An Overview of Real Estate Laws and Regulations Applicable in India

1. Overview

A transaction in real estate in India must take into consideration:

• The legal and contractual capacity of the transferor to transfer the property or interest proposed to be transferred;
• The legal and contractual capacity of the transferee to acquire and utilize the property or interest proposed to be acquired, for the intended purpose of acquisition; and
• Statutory requirements and restrictions on transfer and use of the property or interest proposed to be transferred.

The Republic of India is a federation of 28 States and 8 Union Territories, and is governed by laws enacted and rules and regulations framed by:

• Central Parliament on subjects in the Union List (e.g. taxes on income excluding agricultural income and taxes on the capital value of assets excluding agricultural land) and in the Concurrent List (e.g. transfer of property other than agricultural land, registration of deeds and documents, contracts, trusts);
• State Legislatures on subjects in the State List (e.g. municipal corporations and other local authorities, rights in or over land, including the relation of landlord and tenant and the collection of rents, maintenance of land records, taxes on lands and buildings) and in the Concurrent List to the extent they are not repugnant to any Central law provision on the same subject;

and

• rules, regulations and bye-laws framed by local bodies like municipal corporations and statutory authorities such as planning and environmental authorities.

Many Central legislations on subjects in the Concurrent List (e.g. registration of documents) have State amendments.

Customary laws are applicable to the extent not inconsistent with the Constitution of India (e.g. Islamic Law is applicable to succession in the case of Mohammedans).

For our responses, Central laws and laws applicable in the state of Maharashtra (of which the capital city is Mumbai) have been taken into consideration. Note that some laws differ from state to state and that local laws may also apply depending upon the type of transaction.

2. What is the main legislation relating to real estate ownership?

1. Transfer of Property Act 1882 – which regulates the transfer of property including by way of sale, mortgage, lease, exchange, gift and transfer of actionable claims.
2. Acts governing the ownership of flats (for example, Maharashtra Ownership Flats Act
3. 1963 – which provides for the liabilities of developers who construct apartment buildings for the purpose of sale of apartments – and Maharashtra Apartment Ownership Act 1970 – which provide for the rights and responsibilities of apartment owners who have chosen not to form a company or co-operative society).
4. Real Estate (Regulation and Development) Act 2016 – which has been introduced to protect the interest of consumers in the real estate sector by establishing the Real Estate Regulatory Authority (“RERA”) to regulate the sector and ensure the sale of plots, apartments and buildings in a transparent and efficient manner by making it compulsory for all pending and future real estate projects with land area in excess of 500 square meters and number of apartments in excess of 8, to be registered with the RERA; mandating material disclosures by the promoters on registration and in conveyances executed with allottees of real estate projects; prescribing timelines for completion of projects and delivery of possession; prohibiting promoters from accepting any advance or deposit in excess of 10% of the total consideration without entering into an agreement for sale; restricting deviations from sanctioned and disclosed plans and specifications of the project and empowering allottees with remedial measures against defaults of the promoter; as also by providing mechanisms to allottees for expeditious dispute resolution.
5. Sums accepted from allottees of real estate projects have been classified as ‘financial debts’ for the purposes of the Insolvency and Bankruptcy Code, thereby providing aggrieved allottees with greater rights as ‘financial creditors’, including voting rights in meetings of the committee of creditors which is collectively entrusted with the management of the affairs of corporate debtors undergoing insolvency resolution and preference in distribution of debts on liquidation of corporate debtors.
6. Co-operative Societies Acts applicable to the relevant States – which provide for the registration of co-operative societies, the rights and liabilities of its members, the management of societies and the settlement of disputes.
7. Rent Control Acts applicable to the relevant States – which provide for the fixing of standard rent and permitted increases in certain cases, which provides for specific cases in which a landlord may evict a tenant, which regulates sub-tenancies and which may provide for compulsory registration of lease and leave and license agreements.
8. Indian Stamp Act 1889, and the relevant State Stamp Acts – to provide for the payment of stamp duty to the government upon certain instruments including agreements for sale, conveyances, reconveyances, agreements relating to the deposit of title deeds, gifts, leases, surrender of leases, leave and license agreements, mortgage deeds, powers of attorney, releases, etc. and consequences of failure or underpayment.
9. Registration Act 1908 – which provides for the compulsory registration of certain documents and sets out the procedure for registration and consequences for non- registration.
10. Land Revenue Codes which regulate land tenures and conditions of grant of Government owned lands.
11. Regional and Town Planning and Municipal Acts which regulate land use, construction and conversion.
12. Foreign Exchange Management Act 1999 and relevant regulations framed under it – which consolidate the law relating to foreign exchange.
13. Indian Succession Act 1925 – which regulates testamentary and intestate succession, in cases where the personal laws of the deceased do not apply.

