The terms “due-diligence” or “title-search” appear to have become synonymous with real estate transactions across India. Globally, conducting a thorough due diligence exercise in transactions involving immovable properties (sale/leasing/licensing) was and continues to be the established norm, while in India, merely checking the previous title of the property was considered to be more than sufficient to proceed with a real estate transaction. In most cases involving present day disputes pertaining to real estate transactions, we find that the issues leading to the dispute could have been cured or avoided via a thorough due diligence of the properties involved thereby safeguarding the time and money of the parties involved in such dispute (not to mention the stress and anxiety caused by such disputes in the first place!).
In recent times Indians have become far more particular about the history and credentials of the immovable property that they are looking to invest in. This increased awareness of the possible risks by prospective investors and an unprecedented increase in the value/volume of real estate transactions has definitely highlighted the need for conducting a professional due diligence while investing into a property. This ensures that possible risks involved in transactions are identified and mitigated to the greatest extent.
Conducting due diligence exercise on an immovable property prior to the completion of a proposed transaction aims to achieve the following:
i. Helps collect all the relevant information in relation to the property
ii. Verifying the devolution of title (i.e. historic chain of title) of the property
iii. Identifying any charges/attachments/disputes/litigation/proceedings
iv. Assessing the risks involved in a proposed transaction based on the risk appetite of the parties involved
v. Helps identify and cure possible issues/defects that may affect such immovable property
vi. Helps to check the nature of land use and construction area
vii. Establishes a tentative timeline for the completion of the proposed transaction
viii. Provides transparency in the proposed transaction
As a real estate lawyer, I have come across several instances where disputes could have been circumvented or avoided with the help of a due diligence exercise as a condition precedent to the transaction. For instance, I was recently advising on the purchase of a high-value leasehold property where the purchaser wanted to hurry the transaction without carrying out any due diligence. After the execution and registration of the transfer deed, we advised the client that the property should be converted from leasehold to freehold status which would ensure a better title and market value to the client. When the new owner applied for conversion of the property from leasehold to freehold status, the concerned authorities informed him that there was a steep penalty due on the property as the previous owner had leased a portion of his residential house for commercial use which was found to be a violation of the building bye-laws. The amount of penalty along with the interest accrued had amounted to approximately thirty percent of the gross value of the property itself. The previous owner was nowhere to be found and the conversion procedure has not been completed till today. This is just one of the several instances which we come across on a daily basis which could have been avoided with the help of due diligence.
The real estate climate is constantly changing in India. Traditionally Indian builders have been acting in a mafia-like manner leaving purchasers of homes running from pillar to post to take possession of their homes. With the advent of recent revolutionary legislation’s such as The Real Estate (Regulation and Development) Act, 2016, the government aims to bring about transparency and restore confidence of investors in the real estate market. These new legislation’s, regulations etc. also provide a wide array of compliance’s to be verified while undertaking the due diligence process.
What are the primary heads which need to be examined while conducting due diligence of an immovable property? *
i) Devolution of Title – The historical chain of title of the property in question needs to be checked in the revenue records, the records of the local patwari/tehsildar/registering authority. The devolution of title would vary widely based on the nature of the property (ie. Leasehold, Freehold, Allotment by Government Department etc.). It is typically recommended that the previous thirty-year chain of title be verified with respect to an immovable property before investing into the same.
ii) Capacity of the Seller/Transferor – It is important to ascertain the seller/transferor’s legal right to transfer their interest in the property and to check whether the person is fully competent to enter into a legal agreement to effectuate such transfer. In certain cases ownership of land is joint and undivided and opportunistic persons try to sell or lease others joints owners portion of the land.
iii) Compliance with various bye-laws, local laws, land use, applicable regulations etc. – Land has traditionally been a state subject in India and compliance with various local bye-laws, local laws, land use, regulations etc. is an important part of the due diligence exercise. This also helps verify that the property has been constructed in compliance with the relevant laws (every construction in any part of India has certain compliance’s to be adhered to) and has not been used for any illegal/ restricted purposes (conversions of change in land use, receipts for conversion/regularization charges etc.).
iv) Dues, charges, levy, fees, taxes etc. – There are several payments made in respect of immovable property to comply with various laws such as property tax, development fees, lease rent, society/resident welfare charges etc. Ordinarily these dues have significant implications on the transfer of immovable property.
v) Encumbrances – Mortgaging or otherwise creating an encumbrance over an immovable property has significant implications on the title and transferability of the property. In several cases, persons purchase property which has a previous unknown encumbrance created on it by a previous owner resulting in disputes, deficiency in title etc.
vi) Disputes, litigation etc. – One of the most challenging parts of a due diligence exercise in respect of immovable property is checking for possible disputes, conducting court searches etc. While it is almost impossible to get a conclusive/exhaustive view as to whether such issues exists with regards to an immovable property, these searches often result in key findings thereby mitigating possible risk for the investor.
vii) Checking if land is part of any land acquisition process: It is crucial to determine if the immovable property is under the process of acquisition by any government authority in which case the property ceases to belong to its original owner and becomes the property of the acquiring authority.
viii) Other compliances: Every land parcel has its own specific criterion. In certain cases compliances such as security clearances, environment compliances, urban development architects compliance etc. need to be verified in detail to ensure that the immovable property can be use without any form of hindrance by the transferee.
The aforementioned checks lead to substantial findings during a due-diligence exercise which ensures mitigation of risk and enables transparency in the transaction.
Author: Advocate Yudhist Narain Singh is a leading real-estate lawyer in the NCR region.
_______________________________________________________________________________________________________________*- The aforementioned list is merely indicative and not exhaustive. It will need to be amended based on the specific nature of the transaction.