Real estate is one of the fastest-growing sectors in India evidenced by a sharp increase in real estate transactions involving buying, selling, leasing, and financing of properties. In addition to transactions in urban areas, we have also witnessed large-scale procurement of land from individuals in villages close to the urban, industrial, and commercial centres. Similarly, there has also been an increase in leasing (both short and long term) of commercial office space.
The increase in real estate transaction values combined with the growing participation of the organized sector in real estate has resulted in heightened awareness of the risks involved and, consequently, the need for ensuring that the risks are identified and minimized in such transactions. 'Legal due diligence/ title search' of real property (be it of vacant tracts of land or of constructed residential/ commercial/ industrial properties) is clearly the mode for achieving these objectives.
A due diligence exercise is probably the most important aspect of a transaction involving real estate immediately following a broad understanding of the commercials. This process has the potential of not only impacting the commercials 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 players to provide adequate time and attention to the detailed due diligence of the property involved. It is important to realize issues such as title, permitted use, the legality of construction, encumbrances and easements which have the ability to impact the very nature of the property and its suitability to the commercial needs of the transaction.
Due diligence is conducted mainly to verify the ownership of title over the property and any encumbrances over the property, so as to protect one against pre-existing claims over the property. Such claims could either affect 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 due diligence is therefore to gather information. The extent and type of due diligence to be undertaken by the purchaser's lawyer will depend on the following:
1. the risk profile and business objectives of the purchaser/ lessee;
2. the type of real asset involved;
3. 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);
4. the time frame for completion of the transaction; and
5. 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 diligence 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 lender. Such a 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.