India
Answer ... Real estate transactions involve the exchange of residential or commercial property between two or more parties. Common forms of real estate transactions include:
- self-financing;
- loans; and
- tripartite agreements.
India
Answer ... The parties involved in a real estate transaction are:
- the buyer and the buyer’s agent;
- the seller and the seller’s agent;
- the buyer’s bank and the seller’s bank
- the lawyers of the buyer and the seller.
India
Answer ... Section 55 of the Transfer of Property Act, 1882 imposes a duty on the seller to reveal or disclose all material defects with respect to both the property and the seller’s title. This duty applies where the seller is aware of the defect and the buyer is not.
Some of the other representations and warranties that a seller is bound to make are as follows:
- The property is fully owned by the seller; and the seller has not performed any acts to dilute, prejudice or lessen its title in the property and has the absolute right and authority to sell it;
- No action has been instituted by any authority with respect to the property on account of a violation of building or land use regulations, or breach of any rules, bylaws, sanctions or authorisations;
- The property is free from all encumbrances, including charges, liens, mortgages and imputations;
- No litigation involving the property is ongoing; and
- The structure is insured against all damages; and the seller has provided all fire safety certificates and, until finalisation of the sale, has continued the maintenance and upkeep of the property.
India
Answer ... Due diligence is probably the most important aspect of a real estate transaction, following a broad understanding of the commercials (lease rent value). This process can affect not only the commercials, but also the feasibility of the transaction itself. While the value of the transaction does play an important role, it is also critical to ensure that sufficient time and resources are made available to facilitate comprehensive due diligence of the property. Issues such as title, permitted use, legality of construction, encumbrances and easements can affect the nature of the property and its suitability to the commercial needs of the transaction.
Due diligence is mainly conducted to verify the ownership of title to the property and any encumbrances over the property, so as to protect against pre-existing claims over the property. Such claims either could affect the transferor’s ability to transfer the property or could attach themselves to the property even after it has been transferred.
The primary objective of due diligence is therefore to gather information. The extent and type of due diligence to be undertaken by the purchaser’s lawyer will depend on:
- the risk profile and business objectives of the purchaser and lessee;
- the type of real asset involved;
- the nature of the real estate transaction (ie, whether it is a purchase, long-term lease, short-term lease, mortgage or financing);
- the timeframe for completion of the transaction; and
- whether the purchaser is looking at obtaining third-party financing either pre-transaction or post-transaction.
The purpose of due diligence in a real estate transaction includes the following:
- checking title and ownership with regard to the property;
- checking the flow of ownership with regard to the property for the last 31 years;
- checking for any encumbrances, charges, liens or mortgages on the property;
- checking the physical status/possession of the property;
- checking the applicable land laws on the property;
- checking for any litigation involving the property;
- checking for any change of land use permissions;
- checking for any sanction plans and approvals with regard to the building;
- checking for consent to establish and consent to operate;
- checking environmental clearances and permits;
- checking occupation and competition certificates; and
- checking details with respect to registrations under the Real Estate (Regulation and Development) Act, 2016.
Depending on the nature of the transaction, the property involved and the objective of the participants, due diligence can be divided into two broad categories:
- Full search: A full search is usually done when giving a title certificate of the property and covers a period of 31 years.
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Limited search: A limited search is generally conducted in transactions where the property is taken on lease for a short term (usually under nine years). In such instances, the period for which the preceding ownership of the property is traced is generally restricted to 15 years (or less) from the date on which the current owner of the property came to acquire the property. Unlike in a full search, in a limited search, the search relating to the history of the property may be limited to restricted aspects such as:
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- recent title history;
- encumbrances on the property; and
- disputes relating to the property.
India
Answer ... The following documentation is required:
- leases and licences;
- deeds of conveyance/sale deeds; and
- development agreements.
India
Answer ... The process for concluding a real estate transaction in India is as follows.
- The property is identified.
