This article has been written by Rashmi Natekar, presently associated with VPMS TMC LAW COLLEGE, THANE as an Assistant Professor and have written this article on the basis of her earlier banking industry experience of 5+ years in due diligence of immovable properties. This article has been edited by Shashwat Kaushik.
Table of Contents
Due diligence/title verification of immovable properties refers to scrutinising the legal status of the immovable property. There are numerous transactions related to immovable properties that take place on a day to day basis in our country. We have different laws, rules, and rules/other statutory materials governing this particular topic. The purchase of immovable property is a big decision. The investments, purchases, and transactions are high ticket transactions and hence the interests of the parties are at stake. Meticulous due diligence or title verification of the properties is crucial and therefore, thorough inquiries, searches and application of laws are of utmost importance.
How to conduct title verification/due diligence
Carrying out due diligence/title verification revolves around two main aspects.
- First, what is the nature of the right?
- Second, who is the holder of such a right?
So basically, scrutiny of the party claiming to possess a particular right in the property has to be ascertained. Ascertaining these two things will require the scrutiny of many documents. We can enlist the general procedure/checklist that can be relied upon to begin the title verification/due diligence.
Nature of the right to property
Ascertaining the nature of the right to the property can help decide what type of transaction can be entered into by the parties. It also helps to determine the type of documentation that would be required to enter into such a transaction. It also helps to decide the range of negotiations that the party can engage in.
The nature of the right in the property can be broadly classified as:
- Freehold/ownership: acquired by way of sale, gift, inheritance, etc.
- Perpetual/long term: generally acquired by way of lease.
- Development rights: by way of irrevocable POA/assignment etc.
- Leave and licence rights
- Easement rights
Who is the holder of the right
Ascertaining the holder of a right is necessary to ensure that the party claiming to have the right to the property actually possesses that right.
Chain of agreements/documents establishing the right
A chain of agreements / documents that establish the right would have to be scrutinised for a period of 12 to 30 years, depending on the type of transaction that is proposed to be entered into. This period is also known as the ‘look back period’. The lookback period is the period for which the rights in the property will have to be scrutinised so as to anticipate the potential legal risks involved in the transaction. General timelines for the lookback period can range from 12 years to 30 years.
- 12 years
The limitation period for adverse possession is 12 years. This simply means that a person can claim ownership of the property if he has possessed it for a period of 12 years with the consent of the owner of the property. Therefore, to check the legal risk posed by adverse possession, generally the rights of a person in a particular property are traced back at least 12 years.
- 30 years:
- Property right in name of minor (considering age 0 when such right accrues to it when it attains majority, i.e., 18 years) + 12 years of adverse possession = 30 years.
- The limitation period for the recovery of the mortgage property, where the debtor has defaulted is 30 years, calculated from when such recovery right accrues.
- Limitation period for presumption of correctness of a document – a document is considered to be correctly executed a valid proposal and acceptance, the parties should not be minors, insolvent or of unsound mind; consent between the parties should be free and entered into with lawful object and consideration; and such a transaction should not come under the ambit of agreements expressly declared void by law.
While scrutinising the title of the immovable property, there will be many other documents and records that need to be scrutinised on a case to case basis. Legal Counsel will have to inspect them as per the case in hand.
Legal presumptions with respect to immovable property
Two important legal presumptions with respect to immovable property are:
Legal presumption of notice
The legal presumption of notice simply refers to situations wherein a party interested in the transaction is deemed to have information about the said property.
The provisions of the Transfer of Property Act of 1882, specifically Section 3, talk about the legal presumption of notice. Section 3 of The Transfer of Property Act, 1882. As per these provisions, the person will have notice of a fact if he actually knows the fact, or he would have known that fact if he had made such an inquiry but did not make it, or he would have known the fact if he had not neglected it.
The person will be presumed to have had notice of any transaction related to the immovable property if such property is transferred by way of a registered instrument as per the provisions of the Indian Registration Act, 1908.
The person acquiring any immovable property will be presumed to have had notice if he is aware of the person having possession of such property.
The aforesaid provision reveals the following presumptions of legal notice:
- A person would have known the fact if he had carried out an inquiry or search, but he willfully abstained from doing it or was grossly negligent in making such an inquiry or search. This type of notice is an actual or direct notice.
- If the transaction requires compulsory registration as per the Indian Registration Act, 1908, then such a document is available in public domain. This type of notice is called constructive notice or implied notice.
- The person acquiring the property is aware of the type of interest a person who is in possession of the property holds. This type of notice is a constructive or implied notice.
- The person is deemed to have a notice if the agent has acquired on his behalf in the course of the transaction, with the exception of fraud committed by such an agent. Thus, Section 3 of Transfer of Property Act, 1988, elaborates on both the actual and constructive presumptions of legal notice.
Doctrine of Caveat Emptor
The Doctrine of Caveat Emptor is one of the Common Law principles, which simply means “buyer be aware”. This principle imposes a duty on the buyer to scrutinise the article that is to be bought. It is presumed under this principle that the buyer scrutinised the particular article before purchasing it, and any complaints pertaining to its quality won’t be entertained after such a transaction is done. This principle is mainly used with respect to movable properties and is also subject to certain exceptions.
This principle does not apply to immovable properties under Section 55 of the Transfer of Property Act, 1882. Section 55 of the Transfer of Property Act, 1882. As per this Section, the seller of the immovable property is bound to disclose to the seller the hidden and latent defects in the immovable property that the seller is aware of but the buyer is not. The seller is bound to disclose any material defect in the property, to produce all the documents of title in its possession to the buyer for examination of title and to answer all the relevant questions asked by the buyer in respect of the property or title.
Commercial perspective of carrying out due diligence
The legal counsel who is carrying out due diligence for his client, along with the legal aspects, has to also take into consideration the commercial perspective of the transaction. Whether to go ahead with the transaction, what are the risks involved, how can they be mitigated, and other facts should be considered while advising the client.
Key considerations are enumerated below:
- Feasibility of the transaction.
- Advising on negotiations and documentation.
- Red flags, title issues, and potential litigation.
- Risk profiling.
- Representations and warranties.
- Conditions precedent, conditions subsequent, indemnities
- Recommended payment milestones.
- Seller’s disclosures, etc.
Carrying out due diligence/title verification of the immovable property has to be done meticulously and the due diligence report has to be given to the client in very lucid, clear and understandable language. The client is dependent upon the counsel for entering into such transactions. This very fact magnifies the responsibility of the legal counsellor manifold. Moreover, any material defect in the due diligence report that results in any loss/litigation/problem for the client can attract serious action from the Bar Council. So, thorough knowledge and deep investigations are necessary to be carried out by the Legal Counsel, and the due diligence report has to be drafted very minutely and clearly by the Legal Counsel to avoid any further problems.
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