This article is written by J Jerusha Melanie, a student of SRM School of Law, Tamil Nadu. This article seeks to explain the meaning, legal essentials, types, and various other aspects of development agreements.
It has been published by Rachit Garg.
Table of Contents
Introduction
The real estate industry is one of the largest industries in India. It contributes to around 6-8 per cent of the Indian Gross Domestic Product (GDP). Employing over 50 million employees, it is the third-largest employer in India. With the growth in urbanization, the real estate industry in India is set to reach a market size of $1 trillion US dollars by 2030. So, it’s apparent why many people like to invest in this steadily-growing industry.
In India, most people interested in the real estate industry invest in three major forms- residential rentals, commercial or industrial real estate, and vacation rentals. Another profitable option is to jointly develop the land with the help of a developer. A development agreement is entered into for that very purpose. It facilitates both the land owner and the developer to mutually satisfy their needs. Let’s dive in to know all about development agreements.
What is a development agreement
Development agreements are also called Joint Development Agreements (JDA). A development agreement is basically a contract between the land owner and a developer, in which the land owner agrees to provide his land to a developer who will in turn develop the land with his own investment.
It means that the land owner provides the land, and the developer builds on that land. The land owner may either receive a lump-sum consideration, a certain portion of the developed property, or a certain percentage of share in the profits arising from the result of the development according to the terms agreed upon in the development agreement.
Illustration
Let’s understand the concept of development agreements with an illustration. Mr A purchased a piece of land in Kanyakumari. Pondering the best way to use the land to get the optimum profit, he listed out the following options before him:
- Firstly, to construct a residential or commercial building and then sell or rent it;
- Secondly, to lease it; and
- Lastly, to wait for the golden opportunity for the price of the land to reach considerably high and then sell it off.
However, none of the above options satisfies him, as he doesn’t have enough funds for construction. Further, his lack of requisite expertise to get the required approvals is hindering him from constructing residential or commercial buildings on his land. Mr A also doesn’t want to go with the last option of waiting for the peak of price-hike, as it’s highly uncertain and time-consuming.
Meanwhile, Mr B is a reputed industrial developer, who wants to develop a residential property in Kanyakumari. He has the right expertise in getting construction approvals and managing the construction activities. However, considering the trend of the exorbitant prices of land in Kanyakumari, he only has funds enough for the construction. He doesn’t want to buy a piece of land first and then develop it.
So, Mr A and B come together and agree that Mr A will contribute his land and Mr B will develop the land into a residential property. The deal is that while Mr B gets the requisite approvals, pays for the construction, manages the construction activities, and takes care of marketing the land, Mr A will have no responsibility for the development. All that Mr A has to do is sign an agreement and give his land to Mr B’s control, in return for a share of profits arising out of the constructed property. This agreement is called a development agreement.
Why is a development agreement needed
Development agreements are common in the Indian real estate industry. It helps in situations where an owner of a potentially profitable land may not have enough knowledge regarding construction and related formalities or has no sufficient funds to start constructing on the land. Simultaneously, it helps the developers who may have sufficient funds and expertise but no land at prime locations.
A development agreement creates a win-win situation for both the land owner and the developer. Depending on the terms of the development agreement, the land owner will effortlessly receive ready benefits from his land, while the developer gets to develop land and make a profit out of it without actually purchasing the land.
Legal essentials of development authorizations
License
The development agreement serves as a license that is mandated under Section 52 of the Indian Easements Act, 1882 for the developer to enter into and develop the land owner’s property. As per the said Section, to enjoy any non-easement right over somebody else’s property, one should obtain a license from the land owner. So, in the case of development agreements, only upon such a grant can the developer launch the developmental project on the land owner’s activity.