- A law firm is appointed to determine title to the identified property and to draft, negotiate and finalise the agreement to lease and the lease deed.
- The parties enter into an agreement to sell/lease prior to the lessee conducting due diligence on the identified property.
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The law firm verifies the title to ensure that due diligence is conducted – mainly to verify the ownership of title over the property and check for:
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- any encumbrances over the property;
- the right to use the property;
- the nature of the property – whether commercial, industrial, residential or agricultural;
- whether a land ceiling applies; and
- whether any litigation concerning the property is ongoing.
- If the purchaser/lessee wishes to obtain a loan, an application must be made with the relevant bank and all necessary documents – including the financials of the applicant – must be verified by the bank. The lender may require the purchaser to submit the due diligence report on the property or may conduct its own due diligence.
- The terms of the sale deed/lease deed are finalised.
- The sale deed/lease deed is executed before the office of the sub-registrar following payment of stamp duty and registration fees by the purchaser/lessee. The amount of stamp duty payable varies from state to state and is based on the agreed sale price.
- Possession of the property is handed over to the purchaser/lessee simultaneously with execution of the documents.
- In case of a sale deed, the property must be recorded in the revenue/municipal records against the name of the purchaser. This process is called mutation. It will assist the relevant revenue/municipal authorities in levying property tax.
Timelines: The process from identification of the property to closure of the transaction can take anywhere between two and three months.
Costs: The costs that are likely to be incurred include:
- registration fees;
- stamp duty;
- the costs incurred in obtaining certified copies of revenue records;
- law firm fees;
- notarisation charges for the requisite documents; and
- leviable fees for recording the purchaser’s name with the relevant revenue/municipal authorities.
India
Answer ... The duties and obligations and liabilities of the seller are as follows:
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Disclosing material defects in the property or title: Section 55 of the Transfer of Property Act, 1882 imposes a duty on the seller to reveal or disclose all material defects with respect to both the property and the seller’s title. This duty applies where the seller is aware of the defect and the buyer is not. The defect must also be of such a nature that, despite practising due diligence, a prudent person would be unable to discover the problem in the property or title. If the seller deliberately neglects this duty, this will amount to fraud or omission on its part.
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A ‘material defect’ is a factor that can affect the buyer’s decision on whether to buy a certain property it. Material defects can include:
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- something which interferes with or obstructs enjoyment of the property;
- a defect in the title;
- street alignment, lack of right of way or non-existence of independent passage to the property; or
- a public right of way which could not be discovered on first inspection of the property.
- It is the seller’s duty to convey good title to the buyer. However, the burden of proving that there has been non-disclosure with respect to a defect in the title lies with the buyer.
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In some cases, there may be a defect in both the property and the title – for example, where the property which is the subject matter of the transfer has been illegally built on government land. Consequently, the seller may receive notice to demolish the illegally built property. For example, in Haryana Financial Corporation v Rajesh Gupta the seller (A) wanted to sell a factory by way of auction. The buyer (B) deposited a certain amount with A, on condition that A ensured that there was an independent passage or right of access to the unit. The tacit understanding on this condition was established through frequent communication between the parties. However, the passage was in fact, insufficiently wide to meet B’s requirements. Ultimately, A was unable to arrange for adequate passage to the unit. Therefore, B refused to pay the pending amount for the property. In response, A regarded the amount previously deposited by B as forfeited and put the property back up for auction. The court held, under Section 55(1)(a) of the Transfer of Property Act, 1882, that A was in the wrong for failing to disclose a material defect – that is, there was no adequate passage to the unit. A was not allowed to take advantage of this wrong to retain the deposit.
- Producing title deeds for inspection: If the buyer so requests, the seller must supply the title deeds for inspection before execution of the sale deeds. The main objective is to satisfy the buyer that there is no defect or problem with the title, and that it would present no disadvantage if the buyer were to acquire it. The title is usually delivered directly to the seller or to the seller’s representative or lawyer. However, the legislature can also introduce provisions with respect to the place of delivery.
