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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-
1.1 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.
1.2 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.
1.3 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.
1.4 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.
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.
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.
Very resourceful.Role of due delegence in real estate sectore nicely elaborated.Like it.Pradeep Lokhande.divine justice law firm.