General Power of Attorney (GPA) Agreement
A development agreement is just a contract between the land owner and the developer, wherein the land owner provides his land and the developer is responsible to develop the land using his funds and expertise. No transfer of title takes place while entering into a development agreement. Further, under Section 53A of the Transfer of Property Act, 1882, legal possession of the land remains with the land owner till the revenue out of the property’s sale is received. It means that the developer cannot sell the developed property. So, in most cases, the land owner and the developer enter into a General Power of Attorney (GPA) Agreement.
GPA Agreement refers to the authority given by the principal/ grantor to the agent/ attorney holder to perform a particular task on behalf of the principal. In the case of development agreements, the land owner is the principal and the developer is the attorney holder. Since the development agreement allows the developer to only construct upon and market the land, both the parties enter into a GPA agreement to empower the developer to market (sell) the developed land on behalf of the land owner. The revenue received on selling the developed land is then shared between the parties according to the terms agreed upon in the development agreement.
Nevertheless, one of the key points to note here is that neither the development agreement nor the GPA agreement facilitates the transfer of title of the land owner. So, albeit entering into and registering the development agreement and the GPA agreement, the land owner has to grant the conveyance deed in favour of the buyers of the developed property.
Registration
The registration of development agreements and GPA agreements was optional under Section 18 of the Registration Act, 1908, until the recent judgment of the Hon’ble Supreme Court in the case CIT v. Balbir Singh Maini (2017). In this case, the Apex Court held that unless a contract is registered under Section 53 of the Transfer of Property Act, 1882, it is not enforceable by law. Further, it was also held in this case that the registration of any development agreement is mandatory to consider it as a ‘transfer’ of capital assets under Section 2(47)(v) of the Income Tax Act, 1961.
Now, the registration of development agreements, supplementary deed (if any) and the GPA agreement in the office of the sub-registrar along with the payment of appropriate stamp duty is mandatory to prove its validity. Stamp duties vary from state to state.
Non-objection Certificate (NOC)
Similarly, a development agreement usually vests marketing rights on the developer. So, the land owner can not sell the developed land without the authorization of the developer. This is why a Non-objection Certificate (NOC) from the developer is mandatory to sell the developed land.
No registration, no home loan
Most banks refuse to sanction home loans if the development agreement is not registered. It is because, in the absence of registration, there are chances of disputes arising between the developer and the land owner.
Types of development agreements
In general, there are two types of development agreements- area sharing development agreement and revenue sharing development agreement.
Area-sharing development agreement
An area sharing development agreement is an agreement wherein it is agreed that the developer will construct on the land owner’s property using his money and expertise, and in return, the land owner gets a specific portion/ ratio of the developed property.
Illustration
Let’s understand an area-sharing development agreement through an illustration.
Mr A is the owner of land measuring 1 acre. Mr B is a real estate developer. Mr A and B enter into an area-sharing development agreement. According to the terms of the agreement, Mr B must build 5 villas on Mr A’s land. In return for providing the land, Mr A gets one of the newly developed villas.
Revenue-sharing development agreement
In a revenue-sharing development agreement, the land owner and the developer agree that while the developer constructs upon the land owner’s property using his money and expertise, the land owner, in return, gets a specific share of the revenue generated by selling the developed property.
Illustration
Let’s understand this with the help of an illustration.
Mr A is the owner of land measuring 1 acre. Mr B is a real estate developer. Mr A and B enter into an area-sharing development agreement. According to the terms of the agreement, Mr B must build 5 villas on Mr A’s land. In return for providing the land, Mr A gets a 35% share in the total amount of money received after selling all the 5 villas. The ratio of revenue shared between the land owner and the developer is 35:65.
Rights and duties of the developer in a development agreement
The following are the rights and duties of the developer in a development agreement:
Rights
Right to acquire General Power of Attorney
As aforementioned, the developer is not eligible to sell the property developed under the development agreement, as the title still remains with the land owner. However, it vests on him the right to develop as well as market the property. In such a situation, the developer is entitled to sign a GPA agreement with the land owner, which allows the developer to sell the property on behalf of the land owner. However, it is the land owner who has to grant the conveyance deed in favour of the buyers of the developed property.
