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    Introduction To Diligence - THE WHY AND THE HOW OF TITLE DUE DILIGENCE

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    parasshah.klj

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    ut | Awards | Blog | NewsAlere | &svardhmaanegmailcom Search for Articles Q ‘CONTRIBUTOR aS ©e00 ARTICLE India: THE WHY AND THE HOW OF TITLE DUE DILIGENCE 8 juy 2021 by Bhoumick valdva and Asmita Meade ‘Your Linkedin Connections Introduction "Tile ts.a legal term; it means the ownership right to property. Investigation of titles essential to ascertain the ‘ownership ofthe property and ensuring that the tile fs complete and free from any doubts, risks and interest. However, mind, the procedure of property acquisition and land due diligence is arduous and ‘complicated, due to the involvement of various regulatory authorities, State specifi laws and judicial precedents. lis pertinent to analyse certain issues in relation to the realestate property such as ownership, title, legality of development & construction, permitted use, easements and encumbrances which have the potential to influence the essential attributes of any property and its suitably to a given transaction, ‘The process of ile due-cligence typically involves preparing a checks in accordance withthe state jurisdiction and legislation. Such exercise sto be categorically conducted to procure a crystal clear vision on ‘the preceding tle of onmerships of the immovable property together with all permitted uses, encumbrances! ‘charges, compliance of statutory requirements, restrictions vested in the property and modus operandi to ‘overcome obstructions, Fany. ‘Aue diligence exercise is possibly the most important aspect of a transaction involving realestate immediately following 3 working understanding ofthe involved financials. This process has the potential of not anly impacting the financials ofa transaction but also determining the feasibility ofthe transaction itsly ‘While the commercials often pay high importance to expedite the conclusion ofa transaction, its criticalin the interests ofthe parties to provide adequate time and attention toa detalled due diligence of the property in question. ‘This paper aims to highlight and explain the various aspects thatthe tle due dligence exercise entals, Why it {forms an indispensable par of any ansaction, the types of tle due diigence, and the aspects one needs to particularly scrutinise na tile due dligence pracess wil be elaborated on in this paper. n each of this paper's ‘ollowing sections we have discussed sore of the key elements involved In conducting a title due-dligence of Properties in Ina, followed by the lst section that deals specially, with particular conditional categories of. land in Manarashica Need for Title Due Diligence Due ligence is primarily conducted to verify the ownership of tile over the property and any encumbrances, ‘over such property, 0 a5 to protect one against any pre-existing claims over the property in question. Such claims could either eect the ability ofthe transferor ¢o transfer the property or could attach themselves to ‘the property even after I's wransterre, ‘The primary objective of a due dligence exercises therefore to gather information, andl to cross reference such gathered information to ascertain ts truthfulness. the extent and type of due diligence tobe undertaken by the purchaser's lazer will depend on the following, the rsk profile and business objectives of the urchaser/ lessee i) the typeof real asses involve (i) nature of the real estate transaction (Le, whether is {2 purchase, long terry short term lease, mortgage o financing ofthe real property: (i) the timeframe for ‘completion of the wansaction; and (y) whether the purchasers looking at obtaining third party financing ‘ether pre-transaction or posttransaction. In case ofa prospective purchase, alease ofthe property or real estate financing, atte search's performed primary to answer three questions: |, Does the owner/ lessor have sufficient authorty/ interest right to enter ino the transaction invohing the property in question? li Do any lens exist on the property which needs to be discharged before the consummation of the transaction In question? These could be in the nature of mortgages, charges, acquisitions, unpald taxes, ligation, easements and other assessments, i. whats the nature af restrictions on the use af the propery? -Apar< from undertaking tie searchy due dilgences or purchase o lease of properties a tile search’ due diligence is also performed when an owner wishes to mortgage the property wth any bank. nancial Institution ara ender. Such bank/ financial institution lender may require the owner to submita due dilgence report ofthe property or may conduct such dligence on its own, ‘Types of Title Due Diligence ‘The ype of tile due llgence that ought to be conducted is highly reliant on nature of the transaction, the property involved and the objective ofthe participants, Keeping in mind these considerations, due alligence an be classifies into two broad categories Firstly, 3 fll search which is generally conducted at the time of giving the title cetfieate af the propery in instances of sale/resale/ long term lease transactions and for transactions that involve obtaining of financing boy mortgaging the property in question, Herein the search regarding status of ownership of the property's generally conducted for a period preceding thirty (30) years (or more) from the date on which the seller in ‘question came to acquire the property ‘full search also entalls a detailed search of all aspects relating to the history ofthat property suchas the status of encumbrances over the property, the status of disputes relating to the propery, the applicable regulations and the status of compliance of such applicable regulations relating to the property in question. ‘The second category is formed by what is known limited search, whichis generally conducted in transactions where the property i taken on lease fr a short term {usualy under 8 years) In instances of