India: Legal Due Diligence In Real Estate Transactions – Its Significance And Methodology

Last Updated: 14 October 2014
Article by MNK Law Offices

This article attempts to highlight the significance of undertaking legal due diligence exercises in real estate transactions and the methodology to be followed for undertaking such a due diligence process.

Introduction:

Real estate is one of the fastest growing sectors in India evidenced by a sharp increase in real estate transactions involving buying, selling, leasing and financing of properties. In addition to transactions in urban areas, we have also witnessed large scale procurement of land from individuals in villages close to the urban, industrial and commercial centres. Similarly, there has also been an increase in leasing (both short and long term) of commercial office space.

The increase in real estate transaction values combined with the growing participation of the organized sector in real estate has resulted in heightened awareness of the risks involved and, consequently, the need for ensuring that the risks are identified and minimized in such transactions. 'Legal due diligence/ title search' of real property (be it of vacant tracts of land or of constructed residential/ commercial/ industrial properties) is clearly the mode for achieving these objectives.

A due diligence exercise is probably the most important aspect of a transaction involving real estate immediately following a broad understanding of the commercials. This process has the potential of not only impacting the commercials but also determining the feasibility of the transaction itself. While the commercials often pay high importance to expedite the conclusion of a transaction, it is critical in the interests of the players to provide adequate time and attention to a detailed due diligence of the property involved. It is important to realize issues such as title, permitted use, legality of construction, encumbrances and easements which have the ability to impact the very nature of the property and its suitability to the commercial needs of the transaction.

Need for conducting and scope of legal due diligence of real property:

Due diligence is conducted mainly to verify the ownership of title over the property and any encumbrances over the property, so as to protect one against pre-existing claims over the property. Such claims could either effect the ability of the transferor to transfer the property or could attach themselves to the property even after it is transferred.

The primary objective of a due diligence is therefore to gather information. The extent and type of due diligence to be undertaken by the purchaser's lawyer will depend on the following:

  1. the risk profile and business objectives of the purchaser/ lessee;
  2. the type of real asset involved;
  3. nature of the real estate transaction (i.e., whether it is a purchase, long term/ short term lease, mortgage or financing of the real property);
  4. the time frame for completion of the transaction; and
  5. whether the purchaser is looking at obtaining third party financing either pre-transaction or post-transaction.

In case of a prospective purchase, a lease of the property or real estate financing, a title search is performed primarily to answer three questions:

  1. Does the owner/ lessor have sufficient authority/ interest/ right to enter into the transaction involving the property in question?
  2. Do any liens exist on the property which needs to be discharged before the consummation of the transaction in question? These could be in the nature of mortgages, charges, acquisitions, unpaid taxes, litigation, easements and other assessments.
  3. What are the nature of restrictions on the use of the property?

Apart from undertaking title search/ due diligences for purchase or lease of properties, a title search/ due diligence is also performed when an owner wishes to mortgage the property with any bank, financial institution or a lender. Such bank/ financial institution/ lender may require the owner to submit a due diligence report of the property or may conduct such diligence on its own.

Type of Due Diligence/ Title Search:

Depending upon the nature of the transaction, the property involved and the objective of the participants, a due diligence can be divided into two broad categories:

  1. Full search; and
  2. Limited search.

Full Search: A full search is usually done while giving a title certificate of the property in instances of sale/ resale/ long term lease transactions and for transactions that involve obtaining of financing by mortgaging the property in question. In a full search, the search regarding status of ownership of the property is generally conducted for a period preceding thirty (30) years (or more) from the date on which the seller in question came to acquire the property.

It also includes a detailed search of all aspects relating to the history of that property such as the status of encumbrances over the property, the status of disputes relating to the property, the applicable regulations and the status of compliance of such applicable regulations relating to the property in question.

Limited Search: A limited search is generally conducted in transactions where the property is taken on lease for a short term (usually under 9 years). In such instances, the period for which the preceding ownership of the property is traced is generally restricted to fifteen (15) years (or less) from the date on which the current owner of the property came to acquire the property.

