Due diligence and title search play an important role in real estate/property transactions. People approach us and often have the following queries.
What is due diligence and Title Search before property purchase?
It means taking all precautions and ensuring that investment in a property is safe and secure.
By exercising due diligence:
- The buyer identifies and evaluates all types of risks involved in investment
- The buyer tries to rule out/minimize these risks
How do we go about it?
Due diligence implies:
- Scrutiny of title:
Title Search relates explicitly to the search of ownership and the rights of the owner to sell the property. Two kinds of title search reports are there.
- Full Search – The title of the property is searched for a period of previous 30 years.
- Limited Search – The title of the property is searched for a period of previous few years (less than 15 )
The search report is prepared depending upon the nature of the transaction. The title search is a very crucial part of due diligence as the defective title leads to no transfer at all.
B. Search for the right of the owner to sell the property:
The owner must be capable of transferring ownership. The buyer has to ensure that there is no restriction to the power of alienation of the owner. The limitation can be there:
- If the owner is a minor or a person of unsound mind. Such a person can sell through guardian or a person so authorized.
- The owner is not having an absolute right in the property.
- The owner is a lessee or a tenant.
- Statue does not permit sale of the property.
Which records are searched?
- The records maintained
- at Sub Registrar’s office
- with Tehsildar (mutation and Jamabandi)
- records maintained by Registrar of Companies
- Title deeds – Gift deed, Will, Lease Deed, Sale Deed etc
What is the significance?
There are many reasons to exercise due diligence before purchasing a property:
- Increase in the number of frauds – There has been an increase in frauds related to real estate. Due diligence involves verification of documents, title and ownership rights to ascertain the authenticity of the same and therefore, helps to prevent fraud.
- Cost of investment – People invest hard-earned money or a huge amount of loan in real estate. Due diligence is required to safeguard the funds being invested. As stated above, risks are identified, evaluated and minimized by due diligence.
- Disputed property – Before buying a property, buyer has to ensure that the property is not involved in any litigation. If there is any court case pending concerning the property or the rights of the owner, it can pose hardships later for the buyer. The buyer is bound by the decision of the court, which may or may not be favourable.
- Encumbrances which affect the
value of the property– The property intended to be
purchased must be free from all types of encumbrances like
- Charges due (utility bills, tax payment or any other statutory payment)
A certificate in this regard is issued by the Office of the Sub Registrar. The buyer must inspect the original title deed as it is deposited with the Bank if there is any loan against the property.
- Easement Rights/ Acquisition
process affect the interest of the purchaser: The property might be
- an easement right (right to have a passage through the land)
- covered under acquisition scheme of the Government.
The buyer must check for the same. It affects the returns from investment.
- Necessary Approvals – A buyer must ensure that the owner has obtained necessary approvals from the authorities. Approval is granted if the statutory requirements have been fulfilled.
It is advisable to get legal assistance for the search of records and verification of documents.