Real Estate in India - BFS legal

Real Estatein 30 jurisdictions worldwideContributing editor: Sheri P Chromow2008Published bygetting the deal throughin association with:Advokatfirman GlimstedtAl Sarraf & Al RuwayehArzinger & PartnersBFS LegalBin Shabib & Associates LLPBLP AbogadosCerha Hempel Spiegelfeld HlawatiCHSH Gilescu & Partenerii SCACHSH Šiška & PartnersDivjak Topic & BahtijarevicGianni Origoni Grippo & PartnersGonzález Calvillo SCIur-RealisKatten Muchin Rosenman LLPKim & ChangKrogerus Attorneys LtdLaw Chambers Nicos Papacleovoulou Advocates& Legal ConsultantsLidings Law FirmMizrachi Davarro & UrriolaNagashima Ohno & TsunematsuOrrick Rambaud MartelRussell Kennedy SolicitorsSaladžius & PartnersSchellenberg WittmerSimont BraunTamme & OtsmannTGC Corporate LawyersVeirano AdvogadosZang Bergel & Viñes Abogados

BFS LegalIf the property was acquired out of rupee sources, the NRIor PIO may remit an amount up to US$1 million per financialyear, out of the balances held in the NRO account (inclusive ofsale proceeds of assets acquired by way of inheritance or settlement),for all the bona fide purposes to the satisfaction of the‘authorised dealer’ bank and subject to tax compliance.Legal liability5 What types of liability does an owner of real estate face? Is there a standardof strict liability and can there be liability to subsequent owners? Whatabout tort liability?Any liability that flows with the land will automatically be transferredto a subsequent purchaser of the property. The variousliabilities a real estate owner is likely to face include: acquisitionof property by government for public purposes; defective title;pendente lite sale; tax liabilities; and any fine or penalties payabletowards the Land Acquisition Act or Urban Land Ceiling Act.A defective title illegally conveyed would entitle the purchaseronly to recover the sale consideration along with applicable interestand damages. The purchaser cannot perfect his title by statingthat he is a bona fide purchaser for consideration without noticeof the defect in title. In such a case, the vendee who is deprivedof title and possession as a result of the vendor’s defective titleshould establish that he was unaware of the defect in the titleof the vendor in the first place and that he with ordinary easecould not discover such defect. A defective title conveys no titleto subsequent owners.In India several environmental laws are in place and certainprojects require clearance from the Pollution Control Board andthe Ministry of Environment. Care should also be taken to seethat the property is in a zone where the planned development canbe carried out. In certain coastal zones commercial constructionis prohibited. There is also a bar on sale of forest land.Tortious liability is recognised in India. Though there is nocodified law of torts, common law principles are followed infixing tortious liability. A third party injured by the landlord’sfailure to take due care can file a suit for damages under tort.Protection against liability6 How can an owner protect itself from liability and what types of insurancecan they obtain?Legal liability under the law of tort can arise under several circumstancesin any premises such as: collapse of building structure;accidental falling of fixtures; bad maintenance or poorhousekeeping resulting in accident to visitors on the premises;accidental leakage of toxic substance that pollutes the atmosphereand injures or kills people; and fire, flood or any othernatural disaster.There are government insurance companies as well as privateinsurance companies operating in India and insurance policiescan be taken for a liability arising out of any of the above-mentionedcases. The owner of the property can take insurance fordamage caused by natural disasters, arson or accidents. Dependingon the location of the property and the use to which it isput, the insurance requirements may vary. The Public LiabilityInsurance Act 1991 mandates that business owners operatinghazardous substances take out insurance policies covering potentialliability from an accident and establish environmental relieffunds to deal with accidents involving hazardous substances.Site-specific environmental insurance policies are availablethat allow the insured to design a programme suitable for theGetting the Deal Through – real estate 2008indiainsurable risks of a facility. The policy covers site-specific environmentalcoverages and includes on- and off-site coverages forproperty damage, bodily injury and clean-up costs triggered bypollution conditions.Choice of law7 How is the governing law of a transaction involving properties in twojurisdictions, one outside of your jurisdiction, chosen? What are the conflictof laws rules in your jurisdiction?Real estate laws apply uniformly throughout India and as suchthere are no conflicts. The only scope for conflict is regarding thelaws pertaining to registration of a conveyance, which may varyfrom state to state. In case of properties falling in two jurisdictions,the property has to be split into parts on the basis of territoryand the appropriate registration law