Unlike full searches, in a limited search, the search relating to the history of the property may be limited to restricted aspects such as recent title history, encumbrances on the property, disputes related to the property etc.

Steps involved in conducting such due diligence/ title search:

In order to conduct a title search/ title verification, the following aspects would require to be examined:

  1. Legal capacity of the present owner of the property (whether the person is legally capable of entering into a binding contract for sale or lease of the property or for mortgaging the property);
  2. Nature of current owner's right over the property, and whether such right is transferrable;
  3. Source of right or title of the current owner;
  4. Legality of the construction;
  5. Encumbrances over the property; and
  6. Whether the property is a part of any acquisition process.

We shall now elaborate each of the above and highlight the need to examine these aspects.

Step 1: Legal capacity of the seller:

It is necessary to ensure whether the current owner of the property or any of the predecessor title holders of such owner is:

  1. a minor (a person, who is below 18 years of age); or
  2. a person of unsound mind.

In case of minor's land: If the current owner of the property is a minor, then the property can neither be purchased nor be taken on lease without prior permission of competent authorities. Who or what shall be the 'competent authority' will depend upon the personal laws applicable to the minor. For example, in case of a minor who is a Hindu, permission is required to be obtained from the civil courts under applicable sections of the Hindu Minority and Guardianship Act, 1956 before the guardian of the minor can deal with the minor's property in any manner.

In case the owner is a person of unsound mind: Only a person appointed as a guardian, by a competent court under the Mental Health Act, 1987, can sell the property on behalf a person of unsound mind.

Step 2: Nature of current owner's right over the property:

It is necessary to identify the nature of the right that the current owner has over the property and the transferability of such right. The types of rights that an owner can have over the property can be classified as follows:

  1. free hold or absolute ownership;
  2. right of perpetual lease;
  3. tenancy right; and
  4. land allotted by State Government/ Central Government under various enactments.

Step 3: Source of right or title of the current owner:

In India, a person can acquire right or title over the property in following ways:

  1. by purchase:

    In case the title was acquired by purchase, then one needs to examine the registered1 sale deed/ conveyance deed along with the title documents of the predecessors' title holders of the property.
  2. by inheritance (by virtue of entries in mutation2 register/ jamabhandi3 [which are maintained by Revenue Office for every village] and/ or court orders):

    If the title was acquired by inheritance, the basis of such inheritance would require to be determined, i.e., whether by way of a will or applicable laws of inheritance. It would also require to be determined whether there is any other person(s) who would have a similar claim of inheritance over the property. An understanding of the personal laws would also be required in this analysis. If the owner claims inheritance jointly with other persons, then it should be checked whether there was any partition.

    Also, in rural properties, the jamabhandi/ record of rights needs to be examined to check if the current owner's name is reflected as owner in possession of the land. The jamabhandi/ record of rights would disclose the name of the recorded owner, name of the person in possession, nature of right, nature of land, and also encumbrances, if any. For urban properties, the records of the municipal authorities should be inspected.
  3. by partition:

    If the current owner has acquired title over the property by way of partition, then one needs to examine the deed of partition to ascertain whether there were any conditions or restrictions in the deed which may affect the enjoyment/ transferability of property.
  4. by gift:

    If the title was acquired by way of gift, then the registered gift deed needs to be examined to check if there are any conditions, like reservation of life interest, restrictions for alienation, payment of maintenance, pre-emption etc.
  5. by will:

    In case, the title has devolved upon the current owner by virtue of a will, it is advisable to examine the will as well as the order passed by the probate court granting probate/ letters of administration of the property, if any.
  6. by perpetual lease:

    If the title was acquired by perpetual lease, then the deed of lease has to be examined to determine the transferability of the right and the conditions to such transfer. The extent of the rights of the lessor should also be examined.

