This article is written by Neeraj Salodkar, pursuing Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho. The article has been edited by Ruchika Mohapatra (Associate, LawSikho).
Table of Contents
Introduction
A developer is a person who develops the property. The word ‘develop’ means altering, modifying, and improving the said property. This type of agreement is usually done when the building is in a dilapidated condition and needs to be improved majorly. Usually, the entire building is brought down, a new building is built at the same place, and the old tenants are given back the property.
The entire transaction seems complicated, and it is definitely so for a layman. The tenants have to be given a place to stay rent-free till the old building is demolished entirely and a new one is constructed back in its place. It takes around 1 to 5 years, depending upon the size of the property that is being demolished. Therefore, everything needs to be appropriately documented and accurately mentioned in order to prevent future disputes between the parties involved in the entire transaction. If any dispute arises and goes to the court, then the Indian judiciary takes a long time to resolve the matter given the high number of pendency in courts, and the cost of litigation is high and can be avoided. Therefore, it is imperative to lay down the rights and duties of the parties involved in the transaction in a written contract. This article helps the reader understand the key clauses of a developer’s contract with a tenant.
Key clauses of the agreement
Following are some of the key clauses that need to be incorporated in a developer’s agreement with the tenant:
Recital
A recital is a part of the contract that sets forth the purpose of the agreement that is being entered into. For example, if a service agreement is being entered into, the recital states that the employer needs the employee for a job, and the employee agrees to work for the employer for the given consideration. Therefore, in a developer’s agreement with a tenant, it may contain the following:
The condition of the building (this may be described in the schedule attached to the agreement and also defined in the definition clause of the agreement) is dilapidated/decaying/deteriorating/ruined/impaired and needs significant repairs.
That the tenants agree that it is necessary to demolish the old building and build a new one on it. (This may be due to the fact that the structure of the building is weak and is dangerous for the tenants to live there or the tenants want to live in a new house only for aesthetic purposes).
That the developer has agreed to demolish the old building and build a new one on the terms and conditions laid out in this agreement.
Duration
The developer needs to be accountable for the development of the property. The tenants cannot wait for eternity for the developer to complete the work. The duration to complete the work needs to be chalked out clearly in the agreement. If possible, a schedule of work can be decided upon by the parties with regards to:
- When the old building would be demolished;
- When the new construction would be started;
- When the new construction would be over;
- When the possession of the new building would be handed over to the tenants;
The schedule of payment by the owner and/or tenant to the developer can also be decided. Typically, the consideration is not paid in one go. It is paid in instalments. The time schedule and the amount can be decided in advance by the parties.
A temporary place to live
The developer has to provide a place of equivalent quality where the tenants can continue living till the construction of the new building is completed. Here, the tenants must negotiate a clause that provides a decent place of living until the construction is completed. In this clause, the following can be decided:
- The area in which the temporary accommodation is provided;
- The duration of the temporary accommodation;
- If the temporary accommodation is completely free or some amount would have to be paid by the tenants;
- Any other facilities that the developer in the meantime would provide.
- If the developer provides no accommodation, then the developer must at least pay the rent or part thereof of the place where the tenant proposes to live during the time the new building is constructed. In case only a part is agreed to be paid, then the amount must be decided in advance.
Security
A clause for the payment of security should be negotiated in a developer’s agreement with the tenants. In this clause, the developer may be required to provide certain security for the completion of the project as per the terms and conditions laid down in the agreement. The security may include:
- Deposition of precious metals;
- Immovable property;
- Bank guarantee for a certain amount.
If the developer breaches the contract in the material terms, then the tenants can hold the surety/bank accountable or sell the precious metals or immovable property, as the case may be. The security must be equivalent to the value of the construction cost of building the new project. Also, it is crucial to lay down what constitutes a breach.
Specifications of the new building
The entire purpose of the developer’s agreement is to acquire a better-quality home for the tenants and owners of the property. The terms and conditions of the new property need to be entirely and clearly set forth. There must be no mistake or misunderstanding between the parties as to the specification of the new premises. Oral promises are not of any value. Therefore, whatever has been decided must be clearly spelt out. For example, there are 2 rooms in each flat, and the developer promises to give 3 rooms to each tenant with the same or even bigger area per room. In such a case, the square foot or square meter area needs to be spelt out. If it would be different for every tenant, then a schedule may be drafted with the agreement clearly setting forth the area with the floor number the tenants will get after the new building is constructed.
The ambit of the work undertaken by the developer
This clause contains the scope of the work that is to be completed by the developer. This clause makes the duties and obligations of the developer regarding the project crystal clear. The following questions have to be answered in the agreement:
- Whether the developer is going to deliver a furnished/unfurnished flat?
- As the case may be, whether the developer is going to develop only the building or the surrounding areas as well like swimming pool, gardens, running track, etc., as the case maybe?
- Whether the developer is going to paint the building?
- Any other amenities to be provided in the building, like an elevator (old buildings generally do not have buildings)
- Any charges to be taken from the tenants?
- The rent to be charged to the tenants after the project has been completed?
The above list is only illustrative and not exhaustive.
Default
The default clause is of high importance as it clearly mentions the parties’ liability in case of default from their respective ends. The developer must be held accountable if he defaults in his duties, whereas the tenants must be held liable if they fail to fulfil their responsibilities.
The events that would constitute default also can be incorporated. A sub-clause for liquidated damages can also be added to the contract. The ramifications and the remedies that the defaulting parties can make use of to rectify the situation can also be mentioned. Following are the common defaults in such contracts:
- The developer delaying the construction of the project;
- The developer not complying with the requirements of the new building;
- The tenants/owner not paying as per the terms of the contract;
- The tenants/owners not vacating the property;
The above list is only illustrative and not exhaustive.
Arbitration and conciliation clause
An arbitration and conciliation clause must be incorporated in the agreement. If the matter goes to court, then it might end up taking a long time to get resolved given the pre-existing pendency of cases, and no one would be satisfied with the process. Therefore, a dispute resolution clause should be added. Nowadays, using online dispute resolution (ODR) is also on the rise. There are various government-recognized institutes that provide online mediation services.
This clause prevents the parties from going to the courts. In case a dispute resolution clause exists, the court directs the parties to resolve the disputes according to the method given in the contract. This saves the time and money of the parties involved in the contract.
Representation and warranties
Representation and warranties is a clause that contains specific promises by both parties. One of the most critical and unique clauses in a developer’s agreement with the tenants is that the developer shall first take approvals and permissions from the relevant authorities like municipal corporations before the tenants vacate the said property. This imposes liability on the developer to get necessary approvals to develop the property. The approvals may be related to safety, environment, etc.
Conclusion
The purpose of any agreement is to set forth the terms and conditions of a contract. The draftsman’s job is to draft the contract so that it captures the intention of the parties as clearly as possible. A clear contract assists the parties, and if required, the court or the arbitrator interprets the parties’ intentions.
A developer’s agreement is a complex agreement that governs the rights and responsibilities of a plethora of parties for a long duration. The said contract displaces all the tenants living in a certain society/building to another place with the promise to build them a better home. It needs to be drafted carefully so as to avoid future disputes.
References
- http://bareactslive.com/DD/AGREEMENT%20BETWEEN%20DEVELOPER%20AND%20TENANT.pdf
- https://www.kaanoon.com/148439/tenants-agreement-with-developer-for-alternative-permanent-accom
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