By Nazaqat Lal, Advocate & Solicitor, Bombay High Court
nazaqat_lal@hotmail.com | November 28, 2023
• My broker has given me a draft agreement that is commonly used for sale/purchase of flats. My broker will also arrange to pay TDS. Why should I engage a lawyer and pay legal fees?
• The seller is known to me and has assured me that there is nothing to worry about. Is due diligence necessary?
• While purchasing an apartment in a new project, there is little or no scope for negotiation with the developer. Why should I engage a lawyer and pay legal fees?
• A bank loan was taken at the time of purchase of the house. The bank would have done its due diligence before issuing the loan. Do I need to undertake due diligence if I am purchasing the flat?
• I am selling my flat. I am only concerned with receiving the consideration. Why should I engage a lawyer?
• No one actually responds to public notices. Can we avoid giving a public notice?
These are some of the questions most commonly asked to conveyancing lawyers. The common thread running through all these questions is the role of a conveyancing lawyer at various stages of a sale/purchase transaction.
A purchase/sale transaction broadly involves (i) due diligence, (ii) negotiation, and (iii) agreement drafting, execution and registration.
1. Due Diligence
a. What is due diligence?
Due diligence refers to the process undertaken by a buyer to satisfy himself about the title of the seller to the property he intends to buy. Exercising reasonable care, vigilance, and undertaking due diligence is a legal obligation cast upon the buyer.
A 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.
b. What does real estate due diligence entail?
Real estate due diligence broadly entails 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 building and land, inspection of original documents and a litigation search.
c. What are some of the concerns that get highlighted in a due diligence that could otherwise potentially go unnoticed?
Considering that every property and transaction has its own nuances, it is difficult to put down an exhaustive or indicative list. However, some concerns that may get highlighted include the rights of third parties (including banks/financial institutions), restrictive transfer covenants in the title documents, interest of minors in the property, nominee holding the property on behalf of all the legal heirs and representatives of the deceased, rate of TDS, whether the seller is resident of India, NRI or foreign citizen, seller’s pending liability of direct and indirect taxes, building permissions with respect to OC, height restrictions, FSI, etc., restrictions on 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.
d. Why is due diligence done?
One, there is a legal requirement and legal obligation on the purchaser to undertake due diligence. Two, it is also done to serve as a mitigating factor should the property subsequently become the subject matter of 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 than a buyer who has not undertaken sufficient due diligence, despite them both having made full payment of consideration towards their respective flats.
e. Does a seller’s lawyer have any role to play at the time of due diligence?
The buyer’s lawyer is bound to raise queries and seek certain information and documents relating to the property. A seller’s lawyer is required at this stage to provide the necessary information and documents that would enable the buyer to conduct the due diligence satisfactorily.
In the course of the due diligence, the buyer’s lawyer may highlight certain concerns and risks to the buyer. Based on the risks and their potential impact, the buyer will decide whether to proceed with the transaction or not. The role of the seller’s lawyer becomes crucial to suggest options that would give comfort to the buyer and reduce the risk and its impact. Options may include certain additional representations and warranties by the seller, specific indemnities by the seller, etc.
2. Negotiation
The commercials viz. the consideration, time period for payment, sharing of stamp duty and registration charges, etc. are usually negotiated between the buyer and seller. However, the specific clauses of the contract pertaining to the representations and warranties, indemnity, etc. are usually negotiated by the lawyers.
3. Agreement drafting, execution, and registration
While all agreements for sale by and large follow a standard format, the nuances involved in every transaction vary. These nuances require to be accurately drafted and risks and concerns identified during the due diligence process require to be addressed by way of representations, warranties, and indemnities.
At the time of execution, if one or more parties are a firm or company, the necessary authorisations are required. If any of the parties are unable to remain present for execution and/or registration, they may execute powers of attorney for the same. It is crucial to have a lawyer at the time of execution to ensure that the document is properly executed in accordance with the law for the time being in force to prevent the same from later being found to be unenforceable on account of defects in execution.
Conclusion
Till the time a dispute does not arise between the buyer and seller, the importance and necessity of having engaged a lawyer at the time of the transaction is seldom felt. The legal expenses borne in litigation or arbitration ordinarily far exceed the legal expenses involved in engaging a lawyer at the transaction stage. It is therefore, in the legal and commercial interest of parties to engage lawyers at the time of the transaction and endeavour to mitigate as many risks as possible by accurately drafted clauses in the agreement.
