Real Estate

Introduction

  • The laws governing real estate in India include:
    • The Transfer of Property Act 1882 (TPA),
    • The Indian Contract Act 1872 (Contract Act),
    • The Registration Act 1908 (Registration Act),
    • The Indian Stamp Act 1899 (Stamp Act) and
    • The Indian Easements Act 1882 (Easements Act)
    • Land Acquisition Act, 1894
    • Rent control Act
    • Foreign investment in the construction and development sector is additionally regulated by the Foreign Exchange Management Act 1999 (FEMA) and the rules, notifications and circulars issued there under and those issued by the Reserve Bank of India (RBI).
  • In India, all real estate transactions that include the sale or conveyance or lease of immoveable property and land require registration of the officialagreements or deeds such as the sale deed or conveyance deed and the lease deed, as the case may be. A transaction that takes place in the real estate sector, an agreement to sell or a memorandum of understanding or letter of intent does not customarily require registration.
  • As per Section 17 of the Registration Act, 1908, all transactions that involve the sale of an immovable property for a value exceeding Rs 100, should be registered. This conclusively means that all the transactions of sale of immovable property have to be registered, as no immovable property can be purchased for merely Rs 100. Also, all transactions of gift of an immovable property, as well as lease for a period exceeding 12 months are also mandatorily required to be registered.
  • In special cases, when a party to the transaction cannot come to the sub-registrar’s office, the sub-registrar may depute any of its officers to accept the documents for registration, at the residence of such person. The term ‘immovable property’ includes land, buildings and any rights attached to these properties.
  • Procedure and documents required
    • The property documents that need to be registered, are submitted to the office of the Sub-Registrar of Assurances within whose jurisdiction the property, which is the subject matter of transfer, is situated.
    • The documents that are accepted as identity proofs include Aadhaar Card, PAN Card, or any other proof of identity issued by a government authority. The power of authority needs to be presented by the signatories,if they are representing someone else.
    • In case a company is party to the agreement, the person representing the company has to carry adequate documents, like power of attorney/letter of authority, along with a copy of the resolution of the company’s board, authorising him to carry out the registration.
    • The property card is furnished to the sub-registrar, along with the original documents and proof of payment of stamp duty. Before registering the documents, the sub-registrar verifies whether adequate stamp duty has been paid for the property, as per the stamp duty ready reckoner. In case there is any deficit in the stamp duty, the registrar will refuse to register the documents.
    • As per the Stamp Act, in the absence of any agreement to the contrary, with a sale or conveyance deed the purchaser is required to paythe stamp duty, and with a lease deed the lessee is liable to pay thestamp duty.
  • Foreign Exchange Management Act (FEMA) is the Indian law which consolidates the rules relating to foreign exchange in India. It enables a new foreign exchange management regime consistent with the emerging framework of the World Trade Organisation (WTO).
  • The requirements and regulations governing the buying and selling of property by any foreign national are enclosed in this Act. FEMA allows investment in property in India by NRIs, PIOs and in some cases, foreign nationals residing in India.
  • An NRI or a PIO can acquire immovable property in India. However, investment in agricultural property, plantation and investment in farmhouses are prohibited under FEMA for all classes of residents outside India, including Non-resident Indians or foreign citizens or any foreign entities.
  • If an NRI or a PIO wants to acquire immovable property in India, other than agricultural land or, plantation property or farm house, it can acquire the property in any of the following ways
    • By using the funds held in any type of non-resident bank accounts to make the purchase.
    • By receiving the property as a gift from a person resident in India or non-resident Indian citizen or even a non-resident PIO.
    • By inheriting the property from persons who are eligible to give such inheritance. PIOs can transfer immovable property in India either by way of sale to person resident in India (whether Indian citizen or not) or by way of gift or sale to an Indian citizen resident in India.
  • The exceptions to the rule of a direct ownership or buying of real estate by a foreign company or a foreign citizen are very limited. As per the guidelines of the Foreign Exchange Management (Acquisition andTransfer of Immoveable Property in India) Regulations 2000 a foreigncompany having its branch office or other place of business in India(and which has been set up according to the regulations framedunder FEMA) may acquire immoveable property for carrying on itsbusiness operations in India. For this purpose the foreign company is required to file certain declarations with the RBI.
  • A foreign national is not permitted to acquire any immovable property in India unless such property is acquired by way of inheritance from a person who was resident in India. However, he can acquire or transfer immovable property in India, on lease, not exceeding five years without the prior permission of the Reserve Bank. The Act does however restrict any citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan (whether resident in India or not) from acquiring or transferring immovable property in India without prior permission of the Reserve Bank. Such people can only take the property on lease, for not exceeding five years.
