A due diligence exercise is possibly the most important aspect of a transaction involving real estate immediately following a working understanding of the involved financials. This process has the potential of not only impacting the financials of a transaction but also determining the feasibility of the transaction itself. While the commercials often pay high importance to expedite the conclusion of a transaction, it is critical in the interests of the parties to provide adequate time and attention to a detailed due diligence of the property in question.

This paper aims to highlight and explain the various aspects that the title due diligence exercise entails. Why it forms an indispensable part of any transaction, the types of title due diligence, and the aspects one needs to particularly scrutinise in a title due diligence process will be elaborated on in this paper. In each of this paper’s following sections we have discussed some of the key elements involved in conducting a title due-diligence of properties in India, followed by the last section that deals specifically, with particular conditional categories of land in Maharashtra.

Need for Title Due Diligence

Due diligence is primarily conducted to verify the ownership of title over the property and any encumbrances over such property, so as to protect one against any pre-existing claims over the property in question. Such claims could either effect the ability of the transferor to transfer the property or could attach themselves to the property even after it is transferred.

The primary objective of a due diligence exercise is therefore to gather information, and to cross reference such gathered information to ascertain its truthfulness. The extent and type of due diligence to be undertaken by the purchaser’s lawyer will depend on the following, (i) the risk profile and business objectives of the purchaser/ lessee; (ii) the type of real asset involved; (iii) nature of the real estate transaction (i.e., whether it is a purchase, long term/ short term lease, mortgage or financing of the real property); (iv) the time frame for completion of the transaction; and (v) whether the purchaser is looking at obtaining third party financing either pre-transaction or post-transaction.

In case of a prospective purchase, a lease of the property or real estate financing, a title search is performed primarily to answer three questions:

• Does the owner/ lessor have sufficient authority/ interest/ right to enter into the transaction involving the property in question?
• Do any liens exist on the property which needs to be discharged before the consummation of the transaction in question? These could be in the nature of mortgages, charges, acquisitions, unpaid taxes, litigation, easements and other assessments.
• What is the nature of restrictions on the use of the property?

Apart from undertaking title search/ due diligences for purchase or lease of properties, a title search/ due diligence is also performed when an owner wishes to mortgage the property with any bank, financial institution or a lender. Such bank/ financial institution/ lender may require the owner to submit a due diligence report of the property or may conduct such diligence on its own.

Types of Title Due Diligence

The type of title due diligence that ought to be conducted is highly reliant on nature of the transaction, the property involved and the objective of the participants. Keeping in mind these considerations, due diligence can be classified into two broad categories.

Firstly, a full search which is generally conducted at the time of giving the title certificate of the property in instances of sale/ resale/ long term lease transactions and for transactions that involve obtaining of financing by mortgaging the property in question. Herein the search regarding status of ownership of the property is generally conducted for a period preceding thirty (30) years (or more) from the date on which the seller in question came to acquire the property.

A full search also entails a detailed search of all aspects relating to the history of that property such as the status of encumbrances over the property, the status of disputes relating to the property, the applicable regulations and the status of compliance of such applicable regulations relating to the property in question.

The second category is formed by what is known limited search, which is generally conducted in transactions where the property is taken on lease for a short term (usually under 9 years). In instances of this nature, the period for which the preceding ownership of the property is traced is generally restricted to fifteen (15) years (or less) from the date on which the current owner of the property came to acquire the property.

Unlike full searches, in a limited search, the search relating to the history of the property may be limited to restricted aspects such as recent title history, encumbrances on the property, disputes related to the property etc.