this nature, the period for which the preceding ownership ofthe property is traced is generally restricted to fiteen (15) years (or less rom the date on which the current owner ofthe property came to acquire the property Unik fll searches, in a limited Search the search relating tothe history of the property may be limited to restricted aspects such as recent title history, encumbrances on the property, disputes related to the property Key Elements In this section we alm to rake 2 look at certain essential elements that one needs to very, while engaging ina tile diigence exercise: 1. Derwation af Ownershi, It forms to be of prime importance to, before entering into any transaction, determine the ownership of the property in question, The following considerations are the most relevant in aiding such determination: © Sale and Purchase: I the tle of ownership of subject property is obtained by vitue of sale oF purchase, the regstered sale deeds and the tle documents ofthe preceding holders shall be verified, © Gift Ifthe tte of ownership of subject property is obtained by virtue of gift, one shall scrutinize the repisterea git deed of any other relevant document to give effect tothe transferability of the subject property. © Wilvinhertance:I'the title of ownership of subject property is obtained by virtue ofa will or Innertance, the executors shall examine the will dacument 35 to any conditions therein and the lorder/probate of a competent court authorizing legality of the wil. Similarly, inthe case of Intestate succession, one shal scrutinize the laws of succession in orderta ascertain the proper evolution of propery, © Lease: the tile of ownership of subject property Is obtained by virtue of lease, the transferee shall examine the lease deed, parties rights and compliance of all the obligations with respect to transferabiliy of such propery. © Exchange: the tle of ownership of subject propery is obtained by virtue of exchange, one shall ‘examine the exchange document inorder to ascertain transferability of such propery, 2. Nature ofthe right of the transferor, The rights of transferor with reference tothe ownership of property may be absolute or limited. ‘Ownership may be seen as absolute when possession, enjoyment and disposal rights are vested in the cowmer without any restriction otherwise itis sad to be limited. inorder to execute a valid transfer, is mandatory for such absolute right to dispose tobe vested in transfer ‘Thereby, in conducting a title verfication itis pertinent to inspect the nature ofthe right of the ‘transferor. Ithelps us to kdentiy ithe sald property is transferable and whether the transferor has the absolute right to transfer the property Here, we must also consider the recent ruling in Dahiben v.Arvindbhai Kalyan Bhanusall through Legal Representative and Others (Civ appeal no, 9519 of 2018], Wherein the court stated thatin cases where the entre sale consideration had notin fact been paid, such non-payment could nat be a ground for cancellation of the sale deed. The court held that" Even ifthe whole ofthe price s not paid but the document is executed, and thereafter registered, the sale would be complete, and the tile would pass (nto the transferee under the transaction, The non-payment of apart of the sale price would not affect ‘the vaidty ofthe sale. Once the tte inthe property has already passed, even ifthe balance sale consideration is not paid, the sale could not be invalidated on this ground." Herein, the Court ao relied nits own previous judgment in the case of Vidyadharv. Manikrao & Anr.[(1998) 3 SCC S73} Sub. Repistrar Searches ‘A pre-requisite of any tte due-lligence fs to carry out searches in the ofices ofthe Sub-Registrar of Assurances in order to have a comprehensive and complete record of allregistered documents Including any lis pendens on the subject property. To what extent and up to What period the prior tle ‘deeds are to be perused may vary from case to case, However, its advisable o peruse the tile deeds ‘or the last 30 years as per the provisions ofthe Indian Limitation Act, 1961 In order to ensure that, there are no clams affecting the subject property One of the pre-requiskes ofa diigence exercise involves ensuring that, al documents are adequately stamped under the provisions ofthe Indian Stamp Act, 1899 read with the State-speciic Stamp Acts and further, all compulsorly registrable documents are subsequently registered under the provisions of the Registration Act, 1908. Applicabiliy of ndian Limitation Ac. 1964 Limitation Act’: ‘The period of limitation incase of morigages to redeem or recover possession of mortgaged immovable property ‘article 612, for foreclosure of mortgages (Article 63a) or suits by or en the behalf of the Central Government or any State Government is 30 years (Article 1122 Under Section 90 ofthe Evidence Act, 1872, a document 30 years or more is presumed to be validly executed and the contents thereof are presumed to represent the correct agreement or understanding between the parties there co However, a search for the last 12 years may be treated as normally sufficient depending on the transaction since the limitation period to file a sut in the folowing cases is 12 years © Taenforce payment of money secured by a mortgage or otherwise charged upon immovable property, when the money sued for becomes due; /Artile 62) ® for possession of immovable property mortgaged, when the mortgagee becomes entitled to possession; fArile 634) © For possession of immovable property based on previous possession and nat on ttle, when the plaintiff while in possession ofthe property has been dispossessed, from the date of such ispossession; (Article 54) © For possession of immovable property or any interest therein based on tile, when the possession. of the defendant becomes adverse tothe plant: /Arile 65) © For possession of immovable property when the plaintiff has become entitled to possession by reason of ary forfeiture or breach of condition, when the forfeiture is incurred or the conditions broken. (Article 66) Legal Authority ofa minor ta transfer pro leis pertinent to be heedtul when a minor is involved in ranster of propery. Under Section 8 (2) of the indy Minority and Guardianship Ac, 1956, @ court permission in favour ofa natural guardian isa pre: Fequiste to alienate the minor's interest in property. Furter, any transfer of immovable property made bya guardian may be accepted by the minor on attaining majority (eighteen years of age in India) or revoked by challenging such transfer by way of a suit within the prescribed period of thee years fram ataining majority under Arle 60 ofthe Limitation Act, Therefore, as held by the Supreme Court of India on 25 February, 2019 in Murugan & Ors. vs Kesava Gounder (Dead) THR, LRS. And Ors. [CNIL APPEAL NO.1782 OF 2019 arlsing out of S.LP.