  • Under FEMA, acquisition of property in India is governed by ‘residential status’, this means that the place of residence of an individual becomes a key to determining property ownership. The residential status is determined by operation of law. A person is said to be a resident in India if he stays in India for an aggregate period of 182 days in a year. The obligation is on the individual to prove his / her residential status, if questioned by any authorityas per Indian laws.
  • The investment agreements under which foreign investment or FDI is made into construction development companies, the choice of law and dispute resolution forums for this purpose are usually international forums such as the International Chamber of Commerce, Singapore International Arbitration Centre or London Court of International Arbitration, besides the Indian Arbitration.
  • FDI into the companies incorporated in India is the most viable form of investment, incorporation formalitiesunder the Companies Act would need to be adhered with and further reporting requirements of the RBI would need to be made when foreign investor proposes to set up a 100 per cent-owned Indian company.
  • Where a foreign investor is investing in an existing company or acquiringshares from a current shareholder, the RBI would need to beupdated by way of prescribed forms (these include FC-GPR for subscriptionof shares and FC-TRS for purchase of shares).
  • Limited Liability Partnership (LLPs) are given more preference due tolack of restrictions on capital reduction, buy-back of partner’s equity, and there is no dividend distributiontax on distribution of profits to shareholders as dividends.
  • The basic difference between commercial and residential leasing with respect to properties types is property use purpose when a Lessee uses a property for commercial purpose he will come under the commercial leasing agreement and authority will step in and the both Lessor&Lessee in a commercial lease agreement will have a greater negotiating and bargaining power when compared to the parties in a residential lease agreement on the contrary when he uses residential property.
  • Zoning categories and symbols vary among communities. Jurisdictions use letters of the alphabet as code abbreviations to identify the use allowed in a physical geographic area for instance: R for residential, C for commercial, and I for industrial. These symbols are usually teamed up with some number. The number can define the level of use, or it may show a certain amount of acreage or square footage for that particular property.
    • Residential zoning incorporate Single Family Residences (SFR), Suburban Homestead (SH), or any number of other designation which cover homes, apartments, duplexes, trailer parks, co-ops, and condominiums. Residential zoning can cover issues such as whether mobile homes can be placed on property, and the number of structures allowed on certain property.
    • Commercial zoning usually includes categories and is based upon the business use of the property, and often the number of business benefactors. Office buildings, shopping centers, restaurants, hotels, certain warehouses, some apartment complexes -- as well as vacant land that have the potential for development into such buildings -- can all be zoned as commercial.
    • Industrial zoning is restricted to the type of business. Environmental factors like noise concerns are common issues in determining into which industrial level a business falls. Manufacturing plants and many storage facilities have industrial zoning.Industrial zoning is generally dependent upon the amount of lot coverage (which is the land area covered by all buildings on a lot) and building height.
    • The Building Regulations and by-laws of various cities andstates distinguish between residential, industrial, commercial, and institutional. They have different procedures for each type of property.
    • Additionally, residential and commercial property has separate rates of taxes and circle rates. (Value of property as notified by the government.)
    • Although the circle rates of commercial andresidential property may differ, the stamp duty rates are the same.
  • Transfer of property is an act of conveying property from one person to another, in present or future. According to section 8 of the Transfer of Property Act 1882 (The Act), by transferring property, transferor transfers all rights in a property. There are various modes of transferring ownership of property permanently by:
    • Relinquishment
    • Sale
    • Gift;
  • And temporarily by way of
    • Mortgage Lease and,
    • Leave and license agreement
  • Under Sec 54, the sale is a transfer of ownership by a deed (sale deed/transfer deed) for a price, paid or promised or part paid and part promised. The sale deed is compulsorily required to be stamped (stamp duty) and registered (before a Sub-Registrar) and is for consideration. Sale of property may result in long term, or short term capital gains tax liability, depending upon the period of holding of the property. This tax is payable by the seller of the property, and there are provisions under the Income Tax Act 1961 to save long term capital gains tax.
  • Sec 58 of the Act defines Mortgage as the transfer of interest in the specific immovable property by way of a mortgage deed or deposition of title deeds for securing payment of a loan. The owner of the property creating a lien on an immovable property to the lender is the mortgagor. The lender is the mortgagee. In a mortgage, the mortgagor may either deposit title deeds of immovable property to the lender or his agent with intent to create security or execute a mortgage deed. If there is a debt and if the debtor deposits title deeds with an intention that the title deeds shall be security for the debt, then by the mere fact of deposit of those title deeds, a mortgage comes into being. A mortgage by deposit of title deed does not require registration. Sometimes, a memorandum accompanies the deposit of title deeds to evidence the purpose of deposition of title deeds by way of an aide memoir. Though a mortgage by deposit of title deeds can be created by a mere deposit of title deeds without any written contract between the parties, in case the bargain or contract is reduced to writing, then it has to be registered.
