The real estate business in India has been making news for years, and has witnessed a period of vigorous activity leading to a “boom” that is only now beginning to settle into a more rational pattern of growth. As a result, development of residential and commercial projects has been a rapidly growing business. It is a fairly common arrangement for developers and builders to enter into development related arrangements with land owners rather than making an outright purchase of the land identified for their project. Land owners may grant rights to develop their land under an agreement entered on mutually agreed terms and conditions. Broadly speaking, development rights can be granted in many ways, such as by a joint development rights agreement, sole development rights agreement and through a development services agreement.
Commercially, in a sole development rights agreement, the developer makes an upfront payment in favour of the land owner which enables the developer to own the built-up space on the land without having any ownership rights in the land, which at all times vests in the hands of the owner.
Illustration: Jayachandran / Mint
As far as development service agreements are concerned, the land owner gets the land developed by a developer against payment of a fixed consideration. In such agreements, the developer’s only obligation is to develop the land and hand the developed land back to the land owner. In other words, the developer, being akin to a contractor, gets paid only for services rendered.
The third category—a popular choice for real estate projects—is the joint development rights agreement. Generically, in a joint development rights agreement, the owner provides the land free and clear of all title defects and encumbrances, and undertakes the development of such land along with the developer. In such arrangements, the land owner continues to own the land and shares the responsibility to develop the building project along with the developer. In such arrangements, it is understood that the basic grunt work of development will be done through the developer, who has (or has access to) the manpower, equipment, expertise and experience to implement the project. When it comes to enjoying the proceeds of the built-up space constructed, the land owner and developer can either agree on sharing revenue out of sale or lease of the built-up space or owning the built-up space in an agreed ratio. In the case of sharing revenue from the built-up space, it is the responsibility of the developer to develop the parcel of land jointly with the land owner and sell or lease the built-up space to third-party purchasers/lessees and share the proceeds in an agreed ratio.
Since the ownership in the land continues to be with the land owner, the developer would require the cooperation of the land owner to transfer the title in the land to a purchaser while it transfers the built-up space. On this, the courts have held in the case of Chheda Housing Development Corp. that the developer will have the right for specific performance which shall be specifically enforceable in a court of law if the land owner fails to cooperate with the developer in selling/leasing the built-up space on the land.
In scenarios of joint development rights agreements, the land owner, along with development rights, gives the developer a licence, authorizing the developer to enter the land for the purpose of development. The licence/authority to enter the land is typically given by way of a power of attorney issued in favour of the developer, authorizing the developer to develop the plot, apply for permissions related to the development of the land, carry out construction on the land, deal with local authorities for all necessary approvals and licences, raise debt for the project by mortgaging the land, appoint third party contractors for construction activity and advertising the project.
It is pertinent to mention that the power of attorney granted without consideration can be revoked at any time by the person granting it. However, a power of attorney issued as part of a contract to discharge contractual obligations, if revoked, would amount to a breach of such contract. In such cases, the developer could seek specific performance of the obligation of the land owner to transfer the land by either itself executing the sale deed in favour of the developer or its nominee (as the development agreement may provide) or issue power of attorney in favour of the developer to do so on its behalf, as required by the development agreement. It is also important to mention that in the event the developer is in breach of the terms of the development agreement, the land owner would have the right to revoke the power of attorney.
The rights of developers are also secured by the fact that on bringing up construction on the plot, they shall be considered owners of the built-up space irrespective of the fact that the land is not owned by them.
The Supreme Court of India has given concurrence to this proposition in the case of CAT v. Fazalbhoy Investment. In this case, the court held that there exists a concept of dual ownership in India wherein one person can be the owner of the land and another person can be considered the owner of the structure on that land.
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This column is contributed by Aashish Vats of AZB & Partners, Advocates & Solicitors.