- Answering relevant questions as to the title: Before the sale, the seller also has a duty to answer all ‘relevant’ questions with respect to the sale. If the seller fails to answer, the buyer has the right to rescind the contract. Answering relevant questions as to the title is the responsibility of the seller because it is obliged to ‘make out a good title’ in itself. If the information contained in relevant documents leads to doubts or questions, the seller must resolve them upon being asked to do so by the buyer.
- Executing conveyance: Conveyance is the legal process of transferring the property from the seller to the buyer. The conveyance is executed before execution of the sale deeds to complete the process of the sale. Section 55(1)(d) of the Transfer of Property Act, 1882 stipulates that the buyer must tender the instrument.
- In Jamshed Khodaram Israni v Burijori Dhunjibhai,, there was an agreement between the buyer and seller to transfer a certain piece of land for INR 85,000. The buyer deposited INR 4,000 as a deposit. Within two months of the date of the agreement, the conveyance was to be signed and INR 80,500 was to be paid by the buyer. After the registration and transfer, the buyer was to pay the remaining balance of INR 500. However, if the buyer failed to make payment within the timeframe specified in the agreement, the deposited money would be forfeited by the buyer. Ultimately, the buyer failed to make payment within the stipulated two months and as a result, it forfeited the deposit. The buyer sued the seller for specific performance. The court held that the language of the plainly expressed stipulation must concretely show the intention of the parties to make their rights dependent on the observation of prescribed time limits. The duty to tender a conveyance and to pay the consideration at the time of the execution was subject to a contract.
- Taking reasonable care of the property and title deeds: The seller’s duty to take reasonable care of the property and title deeds begins before execution of the sale deed and continues until delivery of the property to the buyer. Section 55 of the Transfer of Property Act, 1882 stipulates that if there is damage to the property or title within the timeframe specified in that section, the buyer has the right to reduce the price or consideration it must pay. The buyer can also opt to sue for damages and demand compensation from the seller.
- Providing a certificate of no encumbrance: If there are any encumbrances on the property, it is the seller’s duty to clear them up before execution of the sale deed. Regardless of whether the seller has knowledge of the encumbrance, the seller must still resolve it. The buyer has the right to enforce this duty of the seller through Section 69 of the Contract Act, 1872. The seller must pay any rents or charges accrued to the property before the date of execution of the sale deed. The seller also has a duty to deal with public charges and, where necessary, must obtain the permission of the statutory authority to make the sale.
- Before the sale deed is executed, if the buyer discovers that there are charges/encumbrances on the property being sold despite receiving assurances to the contrary from the seller, it can:
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- retain a portion of the purchase money to offset the charges on the property;
- rescind the contract; or
- sue for damages.
- Handing over the title deeds: As the time of execution of the conveyance deed, it is the responsibility of the seller to hand over the chain of title documents to the buyer.
- Ensuring payment of property tax and pending dues of the government/statutory bodies/authorities/utility dues: Up until the date of execution of the conveyance deed, it is the responsibility of the seller to clear all pending taxes and dues.
- Giving possession to the buyer: Upon execution of the conveyance deed, it is the seller’s responsibility to hand over the peaceful and vacant possession of the property to the buyer.
The duties and obligations of the buyer are as follows:
- Disclosing material facts: Where the buyer has knowledge or information about the nature and extent of the seller’s interest in the property, and such knowledge or information indicates an increase in the material value of such interest, the buyer has a duty to disclose such information to the seller. This duty applies where the buyer has reason to believe that the seller is unaware of this information.
- Paying the price: The buyer’s duty to furnish the promised consideration is paramount. It must pay or tender this at the agreed time and place of execution of the sale, and to such person as per the instructions of the seller. The duty to pay is personal in nature and the buyer, upon refusal of the seller to accept it, is free to make a deposit with the court. The buyer must further ensure that the source of payment is untainted.
