Now for the Six Easy Steps for conducting Due Diligence

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Step 1: Legal capacity of the seller

It is necessary to ensure whether the current owner of the property or any of the predecessor title holders is a minor or of unsound mind.

In case the property owner is a minor, the property can neither be purchased nor be taken on lease without prior permission of competent authorities.

In case the seller is a person of unsound mind, only their legal guardian can sell the property on their behalf.

Step 2: Nature of current owner’s right over the property

It is necessary to identify the nature of the right that the seller has over the property and the transferability of such right.

The types of rights that an owner can have over the property can be classified as – free hold/absolute ownership, right of perpetual lease, tenancy right, or land allotted by State Government /Central Government under various enactments.

Step 3: Source of right or title of the current owner:

In case the title was acquired by purchase, then one needs to examine the registered sale deed/ conveyance deed along with the title documents of predecessor title holders of the property.

If it has been inherited, the entries are made in mutation register (jamabhandi), which is maintained by Revenue Office for every village or check court orders.

If the current owner has acquired title over the property by way of partition, one needs to examine the deed of partition to ascertain whether there were any conditions or restrictions in the deed which may affect the enjoyment/ transferability of property.

If the title was acquired by way of gift, then the registered gift deed needs to be examined to check if there are any conditions, like reservation of life interest, restrictions for alienation, payment of maintenance, pre-emption etc.

In case, the title has devolved upon the current owner by virtue of a Will, it is advisable to examine the Will as well as the order passed by the probate court granting probate/ letters of administration of the property, if any. And if the title was acquired by perpetual lease, then the deed of lease has to be examined to determine the transferability of the right and the conditions to such transfer. The extent of the rights of the lesser should also be examined.

Step 4: Legality of the construction:

This is one of the most important steps of due diligence. It becomes imperative to examine the legality of the construction. Each state government and the relevant local authorities have laid down their own rules and regulations which govern the manner in which civil constructions need to be carried out in that particular state.

Hence, a lawyer, undertaking due diligence of land having a structure on it, needs to first get familiar with the local construction laws applicable in the region in which the building is situated, and then, to determine whether these have been complied with in undertaking the construction of the building in question.

Nowadays, acquiring environment clearances have become a big challenge before constructing any building.

The aspects which would need to be examined in this process would be the footprint area (including set-backs), the extent of constructed area, the number of units constructed, the height of the construction, etc.

Step 5: Encumbrances over the property:

It is important to verify whether there are any encumbrances, charges, or mortgages on the property in question. The records of the concerned Sub-Registrar of Properties should be examined to ensure that the property is free from all sorts of registered encumbrances or charges or mortgages.

It is also advisable to obtain an encumbrance certificate issued by the concerned Sub-Registrar of Properties. This certificate may be obtained from the office of the Sub-Registrar for Properties, where the property is situated.

In addition, since a mortgage could also be created over the property by way of deposit of title deeds, the original title documents of the property should be inspected to ensure that there are no such unregistered mortgages.

The thumb rule says that if there is an existing encumbrance, charge or mortgage over the property, it should either be cleared prior to the purchase or provided for in the consideration.

Step 6: Whether the land is a part of any acquisition process:

It is also important to learn if the property is under the process of acquisition by any government authority. For instance, if a farmer sells a property which has already been acquired by the government for maybe constructing a highway on it, the investment is in vain.

If the property has been acquired by the government, it ceases to belong to its original owner and becomes the property of the acquiring authority. The property so acquired cannot be sold or alienated further by the original owner, unless the property has been released from the acquisition process.

 

The Due Diligence exercise is thus relevant only when you thoroughly consider  each of the above detailed aspects; the absence of even one of which could render the process inadequate to address the concerns of the participants. It is expected that, over the years, the process would get more streamlined and organized and thus mitigate the challenges currently faced by real estate lawyers while undertaking a land due diligence exercise. However, as it stands today, the process is not only time consuming but also weighed down with uncertainties and obstacles.