Key Elements

In this section we aim to take a look at certain essential elements that one needs to verify, while engaging in a title diligence exercise:

1. Derivation of Ownership:

It forms to be of prime importance to, before entering into any transaction, determine the ownership of the property in question. The following considerations are the most relevant in aiding such determination:

• Sale and Purchase: If the title of ownership of subject property is obtained by virtue of sale or purchase, the registered sale deeds and the title documents of the preceding holders shall be verified.
• Gift: If the title of ownership of subject property is obtained by virtue of gift, one shall scrutinize the registered gift deed or any other relevant document to give effect to the transferability of the subject property.
• Will/Inheritance: If the title of ownership of subject property is obtained by virtue of a will or inheritance, the executors shall examine the will document as to any conditions therein and the order/probate of a competent court authorizing legality of the will. Similarly, in the case of intestate succession, one shall scrutinize the laws of succession in order to ascertain the proper devolution of property.
• Lease: If the title of ownership of subject property is obtained by virtue of lease, the transferee shall examine the lease deed, parties’ rights and compliance of all the obligations with respect to transferability of such property.
• Exchange: If the title of ownership of subject property is obtained by virtue of exchange, one shall examine the exchange document in order to ascertain transferability of such property.

2. Nature of the right of the transferor:

The rights of transferor with reference to the ownership of property may be absolute or limited. Ownership may be seen as absolute when possession, enjoyment and disposal rights are vested in the owner without any restriction otherwise it is said to be limited. In order to execute a valid transfer, it is mandatory for such absolute right to dispose to be vested in transferor.

Thereby, in conducting a title verification it is pertinent to inspect the nature of the right of the transferor. It helps us to identify if the said property is transferable and whether the transferor has the absolute right to transfer the property.

Here, we must also consider the recent ruling in Dahiben v. Arvindbhai Kalyanji Bhanusali through Legal Representative and Others [Civil appeal no. 9519 of 2019]. Wherein the court stated that in cases where the entire sale consideration had not in fact been paid, such non-payment could not be a ground for cancellation of the sale deed. The court held that “Even if the whole of the price is not paid, but the document is executed, and thereafter registered, the sale would be complete, and the title would pass on to the transferee under the transaction. The non-payment of a part of the sale price would not affect the validity of the sale. Once the title in the property has already passed, even if the balance sale consideration is not paid, the sale could not be invalidated on this ground.” Herein, the Court also relied on its own previous judgment in the case of Vidyadhar v. Manikrao & Anr. [(1999) 3 SCC 573].

3. Sub-Registrar Searches:

A pre-requisite of any title due-diligence is to carry out searches in the offices of the Sub-Registrar of Assurances in order to have a comprehensive and complete record of all registered documents including any lis pendens on the subject property. To what extent and up to what period the prior title deeds are to be perused may vary from case to case. However, it is advisable to peruse the title deeds for the last 30 years as per the provisions of the Indian Limitation Act, 1961 in order to ensure that, there are no claims affecting the subject property.

One of the pre-requisites of a diligence exercise involves ensuring that, all documents are adequately stamped under the provisions of the Indian Stamp Act, 1899 read with the State-specific Stamp Acts and further, all compulsorily registrable documents are subsequently registered under the provisions of the Registration Act, 1908.

4. Applicability of Indian Limitation Act, 1961 (“Limitation Act”):

The period of limitation in case of mortgages to redeem or recover possession of mortgaged immovable property (Article 61a), for foreclosure of mortgages (Article 63a) or suits by or on the behalf of the Central Government or any State Government is 30 years (Article 112);

Under Section 90 of the Evidence Act, 1872, a document 30 years or more is presumed to be validly executed and the contents thereof are presumed to represent the correct agreement or understanding between the parties there to.

