Prime Minister Shri Narendra Modi while addressing the Congress of United States of America on 23 June 2023 said “India is currently fifth largest economy and soon it will be the third largest… we are not only growing bigger, but we are growing faster”. Indian Economy is on the rise and the real estate industry being one of the major pillars of our economy is currently contributing 7% to the Indian Economy and is expected to contribute 10-12% in the coming years. As the real estate industry continues to grow, it has been attracting loads of investments from the Corporates for setting up of their businesses, workplaces, warehouses, stores, lesioning offices, etc.
Corporates to be assured about their investment, engage lawyers to conduct title due diligence for the same. Title Due Diligence is primarily conducted to ascertain the correct title flow, ownership and possession of the property, any encumbrances over such property, and the status of the property and also to check if all the applicable land laws have been compiled.
However, it has been seen that many corporations believe in cutting corners by undermining the importance of adequate due diligence. They tend to rely on their internal assessment and move ahead with their hazy understanding of the background of the property. This not only puts the investment of the corporates at risk and hampers their long-term expansion goals but also they end up inviting unnecessary disputes and litigation as well.
Scenario in India
In India, a property can transferred by way of Inheritance/Testamentary Succession and Non- Testamentary Succession i.e., by way of Sale, Agreement, Partition Deed, Gift Deed, Lease Deed, and Attornment Deed from one party to another or there can be compulsory acquisition by the Government. Therefore, the determination of ownership of land or property which has passed through several hands over the years through different kinds of deeds is a daunting task in itself. Further, Real Estate and Land are majorly controlled and administered by the respective State Governments and Local Governments as per Schedule 3 of the Constitution of India and hence there are variations in the rules, by-laws, policies, and customs concerning land and property from one state to another. Furthermore, to carry on any construction or development on the land, there is a requirement for various kinds of licenses and permission from various government departments like Change of Land Use, sanction, NoCs, etc., both before the beginning of construction and after completion of construction.
There are different kinds of properties i.e. agricultural or non-agricultural, commercial, residential, or industrial which can be transferred from one person to another. Further, any kind of Deed/ Agreement is entered into to perform the transaction of transfer of property is registered with the Registrar's office of a district where property is situated upon payment of applicable stamp duty and registration fees. Whereas, the Sub Divisional Magistrate office or Tehsil office maintains the record of all the past and present ownership of the property i.e. Revenue Records/Record of rights. Revenue Records is called by different names in different states i.e. ‘Jamabandi’ and ‘Khatauni’ in a few of the Northern states and ‘Record of Right, Tenancy and Crop' (RTC) in some of the Southern States, Pik pani 7/12 in Maharashtra which record the details of all the past ownership of the property, and details of any applicable charges/ mortgage/ lien on the property. Whereas, Mutation/Intakal/Dhakil Khariz keep the details of the property holder, whenever there is a change in ownership.
The whole exercise of ‘Title Due Diligence’ can be divided into two domains:
Title Scrutiny
Compliances
A. TITLE SCRUTINY
Setting limits
Before beginning with the exercise of the Title Scrutiny, it is necessary to define the period for which a title scrutiny needs to be conducted. Section 90 of the Evidence Act, of 1872 talks about the presumption about the correctness of the documents. Any document which is 30 years or more old is presumed to be validly executed and the information therein is presumed to be the correct understanding between the parties. Therefore, it is generally advisable to carry out the title scrutiny for the last 31 years.
Solving Jigsaw Puzzle
Conducting Title Scrutiny is like solving a jigsaw puzzle, where information in the deeds is scattered just like pieces of a puzzle, and the information of one deed needs to be aligned with the information of the next deed. In a jigsaw puzzle, putting each piece at its correct place keeps on giving a better view of the puzzle, similarly aligning facts of each deed with the next deed or agreement keeps on giving the clarity of the flow of ownership and possession of the property. To ascertain the correct direction for the scrutiny, it is necessary to collect necessary deeds, revenue records and mutation records concerning the relevant property from the concerned sub-registrar and Tehsil Office and to corroborate information from these records with the deeds or transfer documents available with us.