  • Under section 122 of the Act, one can transfer immovable property through registered gift deed. The immoveable property is transferred voluntarily without any consideration. To make the transfer valid it is mandatory to register a gift deed with the sub-registrar as per section 17 of the Registration Act, 1908, and section 123 of the Transfer of Property Act. A donor does not have the right to revoke or cancel the registered deed at a later stage unless there is a specific clause mentioned in the deed. Section 126 of the Act provides for a situation where in a donor can revoke a gift deed. For instance, if the property was gifted so that the recipient can reside in it, upon the death of the recipient, the property will get transferred back to the donor if she is alive, else to the heirs of the recipient. The Income-Tax Act 1961 specifies that capital gains arising out of a gifted property to blood relations are exempted from tax. However, income accrued from the gifted asset may be taxable.
  • Relinquishment is surrendering inherited or parental rights for another “legal heir”/ “another collateral” in the same property. In simple terms, relinquishment is a family arrangement where one legal heir surrenders his share in the property with or without monetary consideration for another legal heir. The relinquishment deed cannot be executed for another person who is not a legal heir. The relinquishment of property results in taxation of capital gains and on the basis of time horizon of holding the asset the gains are derived and taxes are calculated.
  • The word "SALE DEED" also known as "Conveyance Deed" is a legal written document executed by the vendor and the purchaser which acts as an evidence for the sale and transfer of ownership.
  • A sale deed is under the authority of the Transfer of Property Act and the Registration Act, 1908 and is an important document for both the buyer or the transferee and the seller or the transferor. A sale deed is executed, usually, after the execution of the agreement to sell, and after compliance of various terms and conditions between the seller and the purchaser mutually.
  • A sale deed is the fundamental document which gives details of how the seller got the property, at what consideration the seller is selling the property and assurance to the purchaser that the property is free from any encumbrances, liabilities or indemnity clauses.
  • A sale deed acts as an essential document for the further sale of the property by the purchaser as it serves as an important proof of the ownership of a property.
  • Sale deed is one of the most valuable legal documents in a purchase or sale of a property. A sale deed is drafted by legal draftsman on a non-judicial stamp paper of the requisite value as prescribed by stamp act of the particular state concerned.The following clauses are included while preparing the construction of the sale deed which are as follows:
    • Name of the deed: It is the parties who have to decide that which deed has to be prepared e.g. DEED OF SALE or DEED OF MORTGAGE or DEED OF LEASE etc. and based on which there will be transfer of ownership of immovable property. Since this Sale deed, parties may use DEED OF SALE (OR) SALE DEED.
    • Parties to sale deed: An absolute sale deed must contain the names, age and respective addresses of parties to the transaction and both the parties i.e. seller and buyer must be competent to enter into a contract so that it will not affect the validity of the valid sale. It is very much important that the sale deed is duly signed and executed by both the parties with their bona-fide intention. A valid sale deed must start with clear description of the parties.
    • Description of the property sold: A valid sale deed must contain full description of the property which is the subject matter of sale. It must include identification number, total plot area, construction details as well as its location with its surrounding areas. A schedule of the property must be included in the sale deed which will define the exact location where the property is actually situated.
    • Agreement for sale: In the agreement for sale both the parties may mutually settle the terms and conditions of the agreement so that it will not affect the rights of the parties. A sale deed may be preceded by agreement to sell.
    • Sale consideration clause: A sale deed must include the clause stating the sale consideration/amount as agreed between the seller and the buyer which has to be paid by the buyer to the seller on the execution of sale deed. A sale amount should be clearly stated in sale deed as agreed in the agreement to sell so that there should not be any onus on the parties to the transaction.
    • Advance payment, if any: If there is any transaction of token amount paid by the buyer to the seller then it has to be clearly mentioned in the sale deed, and how much is the remaining balance to be paid on the execution of the sale deed.
    • Mode of payment: It is always the buyer who has to decide that how he is going to pay the sale consideration amount whether by Cash /Cheque/ Demand Draft and the same has to be agreed by the seller.
    • Passing of the title: A sale deed should contain the clause when the original title of the property to be passed to the purchaser. A time limit should be given to the seller for the transfer of the title. Once the title of the immovable property is transferred, all the rights will pass to the purchaser.
    • Delivery of the possession: The possession of the immovable property will be transferred to the purchaser by the vendor once the registration process is completed. A clause in the sale deed must state when there will be actual delivery of the possession.
    • Indemnity provision if any: A seller must clear all the statutory charges i.e. property tax, electricity charges, water bills, cess, society charges, maintenance charges and all other charges relating to the property before the execution of the sale deed. In case there is any encumbrance on the property, the seller needs to repay the loan amount and get the property papers cleared of the encumbrance. It is the duty of the buyer to verify the encumbrance status from the office of the Registrar/Sub Registrar/MeeSevaCentres (in AP).
