This article is written by Karan Jayesh Shah, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.com. Here he discusses “5 most common Contracts executed by Real Estate or Housing Complex Developers and Financiers.”
The Indian Contract Act, 1872 defines the term “Contract” under its section 2 (h) as “An agreement enforceable by law”. In other words, it is a legally binding agreement between two or more parties that creates legal mutual obligations. It can be either an oral or written contract. However, a written contract should be preferred over the oral contracts as they are easy to enforce. A real estate contract is a legally binding agreement between two or more parties for exchange, purchase, or any other type of real estate transaction. This document outlines the terms agreed upon after negotiations have ensued.
There are different types of contracts that are signed and executed between the parties depending upon the nature of the transaction, service requires, etc. When it comes to the contract executed by real estate/housing complex developers and financiers, the following are the most common types of agreement executed between the parties:
- Joint Development Agreement
- Tripartite Agreement
- Loan Agreement
- Construction Loan Agreement
- Option Agreement
Let us discuss each of the agreements in detail.
Joint Development Agreement
Joint Development Agreement is a contract between two or more parties wherein the landowner provides the land and the developer constructs the building on it. The real estate project is carried on by the developer on the landowner land. It would be the responsibility of the developer to obtain approvals, launch and market the project.
The developer could in lieu of land provide the landowner with certain % of sales revenue of the project, certain % of the newly constructed project and lump sum consideration, depending upon the terms and conditions mutually agreed in the agreement.
The benefits of entering a joint development agreement is that risk is mitigated, no primary funding is required in the procurement of the land, partial avoidance of stamp duty.
This agreement is very much in use when it comes to land development and in the real estate sector because it’s a win-win situation for both the parties as the resources and efforts of the developer and the landowner are fused together so as to bring maximum productive result post-construction.
The Joint Development Agreement outlines the terms, such as confidentiality, transfer of rights, title and interests of the land and building, duration of the agreement, security deposit, representations, declarations, covenants and undertakings by the landowner and the developer, expansion and development of the property, insurance, force majeure, termination, consequences of termination, waiver, exclusivity, indemnification, intellectual property rights, settlement of disputes, limitation of liability.
The Supreme Court of India has recently laid down in Bunga Daniel Babu v. M/s Sri Vasudeva Construction that a landowner who entered into a Memorandum of Understanding with a builder for development of his land by construction of a multi-story building, will be deemed to be a consumer within the definition of Section 2(1)(d) of the Consumer Protection Act, 1986.
Tripartite Agreement involves three parties to the agreement i.e. seller/developer, buyer/borrower and financial institution/lender. It is usually executed when the home buyer is in the need of money to complete the transaction with the developer. The financial institution comes into the picture wherein they lend money and if the borrower is not able to repay the money then the property would belong to the financial institution, which the home buyer can’t deny and have to accept them as a new owner of the property.
All the copies of the original documents need to be attached to the tripartite agreement and this agreement is of utmost importance, especially when the home buyer is buying an under-construction property.
The tripartite agreement needs to be stamped in the state where the property is situated.
It is the obligation of the developer to set out in the tripartite agreement that the property has a clear title. Furthermore, it should also mention that the developer has not entered into any other or new agreement for the sale of the said property with any other party.
The details that should be mentioned in the tripartite agreement are: the parties involved in the agreement, objective, possession date, construction details-its stages and progress, rights and remedies, legal norms, borrower’s, bank’s or lender’s or developer’s perspective, final selling price, interest rate, EMI details, as well as details of penalty if the booking gets cancelled.
In the Union of India vs. M/s. D.N. Revri & Co. and Ors., Justice P.N. Bhagwati, observed that the meaning of commercial contracts should be gathered by adopting a common sense approach and it must not be allowed to be thwarted by a narrow, pedantic, legalistic interpretation.
Loan Agreement is between two parties’ i.e. borrower and lender. When associating the agreement with the real estate sector, it could be in the form of a mortgage loan agreement, real estate loan agreement, simple loan agreement, etc. wherein the borrower could be an individual or trust or corporation and the lender could be a non-banking financial institution [NBFC] or a financial institution.
Prior to entering into a loan agreement, the “borrower” first makes representations about his affairs surrounding his character, creditworthiness, cash flow, and any collateral that he may have available to pledge as security for a loan. These representations are taken into consideration and the lender then determines under what conditions (terms), if any, they are prepared to advance the money.
