Legal due diligence before the acquisition of real estate is at least as important in India as it is in Japan and probably more so. Legally non-compliant real estate is often offered and there is no national registry of immovable property. Certain property, such as agricultural and tribal lands, is regulated by protectionist statutes, breaches of which cannot be rectified and may result in confiscation or demolition of the property. In the large scale acquisition of land, there may be rehabilitation and resettlement issues involving farmers. The acquirer may face unexpected financial liabilities should the regulators decide that additional compensation is payable. The development of properties in coastal regulation zones, archaeological and heritage areas are governed by special rules.
Scope of title due diligence
The nature of title due diligence depends on the purpose of acquisition. However, the following matters are common to any investigation of title. The acquirer should ascertain who owns the property and whether ownership rights are freely transferable. It should be determined whether the owner is in possession of the property and whether the title documents impose any restrictions on changes in management and control. There should be questions as to encumbrances such as easements, mortgages, charges, leases and arrears of property taxes. The property may be subject to litigation or compulsory land acquisition proceedings and structures should have been constructed under appropriate environmental permissions. An occupancy certificate should have been obtained. Finally, the property should be fit for the intended use.
How to carry out title due diligence
The documents of title should be perused not just to ascertain the current owner, but to trace the root of the title as far back as 30 years. It is important to examine the various transfers of title and check for competing rights. Detailed requisitions should be served on the owner and there should be an inspection of the original documents of title. If the owner has custody of the originals, it proves that they have not mortgaged the property. There should be a review of revenue records to determine whether there are inconsistencies with the title documents. Revenue records provide corroboration of an owner’s title and also whether the property is held as freehold, tribal or leasehold. They reveal easements, encumbrances, outstanding statutory dues, including property taxes, the existence of any natural water bodies and so on.
The prospective acquirer should make searches at the office of the sub-registrar of assurances (SRO) within whose sub-district the property is situated as sale deeds, gifts, leases and mortgages are compulsorily registrable with the SRO. These documents are available to the public. Such searches will confirm the authenticity of the documents and reveal any undisclosed fetters on the title. There should be a review of plans and approvals. The physical inspection of the site is usually conducted by an engineering and technical team and not the lawyer. In addition to revealing zoning issues, site visits will show whether any high tension transmission lines, public thoroughfares, or water bodies exist on the property. It will show how near the site is to an airport, state or central highways and so on. These issues need to be arranged with the owner at the time of acquisition. A review of city survey plans, zoning certificates, environmental clearances, building approvals and permissions is an integral part of title investigation.
It helps to determine the suitability of the property for its intended use whether it be commercial, residential, industrial information technology and IT-enabled services. The occupancy certificate (OC) should be vetted by the technical team as owners often make unauthorized changes to the structure after the OC has been issued. Court records of ongoing cases are not open to the public. However, searches at high courts, the Supreme Court and national company law tribunals in the name of the owner will reveal if there is any outstanding litigation. The property owner can then be asked to produce the records.
The portal of the Ministry of Corporate Affairs will reveal the existence of mortgages created by companies as they must be registered under the companies acts. Notices placed in newspapers will show whether there are issues not otherwise apparent, such as memorandums of understanding and family feuds. Each transaction is unique and the methodology must be adapted accordingly. Comprehensive due diligence mitigates the risk associated with the acquisition of real estate and helps in the drafting of transactional documents. Knowing whether there has been compliance with requirements applicable to property helps decision makers to decide whether to proceed with deals.
Alok Tewari is a senior partner and head of the real estate practice at Kochhar & Co.
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