Licensee rights
The developer agreement operates as the license-mandated under Section 52 of the Indian Easements Act, 1882 for the developer to enter into and develop the land owner’s property. So, under a developer agreement, the land owner is the licensor and the developer is the licensee. The licensee right of the developer allows him to legally carry on with the development even if the land owner refuses to let him into the property (let’s say in case of dispute).
Right to develop
The very purpose of signing a development agreement is to vest on the developer the right to develop the property. Through the developer agreement, the land owner authorizes the developer to carry out the developmental project on his land. The development may be in the form of converting the land into plots, constructing residential or commercial buildings, etc.
Right to seek requisite approvals
Construction activities involve acquiring numerous approvals and compliances from several government departments like Municipal Corporation, Central Ground Water Board, State PWD, etc. The development agreement entitles the developer to seek such approvals required to develop or construct on the agreed land.
Duties
Bear the developmental costs
The development agreement bestows on the developer the duty to bear the costs of all the activities required to develop the land in the agreed way. It includes the costs of getting approvals, construction, transportation, landscaping, marketing, etc. The land owner’s duty ends by merely providing the land by signing the developer agreement.
Property marketing
The developer is responsible to advertise the developed property, finding the right prospective buyers, negotiating the price profitable to both himself and the land owner, and selling the property at the right time.
Acquire the required approvals
As aforementioned, the development agreement vests on the developer the exclusive duty to acquire the required approvals and compliances from respective authorities to legally develop the land.
Key clauses of a development agreement
The following are the key clauses of a development agreement:
Recitals
A recital is the introductory part of any agreement, which explains the purpose of its making. In a development agreement, the recital may state that the developer intends to build residential buildings on the land owner’s property, and the land owner intends to provide his land to the developer in consideration of a specific share of the revenue accrued.
Parties clause
The ‘parties clause’ is common in almost all agreements. It specifies the name and residential (if the party is a natural person) or corporate address (if the party is a corporate entity) of all the parties involved. In a development agreement, the parties clause will specify the name and addresses of the developer and the land owner.
Property clause
The ‘property clause’ gives a detailed description of the land owner’s property for the development of which the development agreement is entered. It sketches out the exact location and dimensions of the agreed property. A map of such property’s location is often annexed with the developer agreement.
Scope of work clause
As the name suggests, a ‘scope of work clause’ elucidates the work that each party undertakes to perform during the term of the agreement. In a development agreement, this clause majorly specifies the kind of development activity that the developer undertakes to do with the property. It may be turning the property into well-distinguished plots, residential or commercial areas, etc.
Consideration clause
The ‘consideration clause’ clearly specifies the consideration received by the parties. In an area sharing development agreement, the consideration received by the land owner would be a specific portion of the developed property. In the case of a revenue-sharing development agreement, the consideration would be a specific ratio of the revenue accrued after selling the developed property.
Representations and warranties clause
The ‘representations and warranties clause’ is one of the most important clauses of any agreement. Along with specifying their rights and obligations, it also contains the declarations of the parties. In a development agreement, usually, the land owner-
- Affirms (declares) his title and ownership over the agreed property;
- Agrees not to grant a lease, mortgage, etc. during the term of the agreement without the prior consent of the developer;
- Undertakes not to cause unwarranted hindrance to the developmental activities during the term of the agreement;
- Grants exclusive license to the developer;
- Agrees to execute a GPA agreement in favour of the developer, etc.
Simultaneously, the developer usually-
- Undertakes to obtain the required approvals from relevant authorities;
- Elucidates his plan for developing the property;
- Undertakes to execute his developmental plan;
- Undertakes to bear the developmental costs;
- Undertakes to manage the construction activities, etc.
Term and termination clause
The “termination clause’ specifies the agreement’s duration. In case the developmental work is unable to be completed within such duration due to valid reasons, the term may be extended. The parties can extend the term by mutually signing addendums to the original agreement.
