What is the basic legal due diligence that a property buyer must do, to safeguard one’s investment and ensure a clear title to the property? We explain…
Property investments are highly capital intensive and any mistake made during the process can cause a great deal of trouble for the buyer. This makes it imperative for a buyer to exercise due caution while examining the property documents.
Interestingly, land might be a physical asset but who it belongs to, cannot be merely proven by a claim of ownership – the same must be validated by several documents that prove the ownership status of the property.
With proper legal advice, scrutiny of documents, and verification of relevant information pertaining to the property, the buyer can ensure that the investment brings peace of mind and a sense of security.
In this article, we talk at length about the documents a buyer has to seek and examine before he is ready to sign a deal.
1. Property documents checklist
It is a settled legal principle that a person cannot convey a better title, than what he himself has. As a first step, the buyer should undertake due diligence, to ascertain the existence of the title with the seller, the nature of the title and its marketability and the ability of the seller to convey clear and marketable title, free from encumbrance. Documents, for a period of 30 years, if not more (and where documents are not available, for minimum period of 12 years), must be examined and the seller may be called upon to provide the following documents / information:
- Title documents of the property: Government order for grant, succession certificate, sale deed, gift deed, will, partition deed, etc., evidencing the transfer of title over the years, culminating in the vesting of property with the seller.
- Nature of title: Leasehold, freehold, or development right.
- In case of the seller claiming development rights to the property, the development agreement and power of attorney, executed by the owners in favor of the seller.
- All title documents being duly stamped and registered at the office of the jurisdictional sub-registrar of assurances.
- Khata registered in the name of the seller.
- Information on pending or past litigation.
- Availability of original title documents with the seller.
2. Verify the identity of the seller
Similar to verifying the title to the property, the buyer should also ascertain the identity of the seller and any specific conditions, governing the ability of the seller to convey the property. The following instances may be noted for illustration:
- Residence status and nationality of the seller, in case of an individual and whether consents from government authorities are required for the sale.
- Identification of all owners, in case of properties held jointly.
- Where the seller is a company, trust, partnership firm, society, etc. The constitution documents of the entity are necessary to confirm its ability to own and transfer the property, besides ascertaining that the person executing and registering the sale deed is duly authorized.
- Orders from the competent court, permitting the sale of the property and appointing a guardian, where the property is held by a minor or person of unsound mind.
3. Conversion and land-use permissions
With increasing urbanisation and merging of revenue lands with urban conglomerates, conversion of property for non-agricultural use assumes crucial significance, since several state laws restrict purchase of agricultural property by non-agriculturists. Secondly, the buyer must examine the Master Plan and satisfy that the property is developed in accordance with the zoning plan – such as residential, commercial, industrial, public/semi-public, parks and open spaces, etc. Where actual use is different from the notified zoning, obtaining orders from the Town Planning Authority permitting change of land use, is mandatory.
4. Construction approvals
For purchase of apartment or land with constructed building, the buyer should also scrutinize the building plan/layout plan sanctioned by the local municipal authorities, along with approvals issued by government, statutory and regulatory authorities, for providing infrastructure facilities, water, sewage, electricity, environmental clearance, fire safety approval, etc.
5. Occupancy certificate
It is mandatory for the seller to obtain the occupancy certificate from the competent authority, prior to conveying the property. Use of the property, without obtaining occupancy, exposes the buyer to penalty under the applicable building bye-laws, besides the risk of demolition of the property.
6. Status of tax payment
Non-payment of property taxes constitutes a charge on the property, affecting its marketability. So, the buyer must verify with the municipal authorities that the seller has not defaulted on payment of property taxes.
Do ask for the receipts of all utility bills from the seller. Please note here that once the property is transferred in your name, you will be liable to pay all pending dues against the property, utility, or otherwise.
Searches at the jurisdictional sub-registrar office or the official web portal of the Ministry of Corporate Affairs (if the seller is a company) will reveal information of any registered encumbrance on the property. By way of caution, the purchaser may also issue a public notice in newspapers, prior to completing the transaction, calling for claims from interested third parties, if any.
8. Physical survey and access to the property
The buyer may undertake a physical survey and confirm the extent and measurement of the property. In the case of land, it is advisable to identify and demarcate the boundaries and access to the property and further, ascertain any other physical attributes that may impede enjoyment of the property.
9. Compliance under the Real Estate (Regulation and Development) Act, 2016 (RERA)
The RERA mandates that developers should register their projects with the authority constituted under the Act. A buyer, intending to buy a property in a project coming under the ambit of the RERA is advised to verify whether the property has been registered with the authority. The information available on the official web portal of RERA for each state also provides details of any cases/complaints filed against the developer of the project and default by developer, if any, and thus, provides useful insight into the credibility of the developer and the project and helps the buyer make an informed choice.
Buyers should take note of the fact that the law mandates that all real estate brokers should also be registered with the state RERA, in order to operate legally. Hence, hire a property broker, only after asking for his RERA registration. Also, note that agents need to get their RERA registrations renewed, periodically. Ensure that you are dealing with the right person. One of the biggest benefits of having a regulatory body is that it requires a standard process of operation and violators are penalized.
Risks of proceeding with a property purchase without due diligence
Unless you are absolutely certain of the credentials of the seller and his ownership over the asset is duly testified by documentary proof, a buyer should avoid getting into a deal, irrespective of how lucrative it might seem. Sometimes, people try to sell disputed properties at low prices. This prospect might seem attractive in the beginning but would eventually prove to be a major headache. Also, never engage with a seller who wants you to use unaccounted money to make the purchase in order to save taxes. This could also lead to a lot of future troubles.
Some quick tips for buyers:
- Never agree to sign on the dotted line, without doing your own research.
- Even if an agent or a developer is recommended by people who know you, check their RERA ID and registration.
- Never agree to offer money in black, in lieu of tax discounts.
- Do not agree to buy/sell a property on someone else’s behalf.
Should I check the PoA?
PoA stands for Power of Attorney and this is a legal instrument that gives another person the authority to act as a legal owner, on behalf of the actual owner. If you are buying a property, make sure that you check these documents, to ascertain the rights of the PoA holder.
Do banks do due diligence on the buyer’s behalf?
If you are a prospective home buyer, who has submitted their documentation and papers with a bank and looking forward to your home loan being sanctioned, rest assured, your bank will do the due diligence. However, do not leave it to the bank altogether. The number of property-related cases that find their way into Indian courts every year, is a reminder that one must be careful throughout the home buying journey.