would apply.Subject-matter jurisdiction8 Does subject-matter jurisdiction exist? Who are necessary parties? Whatis required for out-of-jurisdiction service? Must a party be qualified to dobusiness in your jurisdiction to enforce remedies in your jurisdiction?Yes. In matters pertaining to real estate, subject matter plays animportant role in clothing the court with jurisdiction. It is settledlaw in India that the court within whose jurisdiction the propertyis situated will exercise jurisdiction for a suit on land.In case of agreement for sale, a suit of specific performancecan be filed against the seller for executing the sale deed.In case of any liability existing on the property, suit can befiled against the erstwhile owner for damages and recovery ofarrears.In case of interference by third parties, suit can be filedrestraining third parties from interfering with the peaceful possessionof property.If the property is situated within the jurisdiction of a court,then that particular court can send summons even to defendantsresiding outside its jurisdiction.It is not necessary for a party to reside or carry on businesswithin the local territory to bring an action in a court of law. Ina matter involving a property, a suit can be initiated even if theplaintiff or the defendants are residing outside the jurisdictionof the court.Investment entities9 What entities does your jurisdiction recognise? What are pass-throughentities for tax purposes and what entities best shield ultimate owners fromliability?Proprietorship, partnership and joint-stock companies (liabilitylimited by shares) are the entities recognised in India.Pass-through entities do not exist in India. However, venturecapital funds (VCFs) are being used in India for makinginvestments in the real estate sector too. There are several VCFsdedicated to making investments in the real estate sector. In fact,in the absence of real estate investment trust (REIT) legislation,the VCF route was being used for realty investment.Budget proposals deny tax exemption to VCFs other thanthose investing in certain high-tech industries. Without tax transparency,there is no motivation to use the VCF route for realestate investments. India has not adopted REIT as yet – hence,other than mutual funds, the scope for using a pass through vehiclefor real estate investments is ruled out.93

BFS LegalUS investors10 What form of entities do US investors customarily use in your jurisdiction?Foreign investors can make investments or operate their businessin a number of ways such as: liaison/representative office;project office; branch office; wholly owned subsidiary; and jointventure company.Any company set up with foreign direct investment has tobe incorporated under the Companies Act 1956 with the registrarof companies, and all Indian operations would be conductedthrough this company. Typically foreign investors puttheir money in real estate through companies as it overcomes thelegal hurdles involved when a non-Indian invests in real estate.A foreign company incorporated under the Companies Act istreated on a par with any domestic Indian company within thescope of approval and is subject to all Indian laws.Organisational formalities11 What are the organisational formalities of creating the above entities? Whatrequirements does your jurisdiction impose on a foreign entity? What are thetax consequences for a foreign investor in the use of any particular type ofentity, and which type is most advantageous?The law mandates registration with the registrar of firms in thecase of partnership firms and with the registrar of companies inthe case of incorporated entities limited by shares.Apart from restriction on foreign direct investment in realestate as detailed above in response to question 3, there are noother restrictions.The rate of taxation is the same for both partnership firmsas well as incorporated companies. However, the taxable profitwould be higher in the case of a partnership firm as there arelimitations on the amount of profit that can be shown as expensein terms of salary to a partner etc, whereas no such limitationsexist in the case of an incorporated company. Therefore, an incorporatedcompany limited by shares is most advantageous for aforeign investor in terms of tax consequences.Documentation12 Does your jurisdiction or customs recognise a non-binding form ofagreement? Is there a form of non-binding agreement before a contract? Is itcustomary to take the property off the market while negotiation of a contractis ongoing?Non-binding agreements such as a letter of intent or a memorandumof understanding is not unknown to Indian jurisprudence.However, such documents are subject to interpretation bycourts of law as to whether it was the intention of parties tocreate a binding agreement or not and whether they can be specificallyenforced.The practice in India is that a property will be taken off themarket only when the vendor receives a token advance out of thesale consideration or enters into an agreement for sale.Contract of sale13 What are typical provisions in a contract of sale?The following are the fundamental