Governing laws and jurisdiction clause
As the name suggests, the ‘governing laws and jurisdiction clause’ specifies the law (for example Indian laws) that govern the particular agreement and the court which has the exclusive jurisdiction to deal with it.
Dispute resolution clause
The ‘dispute resolution clause’ specifies which dispute resolution forum the parties may approach in case any dispute arises. Generally, the parties go for arbitration.
Pros and cons of a development agreement
Pros
Land procured at no initial cost
As aforementioned, a development agreement creates a win-win situation for both the developer and the land owner. It is the most suitable option for a developer who has an ample amount of expertise in real estate and construction but has no funds to buy properties at prospective locations. By entering into a developer agreement, the developer will be able to build on a prime or prospective location without paying any initial cost. All that the developer has to do is develop the land using his expertise and analyse the market trends, and raise the market value of the property. The increased market value will benefit both the developer and the land owner.
The rapid development of property
By entering into a development agreement, the land owner can facilitate his land to be more speedily ready for marketing. As the developer has the practical know-how for getting the government approvals, supervising the construction activities, and marketing it, the land will effectively undergo fast-track transformation. The land owner’s individual efforts alone may not be possible in such a development.
Effortless revenue for the land owner
By entering into a development agreement, the land owner exempts himself from the hassle of getting the requisite approvals from relevant authorities. The cost of developing and marketing the property will be borne by the developer. All that the land owner has to do is authorise the developer to launch the developmental plan and wait for its complete execution. He will reap the benefits of the development without doing anything about it.
Cons
The following are the pros and cons of entering into development agreements:
Long-term commitment and cooperation
A development agreement demands long-term commitments from both the developer and the land owner. There are ups and downs in the real estate market trends, caused by sudden changes in laws or other unprecedented factors. So, the land owner and the developer have to cooperate and trust each other throughout the lengthy process.
Risks associated with unregistered development agreements
It is extremely important to register the development agreement and its supplementary agreements with the sub-registrar. Apart from the fact that the Supreme Court has now made it mandatory (as aforementioned), the registration of the agreements is critical for both the developer and land owner, but also the prospective buyers of the developed property. It is a safety measure for the developer and the land owner, as they can’t deny the terms and conditions agreed upon by them in the agreement in case of a dispute. As for the prospective buyers, it authenticates the validity of the agreement. It saves the buyers from fraudulent real estate developers. So, it is always pertinent for the buyers of jointly developed properties to make sure the agreement is registered.
Uncertainty in market trends
The uncertainty of real estate market trends always looms on the developer and land owner. Dynamic factors like the national economy or legislation dramatically affect the real estate market. For instance, the COVID-19 pandemic had a profound impact on the Indian real estate industry. The developer is constantly under the uncertainty of losing the money invested in developing the property, till its final sale.
Format of a development agreement
The following is the basic structure/ format of a development agreement;
DEVELOPMENT AGREEMENT
This Agreement is made here at … on this … day of …, 20…, between Mr…, hereinafter called the Owner, the First Party, and Mr…, hereinafter called the Developer, Second Party.
WHEREAS, the Owner is the true Owner and is in the possession of plot No…, measuring …sq. Feet, registered as Document No. … Book No. … Vol. No. … on pages from … to … dated …
WHEREAS, the Owner is desirous to erect a residential building with a basement, 5 floors, and a terrace, as per the plans that may be sanctioned by the Competent Authority, but not fully qualified to do so, and has approached the Developer who, on being guaranteed by the Owner that the said plot is free from all kinds of legal flaws, dues, claims, etc., and that the said plot is a self-acquired property, has agreed for the construction of a residential building on the said plot, as per the terms and conditions agreed hereinafter. Now, this Agreement witnesseth as follows:
- The Developer has agreed to pay a sum of ₹… as security for the due performance of the terms and conditions of this Agreement and the successful completion of the construction.