(C) No. 21031 of 2010)] such tansaction/ranster by 2 {guardians voldable and can beset aside upon three years from the date of the minor ataining majority. 6, Nature of Property and Land Use ‘Asa part of the tile verification process, tis necessary to ascertain the nature ofthe property, 35 to whether it is government-owned or privately owned. Any property which is under ile of government ‘Cannot be further transferred or alienated without the prior permission of the relevant competent author, falling which such transfer will be vod ab initio Further, based on and use, property can be divided into two broad categories Le. agricultural land and ‘non-agricultural land, While conducting ttle verification its necessary to idently the land use or status of property in question, as to whether tis agricultural land or non-agricultural land, If itis non- agricultural land then t should be further classified as residential or commercial, institutional, industrial Because knowing the land use pattern will help the buyer ta determine the utility ofthe property. For instance, only non-agricultural land can be used for residential purposes, If on verification itis found that property in question is classified as agricultural land then you have to apply forthe corwersion of land with an authorization to use it for residential purposes. If the conversion Is permitted, only then is it advisable to proceed with the transaction. This information can be derived from the assessment register maintained by the local municipal authorities. 2 1 and constructor In the case the property in question has some ongoing developments or construction, a few steps may be seen to be added to tle verification process, It must be ensured that any construction, that may be ongoing is in adherence to che buléing plan and sanction plan in the samme manner as prescribes and passed by the appropriate municipal authorities, In addition to this, bulders are required to seek a number of permissions and approvals with regard to infrastructure and utly facies lke water, sewage, electricity environment compliance ete The ‘appropriate acquisition and sanction of these ought tobe adequately ensured, In case of ready to move-in’ properties, one also needs to duly verily check occupancy and completion ceoicates ‘Therefore, while conducting title verification itis advised to determine whether ll the local construction rules were followed and complied with or not Further, ifthe property is under construction stage tis important to scrutinize following aspects ~ © One must ascertain ithe developer isthe owner of land itself orf he has entered into ajoint evelopment agreement with the landowner. In ase of latter, a power of attorney must be ‘executed between the landowner and developer, which must be scrutinized while conducting tile verifieation, © itmust be ascertained that the bulder is complying with all the local construction and safety rules, © Itisalso necessary to determine If the builder had sought all the necessary permissions, authorization and approvals, © One need to ascertain i the construction isin compliance with the sale agreement. whether there is adequate access to the subject property 8. charges/Encumbrances: © Real Estate (Regulation and Development) Act, 2016 (°RERA'): Pursuant to the advent of the RERAS itis essential to ensure that, any property development project is registered under the RERA ‘Authority within the State whieh would entail scrutinizing the RERA Regstation Certificate Further, the Agreements fr Sale in respect ofthe flat/premises inthe bullaings forming part of the development project should be perused and ane should be careful about he date of possession thereof and the current status of construction in arder to keep any customer complaints/disputes before the RERA tribunal at bay. Further, on must ensure that, Getails/disclosure ofthe flts/units sol in the given project are provided by the promoter or ceveloper © Insolvency and Bankruptcy Code (IBC: the holder of che subject property isa company, one should cary out Registrar of Companies searches to ensure thatthe property isnot part of any rmortgage/cnarge or hypothecation. Further, the previous three years’ audited balance sheet along with profit and loss account ofthe ownerideveloper forthe las three years should be scrutinized in order to ensure that, the company shall notbe declared as insolvent or be wound Lpmaking it lable in several debts to ks secured/unsecured creditors ® Statutory Dues: One should ensure thay income tax dues, municipal taxes including assessment/property tax water and electricity bils are paid falling which the concerned department of the local Government body may havea len on the subject property. © Pending Ligations: In order to have clarty on any undisclosed disputes/Iiigations, one should carry out itigation searches in respect of the entity in holding of the subject property in erder to conducting a tile due di ascertain whether there are any ordersiclaims affecting the subject property andor the rights/interest ofthe owner/holder in respect thereof. “Acquistion Process: n Ind, the Right to Falr Compensation and Transparency in Land ‘Acquistion, Rehabiltation and Resettlement Act, 2013 restrict the allenation rights ofthe original ‘owner. While conducting tle due-

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