ingredients of a sale deedor document: names; date; parties to the document; tracing oftitle; testatum; consideration paid or to be paid; receipt thereof;operative clauses; parcels; reservations (if required); habendum;testimonium; signatures; attestation.The purchaser can buy an immoveable property by:india• making full payment and getting the sale deed registered onthe same day before the registrar; or• entering into an agreement of sale and making a part payment(usually about 20 per cent) and agreeing for a date tobe fixed for registering the sale deed by paying the balanceconsideration.If the title of the property is not clear and the purchaser is notwilling to risk his money, he can request to deposit the amount inan escrow account to be given to the seller on clearing the title.A purchaser can receive the following in terms of evidenceof good title to the property: all original title deeds pertaining tothe property; and revenue records of the government standing inthe name of the seller.Environmental clean-up14 Who takes responsibility for a future environmental clean-up? Byrepresentation with survival provisions? What are typical general covenants?What remedies do the seller and buyer have for breach?The real estate sector is bound by the Environmental ProtectionAct 1986. However, the concept of environmental clean-up isnot yet mandatory in India. Domestic legislation affecting infrastructureenvironmental services like refuse disposal is fairly new(eg, the Municipal Solid Waste Management & Handling Rules2000), such that the municipalities across the country and thedomestic environment industry have only just begun to respondto the legal requirements. However, there have been instances ofjudicial activism where the courts have ordered environmentalclean-up in areas where hazardous waste or pollutants have beendiscovered. The Supreme Court has even established a monitoringcommittee to oversee the same. Since, the concept of environmentalclean-up is fairly new there are no standard or typicalgeneral covenants.Under the Income Tax Act 1961, income earned during a taxyear is subject to income tax and the same applies to real estate.The risk of loss until closing, if undertaken voluntarily by therealtor will also be met by him.Where the discharge of any environmental pollutant in excessof the prescribed standards occurs or is apprehended to occurdue to any accident or other unforeseen act or event, the personresponsible for such discharge and the person in charge of theplace at which the discharge occurs shall be bound to prevent ormitigate the environmental pollution and shall also: intimate thefact of such occurrence or apprehension of such occurrence; andbe bound, if called upon, to render all assistance.On receipt of such information, the authorities or agenciesappointed under the Environmental Pollution Act and other actsshall cause such remedial measures to be taken as are necessaryto prevent or mitigate the environmental pollution.The expenses incurred by any authority or agency may berecovered from the person concerned as arrears of land revenueor of public demand.Leases15 What are typical representations and covenants regarding leases? Do theycover brokerage agreements and do they survive closing? Are estoppelcertificates customarily required and can estoppel certificates substitute forrepresentations?A document or deed of lease contains more or less the same asexisting in the sale deed such as the date and place of the deed,the parties, recitals, testatum and description of property.94 Getting the Deal Through – real estate 2008

BFS LegalThe habendum or reddendum clause follows. Habendumincludes the commencement and duration of the lease and reddendumrefers to the amount of rent. In case of contradictionbetween habbendum and reddendum, the former prevails.After the habbendum and reddendum clause, the lease deedcontains: covenants by lessee; covenants by lessor; special termsand conditions agreed upon between the parties; and the usualfour covenants (for title, against encumbrances, for quiet possessionand for further assurances).Lease agreements do not cover brokerage agreements andare prior to letting out the property on lease. Both are two differentlimbs. Both have their distinct parameters and do not surviveclosing. Brokerage if any is generally payable by the mortgagor.There is no firm requirement under law for a mandatoryestoppel certificate. Estoppel certificates cannot be a substitutefor representations and only supplement the terms covering thetransaction and may be useful during court proceedings to hit adefence set up. The requirement of an estoppel certificate variesfrom one financial institution to another.Leases and mortgages16 Is a lease generally subordinate to a mortgage pursuant to the provisionsof the lease? What are the legal consequences of a lease being superiorin priority to a mortgage upon foreclosure? Do lenders typically requiresubordination and non-disturbance agreements?Yes, lease is subordinate to a mortgage in terms of section 65Aof the Transfer of Property Act (TP Act). This permits the