Step 4: Legality of the Construction:

If the property involves a construction on the land, it also becomes necessary to examine the legality of the construction. Each State government (and the relevant local authorities) lay down their own rules and regulations which govern the manner in which civil constructions need to be carried out in that particular State. Therefore, a lawyer, undertaking a due diligence of land having a structure on it, needs to first get familiar with the local construction laws applicable in the region in which the building is situated, and then, to determine whether these have been complied with, in undertaking the construction of the building in question. The aspects which would need to be examined in this process would be the footprint area (including set-backs), the extent of constructed area, the number of units constructed, the height of the construction and such other aspects.

Step 5: Encumbrances over the property:

It is necessary to verify whether there are any encumbrances, charges, or mortgages on the property in question. The records of the concerned Sub-Registrar of Properties should be examined to ensure that the property is free from all sorts of registered encumbrances or charges or mortgages. It is also advisable to obtain an encumbrance certificate issued by the concerned Sub-Registrar of Properties which would detail the registered encumbrances, if any, on the property. This certificate may be obtained from the office of the Sub-Registrar for Properties, where the property is situated.

In addition, since a mortgage could also be created over the property by way of deposit of title deeds, the original title documents of the property should be inspected to ensure absence of such unregistered mortgages.

Further, if an encumbrance is created over a property which belongs to a company then such encumbrance needs to be registered with the Registrar of Companies. Therefore, if we are conducting due diligence of a property where the current owner is a company then the records of Registrar of Companies need to be inspected in order to ascertain absence of encumbrance over the property in question.

If there is an existing encumbrance, charge or mortgage over the property, it should either be cleared prior to the purchase or provided for in the consideration.

Step 6: Whether the Land is a part of any acquisition process:

It is also important to know if the property is under the process of acquisition by any government authority. If the property has been acquired by the government, then the property ceases to belong to its original owner and becomes the property of the acquiring authority. Thus, the property so acquired cannot be sold or alienated further by the original owner of the said property, unless the property has been released from the acquisition process.

Constituents of a valid title certificate:

Based on the information collected by following the steps enumerated above, the report/ title certificate is issued. The question as to what would constitute a valid title certificate under Indian laws has been examined by the Bombay High Court in Ramniklal Kotak Tulsidas & Others Vs Varsha Builders & Others (AIR 1992 Bom 62) which lays down some of the principles for issuance of a title certificate. Based on the observations in this case and other relevant matters, in our view, an advocate needs to undertake the following before issuing a title certificate:

  1. Peruse the title-deeds in original.
  2. Undertake searches in the offices of the sub-registrar of properties. This search should cover a period of at least the last 30 years. In case of agricultural land, search should also be undertaken at the local patwari/ tehsildar's office. In case of companies, a search of the records of the Registrar of Companies should also be undertaken.
  3. Obtain an encumbrance certificate.
  4. Make enquiries on title and obtain satisfactory answers.
  5. Obtain declarations on oath from the relevant persons regarding the factual position before issuing the certificate of title.
  6. Public notices should be published in at least two newspapers (one in vernacular and the other in English circulating in the area where the property is situated) inviting claims of members of the public against, or in respect of, the property in question.

Conclusion:

The significance of a due diligence exercise lies in following each of the above detailed steps, the absence of even one of which could render the process inadequate to address the concerns of the participants.

Footnotes

1. Registered with the Sub-Registrar of Properties/ Assurances appointed under the [Indian] Registration Act, 1908.

2. Mutation indicates the changes that have to be brought about in ownership and title of the land. The order directing/ allowing a mutation is called a mutation oOrder.

3. A document prepared as part of record-of-right in every revenue estate. It contains entries regarding ownership, cultivation and up-to-date of various rights in land. It is revised every five years when a jamabhandi is prepared by a patwari (A village accountant or registrar) and attested by revenue officer.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Singhania & Partners LLP, Solicitors and Advocates
Brus Chambers Advocates & Solicitors
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Singhania & Partners LLP, Solicitors and Advocates
Brus Chambers Advocates & Solicitors
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions