Guide to Legal Due Diligence in Indian Real Estate Transactions
Introduction:
A core and well-known industry in the world, the real estate sector encompasses four broad sub-sectors comprising of housing, retail, hospitality, and commercial. Growth in this sector reflects an increase in corporate activities as well as an upsurge in office spaces and housing in urban and semi-urban settings. This is the second largest employment-generating sector after agriculture in India, with growth projected to be huge from Rs 12,000 crores (US$ 1.72 billion) in 2019 to Rs 65,000 crores (US$ 9.30 billion) by 2040[1].
This includes legal complexities of property transactions in India that includes titles, deeds, zoning laws, estate planning, and property taxes. Both commercial as well as residential properties are included here in the process of the real estate transaction. One of the most important aspects of the entire due diligence process would be checking on the legality of a particular property, determining the amount of financial liability associated with it, and analysis of the market situation prevailing at this time. If these steps are not taken, there might be legal and financial implications; thus, sellers and buyers must execute their due diligence meticulously for any deal to ensure it is free of taints and of the law.
Table of Contents
Central Laws governing Real Estate in India:
The Indian real estate market operates under a complex legal framework governed by both central and state laws, ensuring fair transactions and safeguarding the rights of buyers and sellers. Key laws which regulate the real estate transactions are[2]:
The Indian Contract Act gives the terms upon which legal contracts are established stating that for a contract to be valid, it must have a lawful consideration, lawful object, and a predisposition of the parties’ minds to enter into a contract. Also, it affects different parties in the real estate business, such as individuals, companies, and trusts.
The Transfer of Property Act regulates the transfer of property through mechanisms such as sales, mortgages, leases, and gifts and stipulates general legal requirements for transactions concerning property and obliges the parties to set forth previous ownership or claims.
The Registration Act adequately addresses the issue of registration of legal documents with the intention of retaining title evidence and avoiding fraud. For such specific documents, in some jurisdictions, their enforceability is conditioned upon registration, otherwise excluding other situations from their formal registration, and in most cases, justifies that the importance of formal registration secures rights in property.
The Specific Relief Act: provides remedy through law for contracts, particularly the enforcement of contracts and matters of possession. It gives the right to take away one’s property possession to avail of recovery by means of the courts and gives avenues for specific performance of contracts.
The Urban Land (Ceiling and Regulation) Act, 1976, which was repealed in 1999, initially aimed to limit land holdings in urban areas to control excessive land ownership and facilitate development. The act was replaced to release land for urban growth. However, it is still in force in the states of Assam, Andhra Pradesh, Bihar, Maharashtra, Uttar Pradesh and other states[3].
The Land Acquisition Act, 1894, outlines the procedures for the government to acquire private land for public use, including compensation provisions.
Non-Resident Indians (NRIs) can buy residential and commercial properties in India, adhering to FEMA regulations, but cannot purchase agricultural land. Foreign nationals may acquire property under specific conditions and with RBI approval, typically for business purposes. Both NRIs and foreign nationals must comply with tax obligations under the Income Tax Act, 1961, and follow the Registration Act, 1908 for legal validation of transactions.
Additionally, state and local laws such as the Stamp Duty Act and Rent Control Act govern aspects like land revenue, tenancy, and property taxes, varying across states and municipalities. These regulations collectively shape the legal landscape of real estate in India.
Legal considerations for Real estate transactions in India:
When buying or selling real estate in India, legal due diligence is essential to safeguard against future disputes. Here’s a brief overview of the most important legal considerations[4]:
1. Confirm whether the title held by the vendor is clear and marketable: There should be no encumbrance or dispute in respect of the title. Mother Deed to be checked. It indicates the ownership history of the property. Any defects in the title of the seller are transferred to the buyer. A Sale Deed effectuates completion of transfer of ownership, and a check should be taken whether the statutory payments, property taxes, and utility charges have been made strictly.
2. Verification of Documents: The buyer has to check all the original papers of the property, including the Encumbrance Certificate. This is a document that validates that the property does not carry out any mortgage or legal claims against it. This scans all registered transactions in the Sub-Registrar’s Office that might affect the said property so that no undetected liabilities would arise. In case property documents are lost or not found, it must be scrutinized highly, as this might mean problems like an outstanding loan or mortgage.