mortgagorto lease the property and the same is binding on the mortgagee.The mortgagor cannot have the lease for a period of morethan three years. There cannot be a covenant for renewal.A lease cannot be superior in priority to a mortgage: the leasedeed would be void as it would be contrary to the provisions ofthe TP Act. Hence any lease contrary to the provision of section65-A is not binding on the mortgagee.Lenders do not require subordination and non-disturbanceagreements. Once the mortgagor defaults in making the payment,the lender has the right to appropriate the property torecover the monies lent.Under section 105 of the TP Act, a lease is a transfer only ofa right to enjoy the demised premises but there is no transfer ofownership or interest in the demised premises to the lessee suchas existing in a sale (section 54) or a mortgage (section 58).Delivery of security deposits17 What steps are taken to ensure delivery of security deposits to a buyer? Howcommon is it to get a security deposit under a lease? Do leases customarilyhave periodic rent resets?Generally there are no security deposits or deliverance of securitydeposits to the buyer. However, recent trends indicate that theUrban Development Ministry has placed the proposal in the RealEstate Regulatory Management Bill to regulate builders whodelay in completing residential projects or develop low-qualityhouses. The society of property developers has criticised the proposalsaying it will put real estate development at risk.It is, however, a very common practice to get a securitydeposit under a lease.To obviate the risk of leasing out premises and subsequentlylosing possession to a tenant, substantial rental deposits havebecome common throughout India. The deposit is providedto the landlord on an interest-free basis throughout the termGetting the Deal Through – real estate 2008india(and repaid on termination). Though the deposit amount variesdepending on city, property type, location and the period of thelease, it may range between six and 18 months rent.Most Indian landlords have no objection to an option termfor a period equivalent to the initial term. However, it is normalfor the rent and the security deposit either to be reviewed onmutually acceptable terms in line with market norms on exercisingof the option or to a fixed increment.Due diligence18 What is the typical method of a title search and is it customary to ordersearches? Is there something akin to title insurance and opinion letters?Does your jurisdiction provide statutory priority for recorded instruments?Title of the vendor should be traced and scrutinised based on thenature of the property he is offering since his title depends uponthe mode by which he acquired the property or the manner inwhich the property devolved upon him. It is imperative to scrutinizethe title of the property before making payments.For the purpose of scrutiny of title, the property can bedivided as registered and unregistered.Unregistered propertyIn order to satisfy the purchaser, the vendor is required to showa good title and deliver abstract of titles (such as wills, deeds ofconveyance and also the events causing the devolution of ownership)at his expense. Proof of possession is a must as it establishestitle as well.Registered propertyUnlike the unregistered property where the responsibility of thevendor is heavy, the vendee has to exercise caution while dealingwith a registered property. The maxim ‘caveat emptor’ appliesand the vendee alone is liable to trace the title of the vendor andsatisfy before purchasing the property.All the registered properties are entered into appropriatebooks at the office of the sub-registrar and assigned documentnumbers. In a typical title search, the proposed purchaser appliesfor an encumbrance certificate with respect to the property,which reveals all the transactions pertaining to the property. Thisis then matched with the representations made by the vendor anddocuments provided by him. It is also possible to obtain certifiedcopies of all title deeds from the concerned sub-registrar. Basedon such search and other documents, a legal opinion is normallyobtained from an attorney on the title and marketability of thesame by the vendor. In India there is no practice of having atitle insured and the only remedy in case of improper title beingconveyed is to sue the vendor for sale consideration paid anddamages. There is statutory priority for recorded instrumentsas the government requires all immoveable transactions to beregistered. This also ensures that the title conveyed is clear andcan be verified.Reviews19 Is it customary to arrange an engineering or an environmental review?What are the typical requirements of such reviews? Is it customary to getrepresentations or an indemnity? Is environmental insurance available?Until January 1994, obtaining environmental clearance fromthe Central Ministry was only an administrative requirementintended for a mega project undertaken by the government orpublic sector undertakings. However, the EIA Notification issuedby the Ministry in January 1994 (as amended in May 1994 and95