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Bearing loss to the property: Once ownership of the property has been transferred from the seller to the buyer, any loss to the property as a result of the destruction, injury or reduction in value not caused by the seller’s actions is to be borne by the buyer. This rule applies even if:
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- possession has not been delivered yet by the seller; or
- full payment of consideration has not been furnished by the buyer.
- The key issue is the passing of ownership. Once the buyer attains ownership, even if it does not have possession, it must bear the losses.
- Paying outgoings: As with bearing loss to the property, the key point to focus on here is ownership. Once ownership passes to the buyer, the latter is obliged to pay any public charges or rent payable with respect to the property. Public charges may include taxes imposed by the municipality or relevant authorities on the property. The authorities charge tax against the property itself, and not on the buyer or seller in particular. Before the sale, public charges are paid by the seller. After the sale, public charges are paid by the buyer. Upon completion of the sale, the seller ceases to enjoy the benefits of the property; however, it gains the right to indemnification from the buyer with respect to charges imposed after completion of the sale.
Consequences of breach of contract: A contract binds the buyer and seller to move forward with the transaction on the stated terms at closing. After execution of the agreement, neither the buyer nor the seller can back out without breaching the agreement. Still, a breach does not always give the other party the right to terminate the agreement. Most contracts allow for notice and waiting periods, and provide opportunities for remedy and continued performance. Parties must pay special attention to the requirements for termination upon breach before calling off the deal.
Different remedies are available depending on who is in breach. If the seller is in breach, a court can grant specific performance and force it to complete the sale. This remedy is available because it is assumed that each parcel of land is unique and monetary damages will not truly give the buyer the benefit of its bargain. If specific performance is not possible, the buyer can seek monetary damages. The seller may be liable for the return of the buyer’s deposit, together with interest and expenses for title examination, land survey preparation and attorneys’ fees.
If the buyer breaches a purchase agreement and refuses to complete a sale, it will generally forfeit the deposit; the seller can also seek monetary damages. A court will not order specific performance to force the buyer to buy the property because monetary damages are adequate to compensate the seller.
To avoid the hassle and uncertainty of calculating actual damages for a buyer’s breach, a real estate contract may include a liquidated damages clause, which is a pre-negotiated sum that one party to an agreement will owe in the event of breach. This ensures predictability and can act as a type of insurance against the cost of a breach. Although such a clause is commonly included, a court will disregard it if the financial penalties it provides for are exorbitant. In most cases, the liquidated damages clause is the amount of the deposit, which is paid to an escrow agent at the time the contract is executed. If the buyer breaches the contract, the escrow agent pays the money to the seller, which keeps it as damages for the breach.
India
Answer ... Capital gains tax: Capital gains tax is levied on the profit/capital gain that arises at the time of sale of the property. This tax must be paid by the seller and is paid by all taxpayers, irrespective of the state in which the property is situated.
Tax deduction at source: The buyer of a property must deduct tax at a rate of 1% from the amount payable to the seller. This amount must then be forwarded by the buyer to the income tax authorities. This tax is payable by all taxpayers, irrespective of the state in which the property is situated. However, it applies only if the transaction value is more than INR 5 million.
Service tax: If the property that is being sold is under construction, service tax will also be payable.
The effective rate of service tax on property is 3.75% or 4.5%, depending on the size of the property and the transaction value. Service tax on the sale of property must be paid by all taxpayers irrespective of the state in which the property is situated. This is paid by the buyer to the seller, which in turn deposits it with the government.
Value added tax (VAT): VAT is a state tax. Some states impose VAT on the sale of property that is under construction; others do not. VAT is paid by the buyer to the seller, which in turn deposits it with the government.
Stamp duty and registration charges on property: At the time of transfer of title of the property and registration with the government, stamp duty and registration charges are also payable. The rate of stamp duty differs from state to state. Some states also give a concession if the new owner of the property is a woman.