by ca. s. b. zaware - puneicai - pune branch of...

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ByCA. S. B. Zaware

Central Council Member and Member CMII The Institute of Chartered Accountants of India

What is Legal Due Diligence?

Legal = Connected with Law

Due = Appropriate

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Diligence = Meticulous care or attention

“Making sure that you get what you are

paying for.“

Background of Legal Due Diligence

"Due diligence” –“A measure of prudence, activity, properlyexpected from and ordinarily exercised by areasonable and prudent person under the

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reasonable and prudent person under theparticular circumstances, which is notmeasured by any absolute yardstick butdepends on the relative facts of a particularcase.”


“Due Diligence" can be traced in U S SecuritiesAct of 1933, where the expression ‘duediligence’ first came into common use.

“Real Estate Due Diligence"

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“Real Estate Due Diligence"

“The inspection and investigation of Real Property,Personal Property or a Business Entity, before a buyermakes the final decision whether to consummate anacquisition, merger, or a loan transaction.”


Due Diligence consists of-A scrutiny of all, or specific parts, of the legal affairspertaining to a property with a view of uncovering alllegal risks involved in acquiring the property and toprovide the buyer an extensive insight into the nature of

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provide the buyer an extensive insight into the nature ofthe property and risk involved in purchasing the same.

Due Diligence often improves the buyer’s positionby pointing out the risks involved in purchasingthe property and ensures that necessaryprecautions in relation there to.

Why Legal Due Diligence?

Last decade has witnessed the rapid growth in theeconomic development of India leading a vastexpansion in Real Estate Sector.There are several instances where the investors

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There are several instances where the investorsface several legal disputes and to pay high costfor real estate commercial decision taken withouta proper legal due diligence.Due Diligence tool is highly essential whichcovers all the possible areas of anticipatedliabilities.


Due Diligence assessment process removesuncertainty from key decisions that must be madewhen analyzing the cost/benefit of any real estatetransaction.

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A comprehensive inquiry should be designed toprovide a buyer with clear pictures of where theirstrategies and decisions are taking them or to putit simply – what it is they are buying.


Due Diligence process is to eliminate unknownrisk. Potential buyers need to ensure that theirproperties are suitable-legally and from a practicalbusiness perspective-for their intended use. In-

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depth due diligence is necessary to determinewhat a property is really worth.

Area of Legal Due Diligence

Proceeding with due diligence means to leave nostone unturned which may lead to legal defect inthe title of property and any risk intact with thetransaction.There are a multitude of details which must be

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There are a multitude of details which must beconsidered when dealing with purchasing a parcelof real estate. The function of due diligence is toindependently verify all representations made bya prospective seller as well as to uncoverpertinent facts which have not been disclosed butwhich are important from viewpoint of the buyer.

Area of Legal Due Diligence

Due diligence is not merely 'maximum datacollection', but it is the best and elaboratedcommercial-legal analysis, in order to structurethe transaction with all foreseeable risks, and toprevent any potential harm.

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prevent any potential harm.The nature of due diligence shall vary fromtransaction to transaction and shall be dependenton numerous factors including but not limited tosource from which the land/property is beingacquired, purpose for which the land/property isbeing acquired, tenure of the lease (in case ofleasing transaction) and so on.

Steps for Legal Due Diligence – before Purchasing of Property:

Intended use of the property :-Buyers must have an understanding of zoningand land use issues. Upon identifying aproperty, the potential buyer should determine

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that a property's intended use is lawful underthe law of land. If not, whether such propertycan be used for intended purposes withnecessary approvals/permits.


Title of the property-The title of the property forms the foundation of any contract.According to the Indian Contract Act 1872 and Transfer ofProperty Act, 1882, no seller can pass on to the purchaser abetter title than what he already possesses.

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The title of the seller must be clear and free from anyencumbrance. Before buying a property, it is foremostrequirement to verify the title of the seller and marketabilityof property.A search of the records at the sub-registrar’s office may becarried out for documents that may affect the property andmay have been registered.

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Title of the property-The report will show the recorded owner of title of theproperty and changes in the title of the property.If the land is an agriculture land, then khata of that land or

“Kisan Bahi” can be requested from the seller.

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Khata is basically a supporting document of title. It is theentry of the present owner in the local body records. Theabsence of khata in the name of a current owner can berectified at any time by applying for khata transfer. Khata hasbecome important because it is required for loans, titleopinions, electricity meter name change, registration, etc.Khata is changed after a sale deed is executed or after aproperty is inherited through a will, gift, sale, etc.

