12/4/2014

LegalDueDiligenceInRealEstateTransactionsItsSignificanceAndMethodologyRealEstateandConstructionIndia

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Home>India>RealEstateandConstruction

India:LegalDueDiligenceInRealEstateTransactionsItsSignificanceAnd
Methodology
LastUpdated:14October2014
ArticlebyMNKLawOffices
MNKLawOffices

Thisarticleattemptstohighlightthesignificanceofundertakinglegalduediligenceexercisesinrealestatetransactionsandthe
methodologytobefollowedforundertakingsuchaduediligenceprocess.

Introduction:
RealestateisoneofthefastestgrowingsectorsinIndiaevidencedbyasharpincreaseinrealestatetransactionsinvolving
buying,selling,leasingandfinancingofproperties.Inadditiontotransactionsinurbanareas,wehavealsowitnessedlarge
scaleprocurementoflandfromindividualsinvillagesclosetotheurban,industrialandcommercialcentres.Similarly,therehas
alsobeenanincreaseinleasing(bothshortandlongterm)ofcommercialofficespace.
Theincreaseinrealestatetransactionvaluescombinedwiththegrowingparticipationoftheorganizedsectorinrealestate
hasresultedinheightenedawarenessoftherisksinvolvedand,consequently,theneedforensuringthattherisksare
identifiedandminimizedinsuchtransactions.'Legalduediligence/titlesearch'ofrealproperty(beitofvacanttractsoflandor
ofconstructedresidential/commercial/industrialproperties)isclearlythemodeforachievingtheseobjectives.
Aduediligenceexerciseisprobablythemostimportantaspectofatransactioninvolvingrealestateimmediatelyfollowinga
broadunderstandingofthecommercials.Thisprocesshasthepotentialofnotonlyimpactingthecommercialsbutalso
determiningthefeasibilityofthetransactionitself.Whilethecommercialsoftenpayhighimportancetoexpeditetheconclusion
ofatransaction,itiscriticalintheinterestsoftheplayerstoprovideadequatetimeandattentiontoadetailedduediligenceof
thepropertyinvolved.Itisimportanttorealizeissuessuchastitle,permitteduse,legalityofconstruction,encumbrancesand
easementswhichhavetheabilitytoimpacttheverynatureofthepropertyanditssuitabilitytothecommercialneedsofthe
transaction.

Needforconductingandscopeoflegalduediligenceofrealproperty:
Duediligenceisconductedmainlytoverifytheownershipoftitleoverthepropertyandanyencumbrancesovertheproperty,
soastoprotectoneagainstpreexistingclaimsovertheproperty.Suchclaimscouldeithereffecttheabilityofthetransferorto
transferthepropertyorcouldattachthemselvestothepropertyevenafteritistransferred.
Theprimaryobjectiveofaduediligenceisthereforetogatherinformation.Theextentandtypeofduediligencetobe
undertakenbythepurchaser'slawyerwilldependonthefollowing:
i. theriskprofileandbusinessobjectivesofthepurchaser/lessee
ii. thetypeofrealassetinvolved
iii. natureoftherealestatetransaction(i.e.,whetheritisapurchase,longterm/shorttermlease,mortgageorfinancingof
therealproperty)
iv. thetimeframeforcompletionofthetransactionand
v. whetherthepurchaserislookingatobtainingthirdpartyfinancingeitherpretransactionorposttransaction.
Incaseofaprospectivepurchase,aleaseofthepropertyorrealestatefinancing,atitlesearchisperformedprimarilyto
answerthreequestions:
i. Doestheowner/lessorhavesufficientauthority/interest/righttoenterintothetransactioninvolvingthepropertyin
question?
ii. Doanyliensexistonthepropertywhichneedstobedischargedbeforetheconsummationofthetransactioninquestion?
Thesecouldbeinthenatureofmortgages,charges,acquisitions,unpaidtaxes,litigation,easementsandother
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LegalDueDiligenceInRealEstateTransactionsItsSignificanceAndMethodologyRealEstateandConstructionIndia

assessments.
iii. Whatarethenatureofrestrictionsontheuseoftheproperty?
Apartfromundertakingtitlesearch/duediligencesforpurchaseorleaseofproperties,atitlesearch/duediligenceisalso
performedwhenanownerwishestomortgagethepropertywithanybank,financialinstitutionoralender.Suchbank/financial
institution/lendermayrequiretheownertosubmitaduediligencereportofthepropertyormayconductsuchdiligenceonits
own.

