Importance of Real Estate Due Diligence and the best practices
By Rohit Singhania, on March 7, 2024
POSTED IN Real Estate,
“Imagine, you just bought a home and whoa, you find you’ve been duped! The seller has a pending tax proceeding and the property is attached. You never knew.”
“You took a property as security for loan advanced to a friend, and later you find, your friend never owned that property!”
“You spent lakhs and crores on setting up your new office or showroom at a rented space, and guess, your landlord is not the only owner of that space!”
The whole need and principle of Real Estate Due Diligence revolves around the provisions of Section 55 of the Transfer of Property Act, 1882. It derives its roots from the latin maxim ‘Caveat Emptor’ meaning “let the buyer beware”.
Real estate transactions can throw shocks and surprises at any stage if you are not very careful in your dealings, and hence, it is always advisable to first conduct a thorough due diligence of the property intended to be acquired and then make a considered and informed move.
Real Estate Due Diligence is the exercise of carefully and thoroughly investigating and assessing the risks involved in a proposed real estate transaction. It makes a detailed analysis or investigation conducted by lawyers and other professionals to find who the actual owner of the property is, whether his title is marketable or not, whether any obligations attached to the property, and, whether the property is free from all encumbrances or not.
The “Title” of an owner of a property can be broadly classified into three types;- Good, Bad and Difficult.
A “Good Title” is being free from all encumbrances and the owner having absolute and unquestionable right to deal with his property.
A “Bad Title” is a title affected by any major encumbrances and the owner not being able to dispose off the property.
A “Difficult Title” is a title affected by an encumbrance which is curable at a cost.
Title are of two categories:- Freehold and Leasehold.
A Title is said to be “Freehold” when the owner has an absolute discretion of dealing with his property in accordance with the provisions of the Transfer of Property Act, 1882, and a Title is said to be “Leasehold” when the title holder is not an owner of the property but has a limited and restricted interest in the property.
Real Estate Due Diligence typically involves the process of:-
- Examining ownership documents; and
- Carrying out searches at the jurisdictional registrar’s office, courts and other local, public or municipal bodies or authorities.
Searches and/or investigation are also carried out at various Government or other public or local bodies where non-compliance of any rules or regulations by the owner would have a negative impact on the marketability of his title to the subject property.
In addition, the owners/sellers may also be requested to answer Requisitions-on-Title put up by a buyer/his lawyer on owners/sellers. Requisitions-on-Title is a set of questions on various matters connected with the subject property. This helps the buyer/his lawyer to better understand the legal position of the property and to assess the risks involved in the real estate transaction.
At the end, Real Estate Due Diligence is a quintessential cannon of prudent real estate transactions. By-passing this fundamental security measure may result in losses in the hands of potential real estate buyers, lenders, investors and tenants.