However, it is not enough just to connect the pieces and to determine to present ownership or possession of the property. During the whole exercise of connecting the pieces, the following points are to be taken into consideration:
To determine whether the transfer is testamentary or non -testamentary.
To determine whether transfer made is contractually valid or not.
To determine that the property transferred is correctly described in the deed/agreement.
To determine whether the parties who entered into the transactions were competent to agree to the transfer of property.
To make sure that the deed/agreement is properly executed and that the applicable stamp duty has been paid on such transfer.
To obtain a family tree from the Municipality in case of transfer of ancestral property by way of inheritance.
To understand that the property is not subject to any past charges/ mortgages or lien.
To understand that the property is not prevented by laws or notification issued by central/state government.
All these considerations while doing the exercise of title scrutiny give us a holistic picture of the entire transaction. It further helps in identifying all the red flags in the flow of the transfer of the property.
B. COMPLIANCES
The second part of any Title Due Diligence is to check the compliances and necessary permissions that are required to be taken from the concerned departments to carry out any construction or development on the property.
At the initiation of any project, for Change of Land Use Directorate of Town and Country Planning (DTCP) license, Sanction Plan/ Building Plan approval, Environment Clearance, Consent to Establish Height Clearance, etc. are taken and subsequently to put to use the building Fire NOC, Consent to Operate, Lift Working Licenses, Water and Sewer permission, Occupation Certificate and Competition Certificate etc. are required.
Procurement of these above-mentioned documents is necessary to ensure that the construction of the project complies with the applicable laws. However, it is necessary to keep following factors in mind while scrutinizing the necessary compliances and permissions:
The applicable licenses and approval must be obtained.
It is necessary to keep an eye on the validity of the licenses and approvals. In case the necessary construction is not completed within the validity period of the licenses/approvals, it is required to get the relevant licenses or approvals renewed from the concerned authority.
If any deviation is carried out in the actual construction of the project from its sanction plan, it is relevant to note that the revised sanction plan is reissued and the required composition fees are paid to the Municipality.
It is necessary to study all the zoning regulations of the area where the property is situated and to understand that the property complies with those regulations.
It is necessary to go through the ‘Specific Conditions’ of the Environmental Clearance and the relevant geographical specific conditions which are required to be fulfilled. For example: in a few places in Haryana there is a requirement that any Project shall not fall under the Aravalli Area. Separate NOCs need to be obtained in such cases.
It is necessary to ascertain that the Property has all the basic amenities and the owners are regularly paying electricity bills, water charges, and Property taxes on time and there are no pending dues.
Apart from all the necessary licenses and approvals, it is necessary to ensure that the property in question is properly insured.
It is also necessary to ascertain details of encumbrances, if any on the building/property.
It is also necessary to ensure that the property in question is not subject to any litigation, claims, or disputes.
Conclusion
Property disputes and legal risks can pose significant challenges to property buyers and investors, making it crucial to adopt effective measures for safeguarding interests in the land. Investing in real estate presents various lucrative opportunities, but there are always a few associated risks. Proper Due diligence empowers investors to make well-informed decisions, helps in negotiating and eliminating the potential liabilities. The purpose of the whole exercise of Title Due Diligence is to scrutinize all the available documents about the concerned property and give a transparent view of the property in which the buyer intends to invest. The above-mentioned domains give a holistic understanding of the entire transaction and further help in identification of any red flags or defects in the flow of the transaction which may be relevant for the parties intending to invest in the property.
By adhering to rigorous due diligence practices, investors can contribute to the growth and development of the rapidly growing Indian Economy while safeguarding their own interests in an ever-evolving real estate landscape. Conducting due diligence is key to successful and profitable real estate investments in India.
The above article is authored by Mr. Shantanu Malik, Partner, and Mr. Aeshwarya Sisodia, Associate. The article was originally published by AXFAIT (https://www.axfait.com/post/a-key-to-successful-and-profitable-real-estate-investments-consideration-in-due-diligence)