Development tie-ups help ease inheritors’ property woes

Inheritors, especially those who are non-resident Indians (NRIs), are often in a predicament over properties left behind by their ancestors—its quality of construction, location and utility. At times, the house bequeathed is already in a ramshackle condition, or is of a type that does not fit the bill (like an independent bungalow). So, how can the inheritor look at monetising the asset?

Entering into joint development agreements (JDAs) with developers can be one solution. Doing so could help inheritors reconstruct the property according to their requirements and then monetise it by leasing it out or selling it for a better value. Under a JDA, the landowner (in this case, the inheritor) enters into a contract with a developer, allowing him to demolish and redevelop the property. For instance, an individual house can be reconstructed as a multi-storeyed structure.

But before getting into such an agreement, check the credentials and financial strength of the developer. The crux of a JDA lies in contents of the agreement, which the landowner needs to vet thoroughly, preferably with the help of a lawyer. The landowner must also be wary of any possible conflicts, which could lead to delay in completion or termination of the project.

Brass tacks

At the outset, the JDA can be a win-win for developers and landowners. Given the paucity of land and spiralling land prices—especially in large metros—developers find it relatively less capital intensive, as compared to regular projects, to redevelop an existing property. For landowners, such agreements provide convenience as they then do not need to earmark funds for construction, monitor the various stages and traverse the maze of approvals or post-completion formalities.

Before commencement, the landowner needs to give the builder a general power of attorney (GPA), allowing the latter to obtain no-objection, occupancy and sanction certificates and electricity and sewage connections. The landowner can revoke the GPA in case of a breach of contract.

The mode of bearing construction costs and sharing of profits could vary on a case-to-case basis. Typically, the builder and landowner arrive at a common ratio—40:60 or 30:70—where the landowner reserves her right on usage of 40% or 30% of the developed property and the builder can sell the balance 60% or 70% to recover his cost. However, in case of central locations, which govern higher prices, the ratio could be different.

Ground rules

Landowners, or in this case, inheritors need to run a complete fact check before embarking on a JDA. This includes scanning the builder’s credentials, knowing and fully understanding the contents of the JDA, and, most importantly, implications or repercussions of any fallout with the builder, that could delay, or worse, terminate the project.

While assessing the builder’s background, check his track record, financial capabilities and reputation in the market. It is essential that the landowner shares a good mutual understanding with the builder before proceeding with the transaction.

The landowner must be in the know of the agreement’s contents, and be able to read between the lines as well. A JDA must carry complete details of the land and the real estate project—size, floor area, material to be used, price, schedule for construction and completion, payment plan and profit sharing ratio decided upon by the builder and the landowner. Additionally, the agreement should carry details on expenses shared by the two parties, the effect of termination, alternative forms of exit and other legal provisions.

Catch 22 situation

In the event of a fallout between the landowner and the developer, the project could get delayed or even terminated. Hence, it is vital for the landowner to include provisions in the agreement that point towards alternative forms of exit for both parties and likely effects of termination.

Hiring a lawyer to vet contents of the agreement and examine all clauses from a legal perspective would further protect interests of the landowners or the inheritors. This would help them better clarify implications of a possible fallout and ensure timely completion and good quality of the reconstructed property.

When executed properly, JDAs help landowners or property inheritors, especially the NRI community, monetise their assets, derive better value from it and also, in certain cases, reconstruct the property as per their own specifications and gain additional livable area.

In recent times, several builders—large and small—have signed JDAs to develop properties, ranging from ultra-luxury homes, senior living, and affordable housing to even mixed-use formats (combining residential, commercial and retail properties).

Binaifer Jehani, director, Crisil Research.