TypeofDueDiligence/TitleSearch:
Dependinguponthenatureofthetransaction,thepropertyinvolvedandtheobjectiveoftheparticipants,aduediligencecan
bedividedintotwobroadcategories:
i. Fullsearchand
ii. Limitedsearch.
FullSearch:Afullsearchisusuallydonewhilegivingatitlecertificateofthepropertyininstancesofsale/resale/longterm
leasetransactionsandfortransactionsthatinvolveobtainingoffinancingbymortgagingthepropertyinquestion.Inafull
search,thesearchregardingstatusofownershipofthepropertyisgenerallyconductedforaperiodprecedingthirty(30)years
(ormore)fromthedateonwhichthesellerinquestioncametoacquiretheproperty.
Italsoincludesadetailedsearchofallaspectsrelatingtothehistoryofthatpropertysuchasthestatusofencumbrancesover
theproperty,thestatusofdisputesrelatingtotheproperty,theapplicableregulationsandthestatusofcomplianceofsuch
applicableregulationsrelatingtothepropertyinquestion.
LimitedSearch:Alimitedsearchisgenerallyconductedintransactionswherethepropertyistakenonleaseforashortterm
(usuallyunder9years).Insuchinstances,theperiodforwhichtheprecedingownershipofthepropertyistracedisgenerally
restrictedtofifteen(15)years(orless)fromthedateonwhichthecurrentownerofthepropertycametoacquiretheproperty.
Unlikefullsearches,inalimitedsearch,thesearchrelatingtothehistoryofthepropertymaybelimitedtorestrictedaspects
suchasrecenttitlehistory,encumbrancesontheproperty,disputesrelatedtothepropertyetc.

Stepsinvolvedinconductingsuchduediligence/titlesearch:
Inordertoconductatitlesearch/titleverification,thefollowingaspectswouldrequiretobeexamined:
i. Legalcapacityofthepresentowneroftheproperty(whetherthepersonislegallycapableofenteringintoabinding
contractforsaleorleaseofthepropertyorformortgagingtheproperty)
ii. Natureofcurrentowner'srightovertheproperty,andwhethersuchrightistransferrable
iii. Sourceofrightortitleofthecurrentowner
iv. Legalityoftheconstruction
v. Encumbrancesoverthepropertyand
vi. Whetherthepropertyisapartofanyacquisitionprocess.
Weshallnowelaborateeachoftheaboveandhighlighttheneedtoexaminetheseaspects.

Step1:Legalcapacityoftheseller:
Itisnecessarytoensurewhetherthecurrentownerofthepropertyoranyofthepredecessortitleholdersofsuchowneris:
a. aminor(aperson,whoisbelow18yearsofage)or
b. apersonofunsoundmind.
Incaseofminor'sland:Ifthecurrentownerofthepropertyisaminor,thenthepropertycanneitherbepurchasednorbetaken
onleasewithoutpriorpermissionofcompetentauthorities.Whoorwhatshallbethe'competentauthority'willdependuponthe
personallawsapplicabletotheminor.Forexample,incaseofaminorwhoisaHindu,permissionisrequiredtobeobtained
fromthecivilcourtsunderapplicablesectionsoftheHinduMinorityandGuardianshipAct,1956beforetheguardianofthe
minorcandealwiththeminor'spropertyinanymanner.
Incasetheownerisapersonofunsoundmind:Onlyapersonappointedasaguardian,byacompetentcourtundertheMental
HealthAct,1987,cansellthepropertyonbehalfapersonofunsoundmind.
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Step2:Natureofcurrentowner'srightovertheproperty:
Itisnecessarytoidentifythenatureoftherightthatthecurrentownerhasoverthepropertyandthetransferabilityofsuch
right.Thetypesofrightsthatanownercanhaveoverthepropertycanbeclassifiedasfollows:
a. freeholdorabsoluteownership
b. rightofperpetuallease
c. tenancyrightand
d. landallottedbyStateGovernment/CentralGovernmentundervariousenactments.

