By Nazaqat Lal, Advocate & Solicitor, Bombay High Court
email@example.com | Dec 14, 2023
a. What is real estate due diligence?
Real estate due diligence is an investigative process undertaken to ascertain the title of the seller to the land, buildings/structures, flats, etc. and assess the risks involved in acquisition of such property.
The real estate diligence may involve due diligence of the land, land and structure thereon or a part of the structure such as a flat. The land maybe agricultural or non agricultural, it maybe freehold or leasehold.
The nuances vary from land to land and structure to structure but broadly speaking, a real estate diligence would ordinarily entail examining revenue records (in the case of agricultural land), a search at the office of the Sub-Registrar within whose jurisdiction the property is situated, issuing public notices, vetting title and property related documents available with the seller, vetting certain documents and permissions in respect of the land and building, inspection of original documents and a litigation search.
b. Why is real estate due diligence done?
One, there is a legal requirement and legal obligation on the purchaser to undertake due diligence.
Two, it is done to ascertain whether there are any risks attached to the acquisition of the property and any likely hindrances and/or disputes likely to arise on or after the acquisition.
Three, it is also done to serve as a mitigating factor should the property subsequently become the subject matter of a dispute/litigation. If the buyer has carefully undertaken due diligence prior to purchasing the property, courts will factor this in at the time of deciding the dispute.
A buyer who has undertaken sufficient due diligence is far better positioned to protect his rights in the property and/or be sufficiently compensated than a buyer who has not undertaken sufficient due diligence, despite them both having made full payment of consideration towards their respective properties.
To put it very simply, when a person is looking to acquire a property, he/she wants to be able to enjoy such property and be in quiet and peaceful possession of such property without claims from third parties. Real estate due diligence is done to ensure this.
Whether property is being acquired for self use or by way of investment, a substantial sum of money is involved and very often, a lifetime of savings and hard earned money. Not everyone is able to purchase multiple properties.
Therefore, it becomes even more necessary to ensure that the sole property being acquired has clear title or potential for the title to be clear prior to acquisition.
There are also situations where the buyer is already aware that the property is in dispute or carries certain risks with it. In such a situation, real estate due diligence may still be undertaken to ascertain the magnitude of the risk, ways in which such risk maybe mitigated and necessary safeguards suggested to be built into the documentation for the benefit of the purchaser.
c. Legal principles underlying real estate due diligence
‘Caveat emptor’ which means buyer beware is a fundamental principle underlying due diligence. A buyer is required under law to be vigilant and take all necessary reasonable steps prior to acquiring property.
Another fundamental legal principle underlying due diligence is that a transferor cannot pass a better title than he himself possesses. Therefore, due diligence is undertaken to ascertain what title the seller has and what risks, if any, are attached to the same.
d. What are some of the concerns that get highlighted in a real estate due diligence that could otherwise potentially go unnoticed?
Every land, structure or part of such structure has its own nuances. However, some common concerns that often get highlighted include rights of third parties (including banks/financial institutions), restrictive transfer covenants in the title documents, interest of minors in the property, not all legal heirs being party to certain documents, payment of consideration to some legal heirs to the exclusion of others, nominee holding the property on behalf of all the legal heirs and representatives of the deceased, insufficiently stamped documents, irregularly executed documents, unregistered documents where registration is mandatory, property being sold below ready reckoner value, rate of TDS, whether the seller is resident in India, an NRI or a foreign citizen, seller’s pending liability of direct and indirect taxes, building permissions with respect to OC, height restrictions, FSI, etc., restrictions on the use of the land and its transferability, ongoing litigations with respect to the property, outstanding payments pertaining to the property that may result in a charge on the property, etc.
e. Is real estate due diligence foolproof?
No. While the accuracy of the due diligence depends significantly on the reasonable care taken by the lawyers involved, it is still not foolproof. Real estate due diligence relies significantly on searches taken at various government offices such as the Sub-Registrar’s Office, Talathi’s office, etc. Records of older years may not always be properly maintained or easily accessible. While attempts are ongoing to digitize several documents and records, the digitization process has its own drawbacks. As a result, despite undertaking searches, all relevant documents may not necessarily show up in the search. A litigation search is also usually undertaken as a part of the real estate due diligence process. Again, while a high level of accuracy can be achieved, it is difficult to achieve foolproof results considering the number of dispute resolution fora and courts in which a dispute could have been filed with respect to such property.
Real estate due diligence also proceeds on several assumptions such as the genuineness of signatures on documents, documents continuing to be valid, subsisting and in force, documents being validly executed, sufficiently stamped and duly registered, all necessary permissions and approvals being obtained and continuing to be valid and subsisting, execution of documents being duly authorized, etc.
While the process is not foolproof and there is room for error for the reasons set out above, reasonable care taken by lawyers, search clerks and all those involved in the process of collating the title and other property related couments can to a great extent minimize the room for error.
f. What is the consequence of acquiring property without doing due diligence?
As set out above, in a dispute situation, a buyer who has undertaken sufficient due diligence is far better positioned to protect his rights in the property and/or be sufficiently compensated than a buyer who has not undertaken sufficient due diligence, despite them both having made full payment of consideration towards their respective properties.
By not undertaking due diligence, a buyer exposes himself/herself to several risks that have not been accounted for and which the buyer may find difficult to deal with when such risks attaching to the property arise.
To put it simply, acquiring property without doing due diligence is going in blind and leaving it entirely to destiny and chance that no major issues arise.