India: Legal Due Diligence In Real Estate Transactions

Introduction

Legal Due Diligence in a real estate transaction is an investigation of real estate property records and anything else deemed relevant to the sale, purchase, lease or mortgage of the property. In other words, it refers to the reasonable measures which every individual shall adapt before executing an agreement in relation to the real estate/ immoveable property. This is for the purpose of making them aware of the risks involved in the transaction and minimizing them in consonance with the parties' requirements.

In the current scenario, legal due diligence is an important component of a transaction involving sale, purchase or mortgaging the immoveable property to any Financing Institutions ("FI's"). However, in India, the procedure of property acquisition and land due diligence is extremely time consuming and complicated, due to the involvement of various regulatory authorities, State specific laws and judicial precedents. It is pertinent to analyze certain issues in relation to the real estate property such as ownership title, legality of development & construction, permitted use, easements and encumbrances which have the potential to influence the essential attributes of the real estate property and its suitability to the transaction.

The process of legal due diligence involves preparing a checklist in accordance with various state jurisdictions and legislations, scrutinizing litigations pending against the immovable property, encumbrances/ charges, easements and registrations/ authorizations with the competent government authorities. This due diligence exercise is to be categorically conducted to procure a crystal clear vision on the preceding title of ownerships of the real estate property with all permitted uses, encumbrances/ charges, compliance of statutory requirements, restrictions vested in the property and modus operandi to overcome obstructions, if any.

The Legal Due Diligence of a real estate property can be performed in two ways i.e. Full Search or Limited Search. Both methods furnish a comprehensive and complete search of all components of a real estate property such as the chain of preceding title ownerships, encumbrances/ charges (mortgage or lien), statutory compliance or authorizations, easement rights, pending judicial proceedings, if any, and the course of action to resolve such disputes. The only variation between the two searches is the tenure of search carried out in Full Search is usually between 30 (thirty) years to 99 (ninety nine) years or as prescribed by the FI's. In contrast, the tenure of search for Limited Search is restricted to 15 (fifteen) years.

Key components of Legal Due Diligence

The due diligence normally involves tracing of the title verification of the present and preceding owners, any encumbrance/ charges and state specific legislations impacting the transfer of the real estate property. For accomplishing this purpose, the following components are required to be examined in conjunction with the real estate property requirements-

  1. Derivation of Ownership: The title ownership of a real estate property can be derived in the following manner:
    1. If the title of ownership of real estate property is obtained by virtue of sale or purchase, the beneficiary shall verify the registered sale deeds and the title documents of the preceding title ownership holders. Further, all the vested rights over the real estate property shall be alienated to the beneficiary.
    2. If the title of ownership of a real estate property is obtained by virtue of gift, one shall scrutinize the registered gift deed or any other relevant document to give effect to the transferability of the real estate property.
    3. If the title of ownership of a real estate property is obtained by virtue of a will or inheritance, the executors shall examine the will document as its conditions doesn't violate the statutory law in any manner and the order of a competent court authorizing legality of the will.
    4. If the title of ownership of a real estate property is obtained by virtue of lease, the transferee shall examine the lease deed, parties' rights and compliance of all the obligations in regard to transferability of such property.
  2. Authority to transfer the title of real estate property - It is incumbent upon the vendor to examine the flow of rights or authority in the executed instrument to legally transfer the title of property to the beneficiary or new owner. For this purpose, one has to examine the link documents, mutation and jamabandi records or khatiyan as the case may be. Further, the transferor shall be legally capable (not minor or unsound mind) to execute a binding contract in regard to sale or purchase of the property.
  3. Charges or Encumbrances over the real estate property - It is necessary to inspect the encumbrances/ charges (mortgage or lien), over the property to any bank or FI's from the office of the Registrar of Charges of that particular jurisdiction by procuring an encumbrance or non-encumbrance certificate as the case may be, providing details of all the registered charges, depending upon the transaction. Further, 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 FI's requires delivery (actual or constructive) of sale deed or conveyance deed. This is to verify the authenticity of the original title deeds and to safeguard FI's interest by assuring non-existence of such unregistered mortgage.

  1. Transfer within a particular category - In some States by virtue of their local state legislations, if the real estate property belongs to the ST's, SC's or other backward classes, it shall be transferred only to the similar tribes and not to general class. Additionally, while conducting due diligence exercise, the preceding title records of the property shall be examined in this regard and if any preceding title owner is found to be SC, ST or of other backward class, that real estate property shall be transferred to the Government at the very first instance.
  2. Sub-lease for a specific purpose – In India, the Government provides the property to the lease holders specifically for agricultural purposes which can further be sub leased specifically for agriculture purpose. While performing due diligence exercise of the agriculture land, it is pertinent to verify the sub leases made in the transaction are not for any other commercial or residential purposes.
  3. Development/ Construction over the property – While conducting the due diligence process, it is necessary to verify the legality of the construction/ development of the property in accordance with the state specific laws in their particular jurisdiction and the development agreement shall be executed. Further, the nature of property shall also be examined i.e. (agricultural or non-agricultural) and if the property is agricultural land, the Change of Land Use is required by that particular State Government.
  4. Government approvals and authorizations – While performing due diligence process, it is pertinent to inspect and verify that all the approvals and authorization in relation to the transaction have been procured by the competent government authorities for building & industrial approvals, insurance policies, taxes, environment compliance etc.
  5. Acquisition process – In India, the law of Land Acquisition restricts the alienation rights of the original owner. While conducting due diligence, it is pertinent to ensure that the real estate property is not under any acquisition process because if any transaction is executed on the property which has been acquired by the government, the transaction shall be treated as void ab initio and cannot be enforced legally.
  6. Publication - To be on the safer side and to prevent himself from any unregistered transactions, the beneficiary may publish a notice in atleast two local newspapers, which will endorse the beneficiary's bonafide title ownership, if any dispute is raised later.

Conclusion

In view of the above, Legal Due Diligence plays a significant role for an individual as well as the FI's in any transaction related to real estate property for its sale, purchase, lease or mortgage. It is obligatory to probe and evaluate every such record or information about the real estate property which affects the nature and transactions of such property. Further, it is advisable before entering into any such transaction of a property, to determine and ensure that all chain deeds, title documents, encumbrance certificate, insurance policies and government authorizations are in accordance with the statutory requirements.

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
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
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