Step3:Sourceofrightortitleofthecurrentowner:
InIndia,apersoncanacquirerightortitleoverthepropertyinfollowingways:
a. bypurchase:
Incasethetitlewasacquiredbypurchase,thenoneneedstoexaminetheregistered1saledeed/conveyancedeed
alongwiththetitledocumentsofthepredecessors'titleholdersoftheproperty.
b. byinheritance(byvirtueofentriesinmutation2register/jamabhandi3[whicharemaintainedbyRevenueOfficeforevery
village]and/orcourtorders):
Ifthetitlewasacquiredbyinheritance,thebasisofsuchinheritancewouldrequiretobedetermined,i.e.,whetherbyway
ofawillorapplicablelawsofinheritance.Itwouldalsorequiretobedeterminedwhetherthereisanyotherperson(s)who
wouldhaveasimilarclaimofinheritanceovertheproperty.Anunderstandingofthepersonallawswouldalsoberequired
inthisanalysis.Iftheownerclaimsinheritancejointlywithotherpersons,thenitshouldbecheckedwhethertherewas
anypartition.
Also,inruralproperties,thejamabhandi/recordofrightsneedstobeexaminedtocheckifthecurrentowner'snameis
reflectedasownerinpossessionoftheland.Thejamabhandi/recordofrightswoulddisclosethenameoftherecorded
owner,nameofthepersoninpossession,natureofright,natureofland,andalsoencumbrances,ifany.Forurban
properties,therecordsofthemunicipalauthoritiesshouldbeinspected.
c. bypartition:
Ifthecurrentownerhasacquiredtitleoverthepropertybywayofpartition,thenoneneedstoexaminethedeedof
partitiontoascertainwhethertherewereanyconditionsorrestrictionsinthedeedwhichmayaffecttheenjoyment/
transferabilityofproperty.
d. bygift:
Ifthetitlewasacquiredbywayofgift,thentheregisteredgiftdeedneedstobeexaminedtocheckifthereareany
conditions,likereservationoflifeinterest,restrictionsforalienation,paymentofmaintenance,preemptionetc.
e. bywill:
Incase,thetitlehasdevolveduponthecurrentownerbyvirtueofawill,itisadvisabletoexaminethewillaswellasthe
orderpassedbytheprobatecourtgrantingprobate/lettersofadministrationoftheproperty,ifany.
f. byperpetuallease:
Ifthetitlewasacquiredbyperpetuallease,thenthedeedofleasehastobeexaminedtodeterminethetransferabilityof
therightandtheconditionstosuchtransfer.Theextentoftherightsofthelessorshouldalsobeexamined.

Step4:LegalityoftheConstruction:
Ifthepropertyinvolvesaconstructionontheland,italsobecomesnecessarytoexaminethelegalityoftheconstruction.Each
Stategovernment(andtherelevantlocalauthorities)laydowntheirownrulesandregulationswhichgovernthemannerin
whichcivilconstructionsneedtobecarriedoutinthatparticularState.Therefore,alawyer,undertakingaduediligenceofland
havingastructureonit,needstofirstgetfamiliarwiththelocalconstructionlawsapplicableintheregioninwhichthebuilding
issituated,andthen,todeterminewhetherthesehavebeencompliedwith,inundertakingtheconstructionofthebuildingin
question.Theaspectswhichwouldneedtobeexaminedinthisprocesswouldbethefootprintarea(includingsetbacks),the
extentofconstructedarea,thenumberofunitsconstructed,theheightoftheconstructionandsuchotheraspects.

Step5:Encumbrancesovertheproperty:
Itisnecessarytoverifywhetherthereareanyencumbrances,charges,ormortgagesonthepropertyinquestion.Therecords
oftheconcernedSubRegistrarofPropertiesshouldbeexaminedtoensurethatthepropertyisfreefromallsortsofregistered
encumbrancesorchargesormortgages.Itisalsoadvisabletoobtainanencumbrancecertificateissuedbytheconcerned
SubRegistrarofPropertieswhichwoulddetailtheregisteredencumbrances,ifany,ontheproperty.Thiscertificatemaybe
obtainedfromtheofficeoftheSubRegistrarforProperties,wherethepropertyissituated.
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Inaddition,sinceamortgagecouldalsobecreatedoverthepropertybywayofdepositoftitledeeds,theoriginaltitle
documentsofthepropertyshouldbeinspectedtoensureabsenceofsuchunregisteredmortgages.
Further,ifanencumbranceiscreatedoverapropertywhichbelongstoacompanythensuchencumbranceneedstobe
registeredwiththeRegistrarofCompanies.Therefore,ifweareconductingduediligenceofapropertywherethecurrent
ownerisacompanythentherecordsofRegistrarofCompaniesneedtobeinspectedinordertoascertainabsenceof
encumbranceoverthepropertyinquestion.
Ifthereisanexistingencumbrance,chargeormortgageovertheproperty,itshouldeitherbeclearedpriortothepurchaseor
providedforintheconsideration.

Step6:WhethertheLandisapartofanyacquisitionprocess:
Itisalsoimportanttoknowifthepropertyisundertheprocessofacquisitionbyanygovernmentauthority.Ifthepropertyhas
beenacquiredbythegovernment,thenthepropertyceasestobelongtoitsoriginalownerandbecomesthepropertyofthe
acquiringauthority.Thus,thepropertysoacquiredcannotbesoldoralienatedfurtherbytheoriginalownerofthesaid
property,unlessthepropertyhasbeenreleasedfromtheacquisitionprocess.

Constituentsofavalidtitlecertificate:
Basedontheinformationcollectedbyfollowingthestepsenumeratedabove,thereport/titlecertificateisissued.Thequestion
astowhatwouldconstituteavalidtitlecertificateunderIndianlawshasbeenexaminedbytheBombayHighCourtin
RamniklalKotakTulsidas&OthersVsVarshaBuilders&Others(AIR1992Bom62)whichlaysdownsomeoftheprinciples
forissuanceofatitlecertificate.Basedontheobservationsinthiscaseandotherrelevantmatters,inourview,anadvocate
needstoundertakethefollowingbeforeissuingatitlecertificate:
a. Perusethetitledeedsinoriginal.
b. Undertakesearchesintheofficesofthesubregistrarofproperties.Thissearchshouldcoveraperiodofatleastthelast
30years.Incaseofagriculturalland,searchshouldalsobeundertakenatthelocalpatwari/tehsildar'soffice.Incaseof
companies,asearchoftherecordsoftheRegistrarofCompaniesshouldalsobeundertaken.
c. Obtainanencumbrancecertificate.
d. Makeenquiriesontitleandobtainsatisfactoryanswers.
e. Obtaindeclarationsonoathfromtherelevantpersonsregardingthefactualpositionbeforeissuingthecertificateoftitle.
f. Publicnoticesshouldbepublishedinatleasttwonewspapers(oneinvernacularandtheotherinEnglishcirculatingin
theareawherethepropertyissituated)invitingclaimsofmembersofthepublicagainst,orinrespectof,thepropertyin
question.

Conclusion:
Thesignificanceofaduediligenceexerciseliesinfollowingeachoftheabovedetailedsteps,theabsenceofevenoneof
whichcouldrendertheprocessinadequatetoaddresstheconcernsoftheparticipants.
Footnotes
1.RegisteredwiththeSubRegistrarofProperties/Assurancesappointedunderthe[Indian]RegistrationAct,1908.
2.Mutationindicatesthechangesthathavetobebroughtaboutinownershipandtitleoftheland.Theorderdirecting/allowingamutationiscalleda
mutationoOrder.
3.Adocumentpreparedaspartofrecordofrightineveryrevenueestate.Itcontainsentriesregardingownership,cultivationanduptodateofvarious
rightsinland.Itisrevisedeveryfiveyearswhenajamabhandiispreparedbyapatwari(Avillageaccountantorregistrar)andattestedbyrevenueofficer.

Thecontentofthisarticleisintendedtoprovideageneralguidetothesubjectmatter.Specialistadviceshouldbesoughtabout
yourspecificcircumstances.
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