This article is written by Namita N Wagh, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.
What is a Joint Development Agreement
Under a typical Joint Development Agreement (JDA) landowner contributes his land and enters into an arrangement with the developer to develop and construct new projects at the developer’s cost. Joint Development Agreements are prevalent in India as they are beneficial for both owner and developer. Landowner contributes the land and the developer undertakes the responsibility of obtaining approvals, property development, launching and marketing the project with the help of his financial resources.
A real estate developer often enters into the Joint development agreement with the land owners whereby the real estate developers are allocated with the work of developing the land. The transaction is more or less like a barter system.
A lot of disputes arise when Joint development is made. The JDA turns out to be a win-win situation for both the landowner as well as developer. Both of them get to capitalize on the booming realty sector.
What are the benefits of entering into Joint Development Agreement
Some significant benefits of entering JDA are:
- No initial investment is required for land procurement.
- Partial avoidance of Stamp duty.
- Fast-paced development of property as working capital is majorly required for meeting the construction needs.
- Competent Consideration for the landlord.
Residential Joint Development Agreement
According to Notification 06/2019 Central (Rate) RREP shall mean REP in which carpet area of commercial apartments is not more than 15 percent of the total carpet areas of all apartments in REP.
According to the Reports, Realty developer Ambuja Neotia Group has entered into an agreement with Satya homes to jointly develop a 72 acre land parcel in Kolkata’s Rajarata locality in the first ever mega land transaction. Ambuja Group is the Development management Partner while Satya Group will bring in its land parcel into alliance.
Following are the important five important clauses in Joint development Agreement:
1. Joint Development Agreement should be registered
- The Joint development Agreement between the builder and the landowner must be registered in the sub registrar. It is one of the common practices to get the joint development agreement notarized or sign it on stamp paper of Rs 200/.
- If the owner retains their share of built-up area, a construction agreement has to be entered into with the developer and the same has to be registered. The stamp duty and registration charges would be 2% of cost of construction.
- Registration of Joint development agreement is important because at macro level neither the builder nor the landowner can dispute the terms and conditions of the JDA. Also, it provides authenticity to the agreement.
- Merely getting the documents notarized will not save you from possible consequences in future. Besides the main document you should get a supplementary agreement registered.
- Section 54 of Transfer of Property Act enacts that sale of immovable property can be made only by registered instrument and an agreement on sale does not create any charge interest or charge on its subject matter. (Shri Ramesh Chand vs Suresh Chand & Anr. on 9 April, 2012)
No home loan until registration
The banks do not sanction home loans on the property if JDA is not appropriately registered. In that case, you might have to opt for other sources of finance for buying the property, which is not the correct way out.
Supplementary agreement to JDA
It is another smart trick by the builders. The joint development agreement is executed and registered to comply with rules and regulations. After that a separate supplementary agreement to JDA is signed. It is either change in some of the existing clauses of JDA or additional clauses that will form a part of JDA.
- There are various methods of payment of consideration. A common consideration for providing land includes the upfront payment in form of cash/cheque to the landowner. In addition to this the agreement should also specify as to what would happen to this payment if the agreement is cancelled before the stipulated time period.
- Other methods are sharing of gross revenue between the two (or sharing of profits), sharing of constructed area or a combination of consideration, revenue, profits or constructed area.
- The landowner and developer often share the profit in a ratio of 60:40. However this may vary based on location of property. If the land is very costly then split up would be usually more in the favour of the landowner, i.e. a greater number of flats handed over to the land owner.
Taxability of JDA under Income Tax
The income arising to the developer under JDA, in form of the sale consideration of his share in developed property is considered as his business income and is taxed as per the applicable provisions. On the other hand, the amount received by the landowner either as a percentage of sales consideration or as a percentage of build-up area in developed property is considered as Capital Gains in his hands. But this calculation of Capital Gains is the most controversial part where consideration is in the form of build of area.
GST on landowner
The land owner is liable to charge 18% GST on supply of development rights [S.No. 16(iii) of Notification No. 11/2017-CT(R) dt. 28.06.2017].
GST on developer
Liability of tax
The builder is required to charge GST on supply of flats @12% (18% less 1/3 value of land) according to the reports in mint “All Capital Gains in development agreement are not taxed”.
3. Execution of documents and stamp duty
- To be valid as evidence in court, the Joint Development Agreement and general power of attorney must be executed on stamp paper of an appropriate value. If the title is being transferred by the Owner to the developer (before the sale of flats to the end user, that will depend upon how the transaction and consideration is structured) a proper deed of conveyance will be required, which will also need to be stamped. The Stamp duty varies from state to state.
- The project plan is developed by the developer taking into consideration the municipal corporation rules of the city. You will need to obtain necessary approvals from relevant authorities just like in the case of any other independently constructed project.
- If the Joint development agreement is unregistered and for the said document sufficient stamp duty is not paid then the petitioner cannot by way of notice direct the respondent to execute general power of attorney and registered joint development agreement that was not agreed between the parties. The matter will be referred to the arbitrator as per Arbitration and Conciliation Act 1996. The matter to the Arbitrator and also appointment of Arbitrator is not a dispute. The decision of the arbitrator must be final and binding on both the parties. (N.D developers, PVT.LTD v. Bharathi and others.)
4. Property ownership and license to construct
- The developer himself does not buy property/land from the owner. The developer is not the transferee or buyer of the flats as per Transfer of Property act 1882, under the Joint Development Agreement. The sole ownership lies with the owner of the land, but the land owner grants the developer along with development rights, a license to enter the land for the purpose of development but not as a transferee or buyer. The license or authority to enter the land is typically given by way of power of attorney issued in favour of the developer.
- This power of attorney without permission can be revoked by a person granting it unless as part of discharging contractual obligations. In such cases revocation would lead to breach of contract.
- Once the plan is approved, the owner would get an allocation agreement recording the contractual areas which compromises his shares and area going to the developer.
- It is very normal for land owners to transfer rights/title in the property to their family members under family settlement. Such transactions are executed through GPA. In other scenarios, the landowner requests the buyer to transfer money to a family member. The reason for such scenarios is “Inheritance”. The land is inherited in almost all cases.
5. Cooperation between owner and builder
- For the purposes of transfer of the constructed space by the builder, the cooperation of the owner is highly essential. Once the construction of a flat is constructed and occupancy right is granted by the competent authority to the owner, the owner will himself execute the sale deed in favour of the flat buyers.
- The developer will have the right for specific performance which shall be specifically enforceable in a court of law if the landowner fails to cooperate with the developer in selling/leasing the build-up space on the land. However, in case of breach of trust of a development agreement, the landowner would have the right to revoke the power of attorney.
- The Hon’ble Finance Minister Under Atma Nirbhar Bharat movement announced on 13th May 2020 various measures for relief and credit support related to businesses to support Indian Economy’s fight against COVID-19.
- Relief to Real estate project: State governments are advised to invoke the force majeure clause under RERA. The registration and completion date for all registered projects will be extended up to 6 months and may be further extended by 3 months based on the state’s situation. Various statutory expenses under RERA will also be extended concurrently.
- Entering Joint development agreement not only saves the owner from hassles of converting property, but also helps the developer to save money on purchase of land, which is usually a substantial part of project cost. However, while buying a property built on the basis of such an agreement, it is always advisable to a buyer to keep an eye on defects, if any, in the JDA, fraud by landowners and chances of unsanctioned loans in future.
- Taxability of JDA – to know more click here
- Property ownership and licence and corporation between owner and developer – ipleaders
- Case laws – Indian Kanoon and case mine
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