However, a search for the last 12 years may be treated as normally sufficient depending on the transaction since the limitation period to file a suit in the following cases is 12 years:

• To enforce payment of money secured by a mortgage or otherwise charged upon immovable property, when the money sued for becomes due; (Article 62)
• for possession of immovable property mortgaged, when the mortgagee becomes entitled to possession; (Article 63b)
• For possession of immovable property based on previous possession and not on title, when the plaintiff while in possession of the property has been dispossessed, from the date of such dispossession; (Article 64)
• For possession of immovable property or any interest therein based on title, when the possession of the defendant becomes adverse to the plaintiff; (Article 65)
• For possession of immovable property when the plaintiff has become entitled to possession by reason of any forfeiture or breach of condition, when the forfeiture is incurred or the condition is broken. (Article 66)

5. Legal Authority of a minor to transfer property:

It is pertinent to be heedful when a minor is involved in transfer of property. Under Section 8 (2) of the Hindu Minority and Guardianship Act, 1956, a court permission in favour of a natural guardian is a pre-requisite to alienate the minor’s interest in property. Further, any transfer of immovable property made by a guardian may be accepted by the minor on attaining majority (eighteen years of age in India) or revoked by challenging such transfer by way of a suit within the prescribed period of three years from attaining majority under Article 60 of the Limitation Act. Therefore, as held by the Supreme Court of India on 25th February, 2019 in Murugan & Ors. vs Kesava Gounder (Dead) THR. LRS. And Ors. [CIVIL APPEAL NO.1782 OF 2019 (arising out of S.L.P. (C) No. 21091 of 2010)] such transaction/transfer by a guardian is voidable and can be set aside upon three years from the date of the minor attaining majority.

6. Nature of Property and Land Use:

As a part of the title verification process, it is necessary to ascertain the nature of the property, as to whether it is government-owned or privately owned. Any property which is under title of government cannot be further transferred or alienated without the prior permission of the relevant competent authority, failing which such transfer will be void ab initio

Further, based on land use, property can be divided into two broad categories i.e. agricultural land and non-agricultural land. While conducting title verification it is necessary to identify the land use or status of property in question, as to whether it is agricultural land or non-agricultural land. If it is non- agricultural land then it should be further classified as residential or commercial, institutional, industrial etc .

Because knowing the land use pattern will help the buyer to determine the utility of the property. For instance, only non-agricultural land can be used for residential purposes. If on verification it is found that property in question is classified as agricultural land then you have to apply for the conversion of land with an authorization to use it for residential purposes. If the conversion is permitted, only then is it advisable to proceed with the transaction. This information can be derived from the assessment register maintained by the local municipal authorities.

7.Development and construction:

In the case the property in question has some ongoing developments or construction, a few steps may be seen to be added to title verification process. It must be ensured that any construction, that may be ongoing, is in adherence to the building plan and sanction plan in the same manner as prescribed and passed by the appropriate municipal authorities.

In addition to this, builders are required to seek a number of permissions and approvals with regard to infrastructure and utility facilities like water, sewage, electricity, environment compliance etc. The appropriate acquisition and sanction of these ought to be adequately ensured.

In case of ‘ready to move-in’ properties, one also needs to duly verify check occupancy and completion certificates.

Therefore, while conducting title verification it is advised to determine whether all the local construction rules were followed and complied with or not.

Further, if the property is under construction stage it is important to scrutinize following aspects –

• One must ascertain if the developer is the owner of land itself or if he has entered into a joint development agreement with the landowner. In case of latter, a power of attorney must be executed between the landowner and developer, which must be scrutinized while conducting title verification.
• It must be ascertained that the builder is complying with all the local construction and safety rules.
• It is also necessary to determine if the builder had sought all the necessary permissions, authorization and approvals.
• One need to ascertain if the construction is in compliance with the sale agreement.
  Whether there is adequate access to the subject property.