3. Power of Attorney: If the sale is through a PoA, then it is very essential that the PoA is authorized to sell and that such sale transaction has been legally executed. If the PoA is well connected with a sale or development agreement, then stamp and registration would have to be done accordingly.
4. NOCs and Certificates: The buyer should ensure that all No Objection Certificates (NOCs) for the relevant authorities are obtained, which include urban land ceiling, water, and electricity boards. In societies, a No Due Certificate from society confirms that all dues and charges have been paid. Additionally, an occupation certificate is essential to ensure that a building is erected under legal and municipal regulations.
5. Property Inspection: Physical observation of the property, and questions with the neighbours or local authorities can come in handy in revealing any repressed disputes, restrictions, or issues related to simultaneous ownership. Buyers should also seek to know whether the property has a legitimate Building Approval Plan, to ensure that the building is done under the local’s building code.
6. Tax and Utility Bills: The buyer needs to ensure that tax in relation to the property, including water as well as electricity bill payment are all up-to-date. Tax creates a first charge against the property, and hence, it would result in a long-process legal battle later on. A valid receipt from the seller needs to be demanded, and the buyer needs to ensure that these tax and utility bills are paid.
7. Minor-Owned Property: If the owner happens to be a minor, then the sale would call for judicial approval. In any case, the sale could be so nullified if the minor attains the age of majority after the sale. A Deed of Ratification would be required in such case if the minor attained majority.
8. Public Notice: It shall publish a notice in the newspapers in regard to the transaction of the property. It may avoid any third-party claims and thereby provide an added strength to the legal stand of the buyer in case there occurs any future dispute.
9. Stamp Duty and Registration: The purchaser should see that the stamp duty is paid properly, and the registration of the sale deed is done. The insufficient stamp duty paid may attract a charge on the property. To affect the same, such person would require paying the shortfall amount, regardless of whether it applies to the earlier transactions or not.
Both buyers and sellers need to discuss all the legal aspects so that a real estate deal goes in right direction. A buyer must inspect the property, payment verification, and title or other documents of the seller. A seller has to deliver clear title, necessary documents to be delivered with, and the settlement of encumbrances. Recruitment of an appropriate lawyer is also a prime necessity for both parties for protection.
Conclusion:
Selling or buying property in India calls for careful legal due diligence both by the buyer and seller. Generally, a buyer is obligated to inspect the property, verify its title, check if taxes and utility bills are outstanding, and then ascertain whether all documents and approvals are in order. The seller, on the other hand, shall deliver clear and marketable title, clear encumbrances, and disclose essential property details. In the wake of property rights, stamp duty charges and getting a host of other documents registered is one such significant legal requirement. Both parties should seek to see a competent lawyer at each step of the process to ensure that they safely pass through the complex legal backdrop while ensuring the smooth transaction. All these necessary measures undertaken by buyers and sellers of India would protect the respective interests of both buyers and sellers and facilitate them to successfully pursue property dealings.
[1] India Brand Equity Foundation (IBEF). (n.d.) Real Estate Industry in India. Available at: https://www.ibef.org/industry/real-estate-india (Accessed: 12 September 2024).
[2] Confederation of Real Estate Developers’ Associations of India (CREDAI). (n.d.) Central Laws Governing Real Estate. Available at: https://www.credaiup.org/central_law.html (Accessed: 12 September 2024).
[3] Press Information Bureau (PIB). (2002) The Urban Land (Ceiling and Regulation) Act. Available at: https://archive.pib.gov.in/release02/lyr2002/raug2002/02082002/r020820022.html#:~:text=The%20Urban%20Land%20(Ceiling%20and,effect%20from%20January%2011%2C%201999 (Accessed: 12 September 2024).
[4] Government of Telangana. (n.d.) Property purchase precautions. Available at: https://registration.telangana.gov.in/propertyPurchasePrecautions.htm (Accessed: 13 September 2024).
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