- The Developer has agreed to build the residential building with a basement, 5 floors, and a terrace, as per the construction plans agreed upon by the Owner and the Developer and sanctioned by the Competent Authority.
- Upon the default in payment by the Developer, the Owner shall be entitled to terminate this Agreement. Upon such termination, the Developer shall remove all the erected structures within 2 months of such termination, and the Owner shall not be entitled to pay any sort of compensation for the same. However, without prejudice to his rights, the Owner may pardon the default in such payment by the Developer by extending the due date if the Developer pays a 5 % (per annum) interest on the due payment
- The Owner shall execute powers of attorney by separate documents in favour of the Developer for submitting the required document for obtaining various approvals and other purposes in connection with the terms and conditions of this Agreement. However, the Developer undertakes not to misuse the powers conferred upon the Developer by the Owner.
- The Owner gives license to the Developer to enter upon the said plot with all the rights to commence, carry on, and complete the construction thereof. The Developer shall, in no way, assign the rights vested upon him through the said license to any other party, provided, with the prior permission of the Owner.
- The Owner shall not interfere with or obstruct the construction of the said residential building. However, the Owner shall have unobstructed access to the plot at all times and be free to point out the construction flaws, if any.
- The full cost of construction of the said residential building (including material and labour costs, and the requisite fee for getting the approvals from the Competent Authority) shall be borne by the Developer.
- The cost of registering and stamping this Agreement shall be borne by the Developer.
- The property tax till the execution of this Agreement shall be payable by the Owner. Thereafter, the Developer shall pay property tax till the completion of the construction.
- The Owner shall cooperate to execute, sign, and deliver any such document that may be required for fulfilling the terms and conditions of this Agreement.
- The construction of the said residential building shall be completed within … months from the date of executing this Agreement. However, delays that are caused by reasons beyond the powers of the Developer, including natural phenomena, changes in laws, strikes, etc., shall be pardoned.
- The Owner shall deliver all the original documents of the plot to the Developer at the time of executing this Agreement. Such documents shall be returned to the Owner upon the completion of the construction.
IN WITNESS THEREOF, THE PARTIES HAVE EXECUTED THIS AGREEMENT ON THE DATE HEREABOVE MENTIONED:
This Agreement is signed by:
Mr_________ Mr__________
Please note: The above format is a basic sample of a development agreement with only the most essential points. It is always advised to seek legal assistance for preparing such documents.
Conclusion
A development agreement is a contemporary version of the barter system followed ages ago. It’s one of the latest genres of contracts born out of necessity and industry practices. News of frauds in the real estate industry often surfaces over the internet and on news channels. So, one must be always vigilant while entering into development agreements, or any agreement for that matter. Beware, and avoid spending your precious time and money on legal battles.
Frequently Asked Questions (FAQs)
Can developers sell the properties developed under a development agreement?
No, developers can not sell the property developed under a development agreement because the title of the property remains with the land owner till its ultimate sale to the buyers.
Is it mandatory to register a development agreement?
Yes, as per the Hon’ble Supreme Court’s recent decision, it is mandatory to register a development agreement.
What is the typical percentage of the land owner’s revenue share in a development agreement?
Typically, the land owner receives a revenue share of 30- 40 per cent in a development agreement.
References
- AN OVERVIEW OF DEVELOPMENT AGREEMENTS (indianrealestateblawg.com)
- The rights of a developer in a Joint Development Agreement (JDA) – iPleaders
- A primer on joint development agreements – iPleaders
- A primer on the different aspects of Joint Development Agreements – iPleaders
- Real estate collaboration and development agreements – what to do if you don’t have possession? – iPleaders
- All You Need to Know About Execution of Power of Attorney – iPleaders
- Documents Which Do Not Require Registration – Legal Documentation (legalserviceindia.com)
Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.
LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:
Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.
