BackThe process and precautions behind land transactions
The process and precautions behind land transactions
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Liberalization of foreign investment policies has attracted many foreign investors to make investments in the Indian real estate sector, both financial and strategic.
The natural consequence of this interest by foreign investors and other financial investors (including strategic, private equity and hedge funds) has been that large tracts of land are being acquired. This process requires a professional due diligence exercise to verify the legality of such transactions and the underlying acquisition of land. The acquisition of land by Indian real estate companies entails an equally mammoth investigation process.
Title search investigation (to verify that the land being acquired is validly owned by the seller) is a part of this overall due diligence exercise. Title search investigations are usually localized and have historically been conducted by local lawyers who practise in the area where each real estate project is being developed. However, with the increase in the size of the projects and the changing profile of stakeholders, large, well-reputed law firms have started playing a vital role.
The Bombay high court, through its judgement in Ramnikal Tulsidas Kotak v. M/s Varsha Builders (AIR 1992 Bombay 62), has set out the broad essentials of a title investigation and the title certificate issued after such investigation. The court stated that lawyers are expected to apply skill and professional expertise while carrying out the due diligence, and should themselves peruse the title deeds, carry out a search in the office of the sub-registrar and with the registrar of companies, asrequired.
Hence, larger firms that do not conduct title searches themselves work in tandem with local lawyers, who provide investigation reports.
The law firms then draw up the transaction documents (such as an agreement to sell, sale deed or development agreements). The structure of such documentation can become complex, depending on applicable state stamp duty laws, especially with regard to whether or not possession is being parted with or authorizations for conveying immovable properties through powers of attorney are being granted. Several precautions have to be taken by the companies while finalizing land parcels to be purchased for development purposes. Local zoning regulations are perused to determine rules, licences and permits required for land use and development. There are certain states in which land ceiling continues to be applicable, that is, a restriction is placed on the amount of land that can be held by a person, such person including both individuals and corporations.
Corporations often overcome this restriction by setting up multiple companies with the main object that all such separate legal entities would hold the permissible amount of land in their respective names. Other issues such as land falling within the vicinity of an airport, green zone, defence land and so on also have to be considered.
The legal due diligence involves a perusal of the land records maintained at the local revenue office.
The land records, which are referred to by various names in different states, for example jamabandhi, fardh, etc., include not only details of the title to the property, but also whether there is any pending litigation or whether any mortgages or charges have been created on the property. Actual possession may differ from ownership of land and the genealogy of land possession is also traced in the land records. The due diligence could also include a litigation search at the concerned courts to find any pending litigations, which can be both cumbersome and time consuming.
Compliance in payment of statutory dues and taxes should also be ensured. When dealing with government land, issues such as unearned increments also need to be factored in since these can heavily impact pricing.
A verification of whether or not the land is subject to any land acquisition proceedings by the government for public purposes is also prudent.
Depending on the modalities of the transaction, an agreement to sell the land is executed with the seller and the process of removal of existing deficiencies in the land title undertaken. Often, the revenue records contain outdated entries, missing entries or even incorrect entries in the chain of land holding and these entries need to be updated so that the flow of title is complete. Ownership of land by multiple owners or presence of tenants on land requires remedial measures such as partitioning the land and surrender of tenancy, respectively. The necessary legal formalities with respect to redemption of mortgage and removal of charges have to be undertaken in case of any existing security interests on the land.
Upon establishment of clear and marketable land title, usually, a sale deed is executed with the seller containing exhaustive representations, warranties and indemnities in relation to the land title. The applicable stamp duty is paid by the companies based on prescribed rates and all original title documents are handed over to the buyer. In case the land title documents are missing or lost, then prior to entering into a sale deed, a public notice has to be given indicating the proposed purchase of the land and a first information report lodged with the local police.
Thereafter, the local revenue records are updated to reflect the current ownership title and actual possession.
This column is contributed by AZB & Partners, Advocates & Solicitors.
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