Legal risk associated with real estate transactions in India
In the words Jeff Greene, an American real estate entrepreneur, “in real estate, you make 10% of your money because you're a genius and 90% because you catch a great wave”. The quote implies that the real estate transactions are subject to market conditions however; there is more than meets the eye, as there could be many risk factors involved. The term real estate which can be broadly classified into four types - Residential real estate, which includes both new construction and re-sale homes; Commercial real estate; Industrial real estate that includes manufacturing buildings and property, as well as warehouses; and Land (vacant land, working farms and ranches)
In India, more specifically owning (either of the above stated) real estate holds great significance. Hence, it becomes imperative to ensure that the concerned real estate is fit for intended transfer from the owner to the purchaser. Further, under Indian legal scenario various statutes may apply to a real estate transaction including without limitation the Transfer of Property Act 1882, Specific Relief Act, 1963, Indian Contract Act, 1872, Consumer Protection Act 1986, Easements Act 1882, Evidence Act 1872 so on and so forth. Having said that before undertaking any real estate transaction, a thorough due diligence is the most important starting point as it is process of verifying crucial aspects attached to any real estate based on which related transaction may or may not proceed further.
Listed here are the checklists of possible risk factors that may erupt while dealing with real estate and could possibly act as deal-breaker:
Defect in title: As per section 7 of the Transfer of Property Act, “every person competent to contract and entitled to transferable property, or authorized to dispose of transferable property not his own, is competent to transfer such property either wholly or in part, and either absolutely or conditionally, in the circumstances, to the extent and in the manner, allowed and prescribed by any law for the time being in force.” The competency and entitlement stated above is nothing but the contractual ability to transfer real estate to the intended purchaser. Such competency and entitlement to transfer a real estate becomes defective when the seller/transferor doesn’t have a clear or good or marketable ownership vested in the concerned real estate. As per basic principles of contract law, one cannot transfer which one does not have; therefore, in absence of good title a seller/transferor has no legal basis to transfer real estate. Defect in title may arise on account of imperfect inheritance; improper title documents; related pending litigation(s); lien / charge in favour of third party (banks, financial institutions, etc), encroachments, adverse possession, etc. Therefore, it is necessary that the entire chain of title documents (in original) is looked into before confirming the deal.
Encumbrances: This relates to impediments that are attached to a real estate. There may be pre-existing encumbrances on a real estate that the buyer may be unaware of while purchasing the property. The encumbrances can be statutory outstanding (property tax, water/electricity charges, etc); liens; deed restrictions; dues payable to developer/builder; conversion charges; existing lease or leave & license arrangement; etc. For example, if any charge over property is created by company, CHG-1 form filed with Registrar of Companies shall be inspected and encumbrance certificate shall be procured accordingly. In case of equitable mortgage or mortgage by deposit of title deeds, the financial institutions require delivery (actual or constructive) of sale deed or conveyance deed. This is to verify the authenticity of the original title deeds and to safeguard financial institutions interest by assuring non-existence of such unregistered mortgage.
Sanctioned Plan: This means that the real estate (in case of flats / homes / commercial units) are built in conformity with municipal approvals/permitted layout. Non-availability and/or construction in breach of such sanctioned plan may lead to action by the concerned authority as in such case the real estate may be termed as unauthorized construction.
As is where is basis: It is to be ascertained that the real estate shown on papers is exactly the same in reality therefore on-site inspection is a must to be done while planning to invest in real estate. This exercise helps to verify measurements, location, surrounding, neighborhood, and actual condition of the real estate.
It’s all about the money: there could be number of costs attached to a real estate which are not apparent at the time of initial negotiations. A buyer may only be informed about the base price but there could be charges pertaining to internal development costs, external development costs, preferential location charges, parking/club/statutory charges, and applicable taxes, which escalate the total cost. The buyer ought to enquire and ascertain the final cost of the real estate;
Verify the developer/builder: The piece of land in question may be under litigation. Hence, it is recommended that the buyer does an extensive verification of the concerned developer/builder and verify its past or current projects or even post queries on the various online real estate forums.
Financial support: It so happens that a selected real estate may not be supported by bank(s) for their internal policies/guidelines. ie, the banks may not provide financial assistance or loan to support the real estate investment. Therefore, the buyer must get this cross checked with his/her banker;
Sale and purchase of real estate is also governed by respective state acts. Certain states have specific restrictions when it comes to real estate transactions depending upon the state policy, ie, different states have different restrictions which may be crucial to a real estate transaction. So, a buyer needs to be aware of the State Laws applicable to a real estate transaction and ensure that they are to his/her interests before investing.
Above noted points are a broad array of apparent risks that may crop up while investing in real estate. One needs to be extra cautious investing in real estate lest one’s precious savings go down the drain. After zeroing in on the desired property, one still has to go through aformidable maze of tedious legalities and paperwork to ensure proper registration of property in his name. When faced with risks as discussed above, it becomes obligatory on the part of the purchasers to exercise proper due diligence and be extremely alert and aware. Considering the amount of money that an individual spends on real estate, though extremely beneficial it is a risky investment undertaken by putting in one’s life savings. In that view, it is necessary to be fully aware of any pending encumbrances, legal issues, pre-existing claims, liens or any form of hindrances that may exist, which prevents buyer from exercising his rights and reaping the benefits of such real estate investment.
On a positive note, the Real Estate (Regulation and Development) Act, 2016 (RERA) has became effective from May 1, 2017 whereby each state and UT will have its own Regulatory Authority which will frame regulations and rules according to the Act. RERA has been established for regulation and promotion of the real estate sector and to ensure sale of properties, in an efficient and transparent manner. The objective is to protect the interest of consumers in the real estate sector and to establish a mechanism for speedy dispute redressal.
Manoj K Singh, Founding Partner, Singh & Associates
Harsimran Singh, Principal Associate, Singh & Associates