as it is considered to have been constructed in violation of regulations and plans. If an individual proceeds to purchase a property without the occupancy certificate, resale becomes impossible. Moreover, a residential property lacking this certificate may face disconnection of civic amenities such as electricity and water supply at any time.
Therefore, it is advisable to refrain from purchasing a house without an occupancy certificate. This certificate serves as the government's final approval that the house is constructed legally and is deemed safe for occupancy.
9. Allotment Letter
A property allotment letter is issued by a real estate developer, builder, or housing society to an individual who has been designated a specific property or flat. This document serves as evidence of ownership and outlines the terms and conditions of the allocation.
The property allocation letter includes crucial details such as the buyer's name, the property's location and size, the agreed-upon price, buyer preferences, and more. It also provides information about any associated amenities or facilities, such as parking spaces or common areas as these are crucial to avoid any future conflict of rights. Before the final signing, the buyer can review the allocation letter and other important property documents for any discrepancies and notify the issuer.
Once both parties sign the property allocation letter, it becomes a legally binding document. The buyer can then proceed with the necessary paperwork and payments to complete the property acquisition process. This letter holds legal validity and establishes rightful ownership, ensuring that the property has been allocated to the buyer according to the agreed terms and conditions.
The property allocation letter is the sole document of ownership proof that a buyer can obtain for incomplete properties or partial transactions. It confirms crucial property details such as the address, plot number, size, price, payment terms, and any additional charges. Possessing this letter safeguards the buyer from fraudulent activities, preventing the property from being sold to multiple parties, and thereby avoiding disputes or legal complications in the future.
Financial institutions require a property allocation letter as proof of ownership to process home loan applications, making it essential for securing loans for property purchase or construction. If the property owner decides to sell or transfer the property, the allocation letter acts as a crucial
document for potential buyers or new tenants, providing assurance of the property's authenticity and legal status.
While the final sale agreement can vouch for tax redemptions, the property allocation letter also serves as proof of investment. This ensures that taxpayers can claim their tax exemption without waiting for the builder's sale agreement paperwork. Hence as a part of due diligence done by a lawyer, it is crucial to vet an allotment letter to satisfy oneself of the title of the seller.
10. Public Notice
As a part of property due diligence, a lawyer can ask the purchaser to post a public notice in the local newspaper of the proposed sale before the execution of the sale deed and the final payment with a full description of the intended property as to invite any objection from the public regarding the sale of the property within a set amount of time.
11. Current sale deed
A sale deed is the document through which the transfer of ownership of the land takes effect. A sale deed should always be registered in the office of the sub-registrar. This should be done within 4 months from the date when the sale happened, failing which will result in a penalty and the sale deed being declared invalid. Since a sale deed is essentially a contract it is governed by the Indian Contract Act. Hence a person can only enter when he fulfills certain criteria. It is always advisable to get a declaration of such majority, soundness of mind, and as not been disqualified from entering a contract by any law.
Conclusion
The concept and process of performing due diligence regarding any property before purchasing it emerges from the doctrine of Caveat Emptor [Let the buyer be aware]. Due diligence is done with the view that if in the future property's actual legal owner disputes the transaction done between the seller and the buyer regarding the property. The buyer’s right, in the property as a person who entered the transaction in good faith after doing all necessary due diligence,
remains intact. Hence the process of going through all the checkpoints to do a thorough due diligence is a must requirement before entering a property-related transaction.
Keywords: legal due diligence, real estate transactions, real estate, buyers and sellers, checkpoints, property due diligence, Title Search, Power of Attorney, Encumbrance Certificate, Land Survey and Physical Visit, Mutation Certificate, Occupancy Certificate, Allotment Letter, Public Notice.
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