3. How is ownership of real estate proved?

Any transaction for transfer of interest in immovable property is required to be in writing and registered in the office of the “Sub-Registrar of Assurances”, subject to a few exceptions. A document of transfer of interest in immovable property which is compulsorily registrable but has not been registered is not admissible in evidence in civil proceedings. Registration of instruments which are required to be registered will constitute deemed notice to the public of the immovable property transactions which have been effected by such instruments.

Most land holdings have been surveyed by government authorities and allotted a revenue survey number and issued a “Record of Right” (in case of agricultural lands in Maharashtra) or “Property Register Card” (in case of non-agricultural lands in Maharashtra) and similar documents in other parts of India. These revenue documents record the name of the original owner (at the time of first survey of the land by the government) and subsequent transfers as may have been notified to the authorities. The revenue documents provide prima facie evidence of ownership and devolution of title.

Documents registered in respect of the property in the office of the Sub-Registrar of Assurances and documents issued by the revenue authorities are necessary steps for establishing the ownership of real estate.

However, barring exceptions, an agreement for the transfer of immovable property or an interest therein (which does not itself operate to transfer any interest in land) is not required to be in writing or registered but a suit for specific performance of an unregistered agreement for sale of immovable property may be maintainable.

Also, devolution of title on the demise of the owner and whether the names of all heirs of the deceased have been recorded in the revenue records, require consideration.

4. Are there any restrictions on who can own real estate?

Persons resident outside India fall into the following three categories:

(i) non-resident Indians;

(ii) foreign nationals of Indian origin; and

(iii) foreign nationals of non-Indian origin.

(i) and (ii) can purchase or be gifted residential and commercial property (not agricultural land/plantation property/farm houses/private forest land which may only be inherited by (i)

and (ii)). (iii) cannot purchase any immovable property in India unless such property is acquired by way of inheritance from a person who was resident in India. (iii) can, however, acquire or transfer immovable property in India, on lease, for a period not exceeding 5 years.

A foreign company cannot acquire immovable property in India. However, a foreign company which has established a branch office in India may acquire immovable property in India which is necessary or incidental to its activity, subject to certain conditions. A foreign company which has established a liaison office in India cannot acquire immovable property in India, but can acquire property by way of lease, for a period not exceeding 5 years. A branch office is subject to taxation in India; a liaison office is not, because it cannot earn revenue in India.

Foreign direct investment (“FDI”) into India is governed by the Consolidated FDI Policy. Investment can be made into an Indian company by subscribing to or acquiring instruments which are permitted, including equity shares, compulsorily convertible debentures, preference shares and certain other products available to foreign portfolio investors.

• Foreign investment in incorporated or unincorporated entities (including companies, partnership firms, proprietary concerns, trusts, etc.) engaged or proposed to be engaged in “real estate business”, construction of farm houses and/or trading in transferable development rights, is regulated. “Real estate business” means dealing in land and immovable property with a view to earning profit or income. It does not include the “development of townships, construction of residential/commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships”. It also excludes Real Estate Investment Trusts (“REITs”) registered and regulated under the SEBI (REITs) Regulations 2014. Earning of rent or income through leasing of property, which does not amount to a transfer, is also excluded from the scope of “real estate business”.
• The Consolidated FDI Policy currently permits up to 100% investment, in resident entities engaged in “Construction-development” projects, under the “Automatic Route”. “Automatic Route” means that prior approval of the government is not required for investment by non-resident entities in the capital of resident entities. Construction- development projects include the development of townships, construction of residential or commercial premises, roads or bridges, hotels, resorts, hospitals, educational institutions, recreational facilities and other city and regional level infrastructure. Each phase of the construction-development project is considered as a separate project for the purposes of the FDI policy. A foreign investor is permitted to exit the project and repatriate its foreign investment before the completion of a project under the Automatic Route (i.e. without government approval), provided that a lock-in-period of three years, calculated with reference to each tranche of foreign investment, has been completed. The transfer of a stake from one non-resident to another non-resident, without repatriation of investment, is not subject to any lock-in period and does not require government approval. However, the Indian investee company will be permitted to sell only “developed plots”, meaning plots where basic infrastructure (roads, water supply, street lighting, drainage and sewerage) has been made available.
• 100% FDI under the Automatic Route is permitted in completed projects, for the operation and management of townships, malls, shopping complexes and business centres. Upon the receipt of the foreign investment, transfer of ownership and/or control of the investee company from resident to non-resident Indians is also permitted.
  However, a lock-in period of three years applies, calculated with reference to each tranche of FDI.
• Certain additional conditions apply to investments by Foreign Portfolio Investors, Foreign Institutional Investors and Foreign Venture Capital Investors.