Only after the execution of the loan agreement, the money is provided by the lender and on failure to repay the money; the security kept with the lender in the form of mortgage is considered as a payment.
It is important to set out all the details explicit in the agreement with regards to the duration of the loan agreement, repayment method i.e. on-demand or in instalments, obligations and rights of the parties, what all action are covered under indemnification by which party, interest rate, the value of collateral involved, guarantees, what shall be considered as default/breach, consequences of default/breach, etc.
Construction Loan Agreement
The Construction Loan Agreement is a legally binding contract between two parties’ i.e. borrower and lender wherein for carrying out the work of construction of the building or for funding of construction project, a short term loan is taken from the financial institution or from non-banking financial institution by the developer of the building.
After entering into the agreement, the borrower needs to pay back the loan amount with interest. The amount can be paid back in instalment or lump sum depending upon what has been mutually agreed by the parties in the agreement.
The Construction Loan Agreement shall include among other things, construction financing terms that establish how the loan can be drawn based on construction progress, the calculation and imposition of interest and fees based on outstanding loan amounts, obligations and rights of the parties to the contract, duration of the contract, what shall constitute default/breach, the consequence of default/breach, what would be the governing laws, what all actions are covered under indemnification by which party, and the usual provisions found in a corporate or real estate loan agreement.
The Option Agreement will give the right to the party to the contract to the first chance of purchasing a specific piece of property at a specific price at some future date. It is a legally binding agreement between the buyer and seller which is legally enforceable by law. This type of agreement is most commonly used for real estate but can be used for other things, as well. Investors can use real estate option contracts to secure high-profit investments at relatively low risk.
Traditionally, the seller has the right to decide whether to sell their property to a particular buyer but when an option contract is executed between the parties, the buyer gets the exclusive right to buy the property at a predetermined price at some future date but would not be obligated to do so. On the other hand, the seller won’t be able to sell that particular piece of property to any other buyer during the pendency of the agreement or without the prior consent of the buyer.
The Option Agreement shall include among other things, the location of the property, consideration to be paid by the buyer to seller, duration of the contract, purchase price, what shall constitute default/breach, the consequence of default/breach, governing law, what all actions are covered under indemnification by which party, etc.
The above list is not exhaustive and there are various other contracts that are executed by the real estate or housing complex developers and financiers. Whenever the developer is in need of money they take help of lenders, investors, buyers, financiers who help them financially in return of some consideration. Usually, in all the dealings, the contracts are signed and executed so that all the rights, duties can be put forth at one place and in case of any dispute or disagreement, the agreement can be referred by the adjudicating agency or court of law.
- 4 TYPES OF REAL ESTATE CONTRACTS: A BEGINNER’S GUIDE (March. 30, 2020, 10:20 AM), https://www.mashvisor.com/blog/types-of-real-estate-contracts/.
- All that you need to know about a Joint Development Agreement (March. 30, 2020, 10:20 AM), https://www.99acres.com/articles/all-that-you-need-to-know-about-a-joint-development-agreement.html.
- C.A No. 944 of 2016.
- All You Need To Know About Tripartite Agreements (March. 30, 2020, 11:20 AM),https://www.proptiger.com/guide/post/all-you-need-to-know-about-tripartite-agreements.
- All you need to Know about Tripartite Agreement (March. 30, 2020, 11:47 AM), https://www.homeonline.com/home-buying-guide/article/all-you-need-to-know-about-tripartite-agreement/.
- (1976) 4 SCC 147.
- What is a Loan Agreement? (March. 30, 2020, 12:50 PM), https://www.debt.org/credit/loans/contracts/.
- Loan agreement (March. 30, 2020, 2:40 PM), https://en.wikipedia.org/wiki/Loan_agreement.
- How to Draft a Construction Loan Agreement (March. 30, 2020, 3:51 PM), https://www.wikihow.com/Draft-a-Construction-Loan-Agreement.
- Project Finance Documents Overview (March. 30, 2020, 4:30 PM) https://globaltradefunding.com/project-finance/project-finance-documents/#loanagreement.
- What Is a Real Estate Option Contract—and Do You Need One to Buy a House? (March. 30, 2020, 5:55 PM), https://www.realtor.com/advice/buy/basics-of-real-estate-option-contracts/.
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