Steps for Legal Due Diligence –before Purchasing of Property:

Sale by holder of power of attorney:If the sale documents are being executed by a personholding power of attorney on behalf of the owner, the saidpower of attorney should be scrutinized closely.The person must not only possess the power to sell

property, the power of attorney should also be validly

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property, the power of attorney should also be validlyexecuted before the appropriate authority.An agreement holder who also has a power of attorney tosell the land and/or building is normally a developer.Alternatively, a person may have paid the entireconsideration to the owner and hold`s on to the property forsome time to sell it at a later date for a profit.Such power of attorney must be properly stamped andregistered. It should also not be revoked.


Check the original documents:Beyond the physical condition of the property , there are a multitude of intangibles that have to be taken into account when evaluating a site for acquisition.Every document concerning the land, building and its

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Every document concerning the land, building and its operation must be examined. This includes leases (with any and all extensions and modifications), notes and mortgages, (whether the buyers are assuming them or not), title policy, certificate of occupancy, tax history, licenses (in some jurisdictions), parking lot contracts, etc.


Check the original documents:Inspect the all the original documents of the seller andscrutinize them carefully before buying the property.A public notice may be placed in newspapers calling forclaims in respect of the property being purchased.

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claims in respect of the property being purchased.Claims can come even afterwards, public notice helpsin proving that you purchased the property bona fideand in good faith.In case the original documents are not available orhave been lost, the certified true copy may beconsidered for verification of title with due affidavit fromthe seller.


Inspect the plans:

If the building is under construction or constructed, theninspect the plans to check whether they have beensanctioned by the concerned authority.

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Payment of stamp duty:

Always verify documents of title to check payment ofstamp duty. If the ownership of Property has changedhands more than once, examine all the documents forpayment of stamp duty by the predecessors.


Minor’s Property:

In case where the property is owned by a minor, priorapproval of the court is required to enable the minor’sfather/natural guardian to sell the property. In the

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father/natural guardian to sell the property. In theabsence of such permission, the sale could be void -able at the option of the minor on attaining majority.


Check the minimum tenure of land if taken onlease:

If the property that is being purchased is a building builton a land which is given on lease, lease rent would

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on a land which is given on lease, lease rent wouldhave to be paid for the land owners.

If the lease is to expire shortly, it is possible that thelease rent may increase substantially. Hence, the termsof the lease must be verified before buying the building.


Other precautions need to be taken :Check the occupation certificate:Completion/Occupation certificate should be inspectedto ensure that the building has been built legally,especially in case of new buildings.

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especially in case of new buildings.Check the Carpet/Built-up/Super built up/Salablearea: Areas can be verified by taking actualmeasurement of the property, if the same is ready.Search for records: A search of the records at the sub-registrar’s office may be carried out for documents thatmay affect the property and may have been registered.


Other precautions need to be taken:NOC of the society: It is advisable to obtain a ‘No DuesCertificate’ and ‘No Encumbrance Certificate’ from thesociety (if the property is in the society) and MunicipalCorporation to ensure that all dues are paid and nomortgage is registered with the society in respect of the

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mortgage is registered with the society in respect of theproperty being purchased. In case the property is in asociety, check that all the society forms are duly filled andsigned.Dispute regarding property: It must be verified that anysuit regarding the title of property is not pending /continuingin any court of law.Further, the factors like partition are also to belooked into in case of purchase of joint property.

Steps for Legal Due Diligence – after Purchasing of Property:

Proper Execution of ‘Agreement of sale’ and ‘SaleDeed’Payment of proper stamp duty under Stamp Act,1899

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Registration of Deeds

How to carry out Legal Due Diligence?

Real property acquisition in India may differ in format,processes and procedures in different parts of the countrywhich makes it necessary for an buyer to spend time andresources scouting for properties, verifying title, physicalinspection of the premises, identification of the

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inspection of the premises, identification of theencumbrances it is subject to and ensuring tax liabilitieson it. In other words, before an acquisition, a buyer has tocarry out an extensive due diligence not only on theproperty but on the financial viability of its owners.

How to carry out Legal Due Diligence?

The findings made during a legal due diligence processwill be summarized in a due diligence report, offering acomplete picture of the legal situation of the property inquestion.In addition to conveying a general overview, the report will

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In addition to conveying a general overview, the report willclearly flag those areas, which require particular attentionthereby making it easier to evaluate the impact of the legalfindings on the acquisition as a whole.The report will often pinpoint those areas where specificrepresentations and warranties are needed, including asuggested wording hereof.

Role of Chartered Accountants:

The Chartered Accountants can play veryimportant role in due diligence in Real EstateSector.

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Paradigm shift in Professionalism

Chartered Accountant is a financial Doctor

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Chartered Accountant is a financial Architect

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Chartered Accountant is a financial Engineer

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Chartered Accountant is a Legal Advisor.

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Chartered Accountant is a Business Solution Provider

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Conclusion:

A comprehensive legal due diligence has provedto be of vital importance in identifying themarketable title of the property and also ensurecompliance of law of land.

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THANK YOU

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