External Commercial Borrowing is not permitted for investment in real estate or purchase of land, unless used for affordable housing, construction and development of Special Economic Zones and industrial parks/integrated townships.

Under Indian law, a minor is not competent to enter into a contract. However, property can be acquired by a minor by inheritance or by the guardian for the minor or out of funds gifted to the minor. Transfer of immovable property during the minority of the holder can be effected with Court sanction.

5. What types of proprietary interests in real estate can be created?

Freehold: Where the owners are dominant owners of the property in perpetuity with no obligation to make any payment to or seek consent from any other person and all other rights and interests in the property emanate from the owner. The absolute ownership of the owner is subject to some statutory restrictions e.g. on excavation and mining and extent of construction.

Leasehold/Tenancy: Where the lessee/tenant has possession and use and income of the property for a fixed term or even in perpetuity, on condition that he pays rent and observes and performs the terms and conditions of the lease/tenancy, and the lessor/landlord has the right to terminate the lease/tenancy and take back possession, unless the lessee/tenant can claim protection from eviction under rent control legislation or the Transfer of Property Act.

Licensee/Occupancy Rights: Where a person is permitted by the owner or by the lessee/tenant (provided the terms of lease/tenancy permit the lessee/tenant to do so) to carry on a specified activity on the property of the owner/lessee on specified conditions.

Common Ownership: Where a building is owned by a Co-operative Society or Limited Company or Association of Apartment Owners/Condominium and individual apartments/offices/premises are acquired and used by Members/Shareholders/Apartment Owners on certain conditions.

6. Is ownership of real estate and the buildings on it separate?

Buildings form part of the land on which they are constructed and the ownership of the building vests in the owner of the land, unless there is a contract to the contrary.

In case land is leased from a lessor to a lessee, the concept of dual ownership may apply (in the absence of a contract to the contrary), which concept will allow the lessee to remove all things which he has attached to the earth (including structures or buildings). This is because the concept of dual ownership recognises the lessor as the owner of the open plot of land and the lessee (who has built a structure on the open plot of land) as the owner of the structure.

In case of common ownership, please refer to the response to question 5 above.

7. What are common ownership structures for ownership of commercial real estate?

Common ownership structures for ownership of commercial real estate are:

• Direct ownership by one or more individuals/entities as owners / joint owners (with or without an express agreement between co-owners on the mode of utilization and devolution of the asset).
• Co-operative societies, in which allottees of plots/premises on the property held by the co-operative society are members. Here, title to the entire property including common areas like internal roads vests in the co-operative society, whereas members of the society are allottees of demarcated premises. The property or the building is managed by the society from contributions from members in accordance with its bye-laws.
• Limited Liability Companies (“LLCs”), in which allottees of plots/premises on the property held by the limited company are shareholders. Here, title to the entire property including common areas vests in the company, whereas shareholders of the company are allottees of demarcated premises. The property or the building is managed by the limited company from contributions from shareholders in accordance with its Articles of Association.
• Association of Apartment Owners / Condominium, in which ownership of individual apartments and their appurtenant common areas and facilities remains with the respective individual apartment owners. The property or the building is managed by the Association of Apartment Owners from contributions from apartment owners in accordance with its bye-laws.
• Limited Liability Partnerships (“LLPs”) are also used for real estate investments, since the profits and losses of the LLP are assessed in the hands of the LLP itself and there is exemption from tax in the hands of its partners. Since November 2015, the government permitted FDI under the automatic route into LLPs operating in sectors where 100% FDI is allowed through the automatic route (including Construction-development projects, as explained in the response to question 3). But LLPs with FDI are not allowed to operate agricultural/plantation activity or “real estate business” (as defined in the response to question 3).