8. Charges/Encumbrances:

• Real Estate (Regulation and Development) Act, 2016 (“RERA”): Pursuant to the advent of the RERA; it is essential to ensure that, any property development project is registered under the RERA Authority within the State which would entail scrutinizing the RERA Registration Certificate. Further, the Agreements for Sale in respect of the flat/premises in the buildings forming part of the development project should be perused and one should be careful about the date of possession thereof and the current status of construction in order to keep any customer complaints/disputes before the RERA tribunal at bay. Further, on must ensure that, details/disclosure of the flats/units sold in the given project are provided by the promoter or developer.
• Insolvency and Bankruptcy Code (“IBC”): If the holder of the subject property is a company, one should carry out Registrar of Companies searches to ensure that the property is not part of any mortgage/charge or hypothecation. Further, the previous three years’ audited balance sheet along with profit and loss account of the owner/developer for the last three years should be scrutinized in order to ensure that, the company shall not be declared as insolvent or be wound up making it liable in several debts to its secured/unsecured creditors.
• Statutory Dues: One should ensure that; income tax dues, municipal taxes including assessment/property tax, water and electricity bills are paid failing which the concerned department of the local Government body may have a lien on the subject property.
• Pending Litigations: In order to have clarity on any undisclosed disputes/ litigations, one should carry out litigation searches in respect of the entity in holding of the subject property in order to ascertain whether there are any orders/claims affecting the subject property and/or the rights/interest of the owner/holder in respect thereof.
• Acquisition Process: In India, the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 restricts the alienation rights of the original owner. While conducting title due-diligence, it is pertinent to ensure that the subject property is not under any acquisition process because if any transaction is executed on the property which has been acquired by the government, the transaction shall be treated as void ab initioand cannot be enforced legally.

9. Restrictions and allowances:

Real covenants on the property may come in to the picture owing the housing society’s bye-laws. Such bye-laws enumerate the restrictions and allowances with respect to construction on the property.

For example, bye-laws of the society may not be allowing you to cover the balconies and open spaces or you may be required to follow a specific construction plan or there might be some parking restrictions which are to be considered before investing in property. So, these bye-laws must be scrutinized while conducting title verification.

Easementary rights too may pose an issue. It is possible that the owner may have provided a right to way to an adjacent property, or there can be easements created for utility services like a portion of property may have been reserved for installation and repair of water and sewage pipelines, electrical cables etc. which have to be looked into and verified while conducting title verification.

10. Revenue Records:

One must scrutinize the Property Register Card, Encumbrance Certificate, Khata/Patta Certificate and other revenue records (by whatever name called in different States uas per applicable State laws) as material for reference to ascertain and clarify the chain of title of past holders. However, one should be cautious as to their conclusive value since entries mutated in the revenue records are not title deeds and the same cannot be relied on for establishing absolute title in favour of the holder/owner. Record of rights and mutation records (available through revenue authorities in different States) though not held as official title documents can still be seen as a promising source for the verification as such documents reflect the nature of the right of the transferor with respect to subject property.

The same has been observed by the Apex court on 16th April, 2007 in Suraj Bhan & Ors. vs. Financial Commissioner & Others. [CIVIL APPEAL NO. 1971 OF 2007.]

11. Others:

In a landmark judgment passed by the Hon’ble Bombay High Court on 26th August, 1991 in Ramniklal Tulsidas Kotak and Others vs. Varsha Builders and Others [Notice of Motion NO. 966 OF 1991 In Suit No. 1094 OF 1991], the following guidelines to be adopted by the Advocates and Solicitors while issuing title certificates have been laid down:

• perusal of the title deeds;
• conducting searches in the office of the Sub-Registrar (and also of the Registrar of Companies in case the vendor is a limited company);
• issuing public notices in at least two newspapers (one in vernacular and the other in English circulating in the area where the property is situated) inviting claims of any member of the public against or in respect of the property in question;
• to require the architect of the purchaser to ascertain whether the land is under set-back or reservation;
• to administer requisitions of title and be satisfied about the answers;
• to obtain declaration on oath from the vendor regarding the factual position before issuing a certificate of title.

Particular Conditional Categories of Land in Maharashtra:

This section deals in particular with the conditional categories of land in the state of Maharashtra. In conducting a title due diligence on any land that may be classified any of the following categories that is to be subject of transfer of title, one must take note the specific provisions mentioned herein.