    • Execution: Once the Sale Deed is prepared all the parties to the deed shall execute it by affixing their thumb impression or full signature. Each page should be signed by the seller and buyer. Any erasure, alteration, addition or deletion is to be authenticated by full signature of the parties. Execution of the sale deed requires to be witnessed by two witnesses. The witnesses shall give their full particulars and addresses.
    • Registration According to Section: 17 of "The Registration Act, 1908", the registration of a tangible immovable property is compulsory if the value of the respective property exceeds rupees 100/- and it is the registration of the property which makes the sale valid. For getting the registration done both the parties must be present in person or through their duly authorized agent(s) before the jurisdictional sub-registrar office with the original documents within four months from the date of execution. A stamp duty has to be paid by the purchaser to the sub-registrar for getting the registration done. A certified copy of the registration document to be obtained for the future reference.
    • Testatum: Once all the terms and conditions have been settled between both the parties, a sale deed is prepared. The executed sale deed should be witnessed by at least two witnesses one from seller side and one from buyer side, giving their full names, addresses and signatures.
    • Original documents: Once the property gets registered under the registration act all the original documents of the sold property to be hand over by the seller to the purchaser. All the statutory rights along with ownership, possession, title, interest will get vested in favour of the purchaser.
    • Default clause: An agreement for sale of immovable property should include the clause stating if there is any default by the vendor or the purchaser then the party who rescinds the contract need to pay damages to the other party for the breach of contract so that it will not affect to the execution of the sale deed.
  • Registration of transfer of ownership of property once a property has been transferred by way of relinquishment, sale, or gift deed in the “name” of the recipient. It is also important to have the transfer recorded in the municipal records by way of mutation. Stamp duty on transfer is payable as per applicable state laws. The stamp duty on gift deed may or may not be equal to the general stamp duty you pay on selling or relinquishing the property.
  • It is different for different states in India. Circle rate is the minimum price at which stamp duty is payable in case of transfer of immovable property. These rates are an indicator of likely prices of properties in various areas. Circle rates differ within cities in the same state, and among various localities of a city. Where the actual price paid by a buyer is less than the circle rate, stamp duty is generally paid on the circle rate.
  • However, a Sub-Registrar is required to allow registration of property even when the stamp duty paid is lower than the circle rate. However, it can impound the document and adjudicate proper stamp duty. The buyer can provide proof of the fact that the actual transaction is at the value stated in the deed, and that is the correct market value. State governments collect stamp duty and registration charges on the declared value or the circle rate, whichever is higher, on the property being transferred.
  • These charges are usually defined as a percentage of the transaction value and differ across states. Besides stamp duty, typically 1% of the value of the property is charged as registration fee (to register the document). Stamp duty payable in case the purchaser is a woman is generally lower by about 1%-2% in most states.
  • In Delhi, when purchasers are one or more women, its 4%, in case it’s only men or a corporate body, it’s 6% and in case it’s a man and woman it’s 5%. A further 1% is payable at registration charges. For the seller of the property capital gains tax would be calculated on the value of the property as fixed by the Stamp Valuation Authority especially when such value is higher than the declared value of the property as appearing in the sale deed.
  • In the situation of individuals and Hindu Undivided Families receiving properties from non-relatives, the circle value rate of the property would be treated as the amount on which income-tax is payable according to the Income-tax Act. In case a buyer get’s it for a lower price, the difference would be chargeable to tax as “Other Income”.
  • The Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976, provides for forfeiture of both movable and immovable property illegally acquired by smugglers and foreign exchange manipulators and their relatives and associates.
  • Long-term leases and conveyances of the acquired lands allowed by theGovernment for a predefined reason take into account rejection of the rent or movement and seizure of the property by the legislature in the occasion of default by the lessee or transferee on payment of rent, consideration, municipal charges, taxes, usage of the property for any purpose other than for which it is leased, conveyed or acquired or for any illegal or immoral purpose, etc.
  • Other cases of forfeiture of property come under actions taken by the civil and criminal courts. The CPC empowers the courts to seize and attach property of a judgment debtor if he or she fails to satisfy a decree passed by a court.
  • Similarly, the Code of Criminal Procedure 1973 authorises attachment of the property of an accused who fails to appear before the court despite service of summons to appear. Non-payment of statutory taxes and bankruptcy could also lead to attachment of property by the competent government authority or court of law.
  • 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.

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-

  • Derivation of Ownership: The title ownership of a real estate property can be derived in the following manner:
    • 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.
    • 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.
    • 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.
    • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • Publication - To be on the safer side and to prevent himself from any unregistered transactions, the beneficiary may publish a notice in at least two local newspapers, which will endorse the beneficiary’s bonafide title ownership, if any dispute is raised later.
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