A co-operative society is preferred as a common holding structure, as it promotes participation by the members in decisions regarding management of the common asset in a democratic manner with one member having one vote, though majority rule can sometimes be a disadvantage.

8. What is the usual legal due diligence process that is undertaken when acquiring commercial real estate?

For asset sales, legal due diligence on behalf of the buyer will involve the following (Note that there is no standard form of reporting/certification of title nor of requisitions for title.
Counsels/Advocates for the transferee are responsible for the legal due diligence. Generally, notaries in India do not carry out legal due diligence and the functions of the notary officers include verification, certification, authentication and attestation of instruments):

• Review of title deeds: Inspection of original documents, if available, to ascertain their terms, whether they have been registered if compulsorily registrable, whether there is any “mortgage by deposit of title deeds” or any claim or lien on the basis of custody of original title deeds. The terms of any lease or grant under which the property is held are required to be considered to ensure that there is no breach of such terms.
• Searches in the office of the Sub-Registrar of Assurances, usually for the previous 35 years, for ascertaining whether, apart from documents provided for inspection, any other document or notice of lis pendens has been registered (since registration operates as notice of the registered document to the public).
• Online searches for charges on properties of LLCs registered with the Registrar of Companies, online searches for information available in the public domain like status of litigations, disqualification of directors.
• Consideration of revenue records relating to the property.
• Publication of a public notice in two local newspapers inviting claims within 15 days of publication and stating that thereafter the transaction will be completed and any claims which are not notified within time will be considered as waived.
• Requisitions / inquiries with the transferor, including about any third party claims, oral or written agreements, past and pending litigations/arbitrations, attachment orders, income tax proceedings, persons in occupation of the property.
• Consideration of the survey report / plan of the property showing its area, boundaries and construction thereon and consideration of any statutory restriction on permissible use of immovable property and conversion, such as under coastal zone regulations, development control regulations, etc.
• Consideration of whether, apart from the transferor, permission of any other person or authority, such as the landlord/lessor, Government, mortgagee, co-operative society or owner of adjoining land providing access to the property, is required.
• Searches to ascertain any compulsory registration of a developer/project and details and documents compulsorily made available pursuant to such registration, such as under the Real Estate (Regulation and Development) Authority Act 2016.

The extent of due diligence will depend on the asset under investigation. In case of purchase of a plot of land with or without buildings, it will have to be extensive. In case of purchase of a leasehold asset, the due diligence may start from the lease deed. In case of premises proposed to be taken on lease or leave and license for a limited period, public notice may not be issued.

9. What legal issues (if any) cannot be covered by usual legal due diligence?

Some legal issues which are not apparent from title documents, revenue records and inspection in the office of the Sub-Registrar are:

• Claims of persons in possession, like persons claiming adverse possession (for more than 12 years) or squatters or tenants protected from eviction – may require survey of the property by a Surveyor in order to be ascertained. A person acquiring immoveable property (or any share or interest in such property) is deemed to have notice of the right, if any, of any person who is in actual possession of the property.
• Legal status of construction on the property where construction or part thereof lacks requisite permissions – professional advice from Architects and Surveyors is required on these issues.
• Information on pending or likely Government actions to the extent not disclosed by the transferor or whether any proceedings which may result in liability for payment of income tax or any other tax, interest or penalty have been initiated against the transferor.
• Whether the property is notified for or reserved for compulsory acquisition by the Government.
• Whether the property is attached for recovery of any amount.
• Whether acquisition of property by the transferor is tainted by any illegality, for example by utilisation of proceeds of crime, money laundering, utilisation of borrowings from banks and financial institutions for purposes other than the agreed end-use, breach of Court order and any such illegality can expose the transferee to the risk of claims by the authorities.
• Claims based on reversionary rights.

10. What is the usual process for transfer of commercial real estate?