It is pertinent to note that, for the following categories of land in Mumbai, Maharashtra, prior permission is required for transfer:

• Public Trust Property: Prior permission of Charity Commissioner required under section 36 of the Bombay Public Trusts Act, 1950;
• Collector’s Land: Prior permission of the Collector of Mumbai City required.
• MCGM Land: Prior permission of the Municipal Corporation of Greater Mumbai (MCGM) required.

1. Collector’s Land Transfer Fees: The State Government of Maharashtra through its Revenue and Forest Department follows a policy of charging transfer fees for granting permission to transfer, lease or license the premises in buildings constructed on Government Land in accordance with the Maharashtra Land Revenue Code, 1966. The rate of transfer charges levied in areas falling within Mumbai District and Mumbai Suburbs may vary for Industrial and/or Commercial Premises. While the documents in respect of such premises are accepted for registration, the Collector can levy a demand for payment of transfer charges pursuant thereto creating a lien on the premises until payment thereof.
2. MHADA Land: Regulation 33(7) of the Development Control and Promotion Regulations, 2034 (“DCPR, 2034”) makes a provision for 51% irrevocable written consents of tenants in favour of the developer/owner in respect of any re-development project falling under the housing schemes of the Maharashtra Housing and Area Development Authority (MHADA) and/or Mumbai Repairs and Reconstruction Board (MBRRB).
3. Slum Land: Regulation 33(10) of the DCPR 2034 makes various provisions in respect of slums (censused or else) including payment of premium by the developer/slum co-operative housing societies in respect of slum rehabilitation schemes proposed to be undertaken on lands owned by the Government, Semi-Government undertakings and local bodies.
4. Mill Land: Regulation 35 of the DCPR, 2034 provides for sick/closed cotton textile mill lands in Maharashtra whereby; a monitoring committee headed by a retired high court judge shall be responsible for granting approvals and generally overseeing the re-development of such mill lands. Therefore, one should be cautious to scrutinize such additional approvals and compliance of permissions/conditions granted by the monitoring committee.
5. Transfer to Agriculturist: Under S. 63 of the Maharashtra Tenancy and Agricultural Lands Act, 1948 (“MTAL”); transfer of agricultural land is restricted to an agriculturist and the Supreme Court of India in its judgment dated 15th June, 2020 in Vinodchandra Sakarlal Kapadia vs. State of Gujarat [CIVIL APPEAL NO. 2573 OF 2020] upheld the same stating that, an agriculturist could not part with his agricultural land to a non-agriculturist through a will/testamentary disposition and upheld the prohibition against transfers without the previous sanction of the concerned authorities. Therefore, undertaken with the prior permission of the Collector or Officer authorized by the State Government. Further, Section 63 was amended in 2016 to remove such bar/restriction for transfer in certain regions of Maharashtra and imposing certain conditions for use within 5 years, penalty of 2% of market value for non-usage within 5 years, etc. Accordingly, one has to take Section 63-1A and the conditions stipulated thereunder into consideration whereby the agricultural land is purported to be used for bona fide industrial purposes.

Conclusion

Taking into account all that has been discussed above, we can ascertain that Legal Due Diligence plays a pivotal role in the amicable resolution of any transaction related to real estate property for its sale, purchase, lease or mortgage. To ensure the sanctity of the title of the property, which forms the subject of the transaction, it is imperative to conduct a thorough title verification process. For a defective title hold no real value, and it the title to the property that creates the ownership rights and ensure that they are free from any doubts, risks and clear of any kind of claims, encumbrances and defects.

It is obligatory to investigate, evaluate and scrutinise every such record or information about the real estate property which affects the nature and transactions of such property. Further, it is advisable before entering into any such transaction of a property, to determine and ensure that all chain deeds, title documents, encumbrance certificate, insurance policies and government authorizations are in accordance with the statutory requirements.

This article was originally published in Mondaq on 8 July 2021 Co-written by: Bhoumick Vaidya, Partner; Asmita Hegde, Associate. Click here for original article

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