In Real estate, legal due diligence is an investigation of real estate records and everything else which is related to the lease, sale, purchase, or mortgage of the property. Legal Due diligence is a vital role in today’s era of the transaction including the sale, purchase mortgage of immovable property to any Financial institution. In India, legal Due Diligence is a little complex and time-consuming because of several regulatory authorities.
The main purpose of the exercise of legal due diligence is to achieve a crystal-clear vision of the preceding title of ownership, of the immovable property including all encumbrances, permitted charges, restrictions, compliance of statutory requirement, and method of operations to overcome obstructions. Legal Due diligence of a property eliminates unknown risks. Investors or buyers need to ensure that properties they are investing in are legally suitable for a practical business perspective. Mainly, legal due diligence is necessary to determine the worth of the property.
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What are the legal aspects to check before buying a property on a lease?
Here, are a set of documents you must ensure before investing in a property:
A Sale Deed is a legal document that acts as proof of the ownership of the sellers over their property. A Sale Deed has to be mandatorily registered. Before executing the sale agreement one should check for compliance of various terms and conditions as agreed upon between the buyer and the seller. The buyer should even check whether the property has a clear title or not.
It includes legal documents that trace the origin of the ownership from start. It helps in the further sale of the property, thereby creating the new ownership. In case of the absence of the original Mother Deed, certified copies should be obtained from the registering authorities. Mother Deed also includes the change in ownership of the property, be it through sale, gift, or inheritance.
Building approval plan:
A building plan must be sanctioned without which it will be illegal under the State Municipal Corporations Act. A set of documents should be submitted by the owner in order to obtain a building approval plan such as Title Deed, property assessment extract, property PID number, 2 copies of demand drafts, city survey sketch (from the Department of Survey and Settlement and Land Records), up-to-date tax paid receipt, earlier sanctioned plans, property drawings, foundation certificate and a land-use certificate issued by the competent authority. The building owner should hire a registered architect who will draw the plan following the law.
Commencement Certificate (For under-construction property):
It is a legal document issued by the local authorities after the inspection of the site. This document states that the project meets the given criteria and helps in the commencement of construction on a site by the builder. If there is no Commencement Certificate construction comes under being illegal, levy penalties, and can even attract an eviction notice.
Conversion Certificate (Agricultural to Non-Agricultural land):
A Conversion Certificate is issued to change the use of land from agricultural to non-agricultural purposes. There is a certain set of documents to be submitted by the owner to acquire a Conversion Certificate such as
- 3 copies of the R.T.C extracts
- Village map
- Land sketch
- certified copy of the land tribunal,
- zonal certificate,
- A Title deed
- No dues certificate by village accountant
- Mutation Records (MR) copy.
Encumbrance Certificate (EC):
The single most important document after Sale and Mother deeds is The EC certificate. This brings changes in the ownership of the property that has been held against a home loan. It consists of all the registered transactions that are done on the property during the time duration for which this EC is filed. In simple terms, this will provide you with evidence of mortgages, title transfers, or any legally registered transaction that affects your property.
Power of Attorney (POA):
The POA gives legal authority to another person over the property on his behalf. To transfer one’s rights over one’s property, one can either give a Special Power of Attorney (SPA) or a General Power of Attorney (GPA).
Property tax receipts:
You should check that seller is paying all property taxes on time for at least the past 5 years without any due.
Completion Certificate (for a constructed property):
A Completion Certificate is issued by the municipal authorities which states whether the building is in compliance with their rules in terms of height, distance from the road, and is constructed as per the approved plans, etc. At the time of purchasing a property and seeking a home loan, this document is of prime importance.
How to ensure that a property is registered or not before buying a property?
In the case of buying an apartment, one should check the background of the developer. One must go through the list of past projects. The sale deed must be checked and it should be confirmed that the land is in the name of the developer. Before booking an agreement it is important to verify the date on which the property will be delivered and the ext options available on the property. The commencement certificate, which is issued by the municipal corporation after the verification of the proposed plan and approving it, must be checked. Also, make sure the actual size of the property is mentioned in the document and all the tangible and intangible features promised are mentioned in the document.
Once the construction processes are completed, it is important to ensure that you receive the completion certificate and occupancy certificate from your builder. If possession is taken over without the certificate, it may lead to legal issues in the future as you may also be evicted out of the property. In the case of buying a plot, make sure the title of the land is clear and marketable. One must confirm and make sure that the ownership rights of the land lie with the seller and the seller alone. Make sure to check the Encumbrance Certificate has been issued by the sub-registrar office where the deed of the land has been registered. The Encumbrance Certificate should also be obtained to confirm that there are no dues or encumbrances that are pending on the property.
Who will do due diligence for me?
Due diligence processes can be carried out by the buyer or seller themselves. However, some defects in the property need professional assistance. A lawyer, real estate agent, financial agents, advisors, home inspectors, etc. A lawyer may help in ensuring no legal complications in the property. He can help by verifying the title of the property and also helps in drafting the documents necessary for the transfer of the property.
A real estate agent or banker can help in carrying out the valuation of the property. The real estate carries out the valuation of the property by comparing similar properties. Banks also value the property before granting a loan to finance the property. The real estate agent, financial advisors, and lawyer can also help in identifying any encumbrances remaining in the property. In cases of identifying physician damage in the property, real estate agents or engineers can be employed. By identifying the damage, an estimate of repair costs can be identified.
Common legal due diligence issues
Some of the common mistakes in due diligence include:
- Improper valuing of the property
- Trusting the seller to reveal any problems
- Skipping on Research
- Title issues, usage, and legal complications on the property
- Trusting the third party reports completely
Is it necessary to publish a notice in the newspaper before registering for a property?
The issue of public notice in the newspaper is neither statutory nor mandatory. On the other hand, it is a precautionary step. It is recommended to issue a public notice to ensure that the title is free from encumbrances. The public notice would serve as an intimation to the public to raise any objections for the said property within a stipulated period of time and in the absence of any objections raised, the title would be deemed as unencumbered. The notice shall contain the intention of the purchaser along with a description of the property with boundaries and the fact of execution of the Sale Agreement.
The purchaser has to exercise proper care and diligence to ensure that the property is free from litigations and charges. Home buying is a sensitive process and if neglected can lead to litigation or disputes. So, make sure you check out for the legal due diligence checklist before buying property, whether new construction or a resale one, a complete title search of the property must be done. An appropriate check should be done on the property to ensure that there is no trouble that may arise in the future. The property investors should put their money after taking necessary precautions to ensure a hassle-free living for the rest of your life.
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