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Legal aspects to consider when purchasing a flat from a developer in under construction

A highlight of the legal aspects to consider when it comes to purchasing a property in an under-constructed property


The legal considerations when it comes to buying a property in an under-construction property are substantially different. For under-construction properties, the agreement of sale is of acute importance as no physical structure of the building exists as yet. Since the property is still being developed, buyers need to more meticulous and thorough before entering into an agreement for the purchase of the flat.

Through this article, we will aim to help purchasers highlight the legal aspects to consider when it comes to purchasing a property in an under-constructed property as there are certain legal nuances that purchasers may not entirely be aware of.

Legal aspects to consider when purchasing a flat from a developer in under construction

Nature of the title of the project: This aspect defines the manner in which the developer of the under-constructed project has acquired the land and its right to develop and construct on the same.

This title of the Developer is generally set out in the Agreement for Sale which is usually entered into between the developer and the flat purchaser. Further, in terms of RERA, the Developer is required to annex a title report issued by an Advocate setting out the details of the title of the Developer to the land and the building under construction. For this reason, it is important for the buyers to review the sale agreements thoroughly. Carefully reading the agreement can help understand the title of the developer allowing the purchaser to make informed decisions. A typical agreement for sale would, inter-alia, include:

  • Title of the developer

  • Details of whether the developer is the owner of the land

  • Details of if the developer is developing the project jointly with a third party


Disputes and encumbrances: As per RERA Act, the developer is required to disclose all disputes or encumbrances related to the property under development. This point is important to note as the purchaser must know whether the property is subject to any litigation. A complete understanding of this will help the purchaser know if any of the aforesaid aspects could affect the development of the project as well as factors that could delay or even stop the construction of the property.

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Building approvals and permissions: The Developer is required to obtain several approvals from the concerned building/planning department for the purposes of constructing a building. One of the key approvals is the building plan sanction and the permission to commence construction. It is, therefore, important for homebuyers to verify whether all the key approvals for construction of the building have been issued and are valid and binding. In the case of multi-story or high-rise buildings, one should verify whether necessary height approvals and environmental clearances have been obtained by the Developer.

Sanction plans and floor plans: The sanctioned plan and floor plan provide the flat purchaser with the layout of the building and the flat. This plan must be approved by the appropriate authorities such as the Municipal Corporation. Prior to entering into an agreement for the purchase of the flat, the Purchaser should review the sanctioned plans and flat layout approved by the authorities. Care also needs to be taken that the relevant floor plan is attached to the agreement for sale with covenants from the developer that the same cannot be modified without prior permission from the buyer.

Possession Date: By possession date, we mean the date on which the developer would handover possession of their completed flat. It is important that this date is mentioned and expressed in unequivocal terms in the agreement of sale. At times, developers may qualify the possession date making it subject to force majeure events etc. In recent times, there has been significant delays by developers in handing over possession due and therefore, the buyer must ensure that possession date is clearly specified in the agreement and the same is unqualified.

Changes in the building plan: The buyer must read the agreement of sale carefully before signing as there could be clauses in the agreement of sale which could give the developer flexibility to amend the building plans/ floor plans. Some of these clauses, enable the developers to exercise the option of modifying the building plans, construct additional structures etc.

Changes to approved plans can be detrimental to the purchaser as the finished constructed project could be significantly different from what was earlier promised. To give an example, a developer may have initially agreed to construct two buildings but due to changes in regulations and plans, he wishes to now construct an additional building which could significantly modify the layout and the look and feel of the existing buildings. If the agreement of sale contains clauses that allows the developer to exercise this option, he may go ahead with changes without discussing the same with the flat purchaser.

Costs & Charges: There are some additional charges that come to fore while buying property of under-construction projects. These charges are in addition to the cost of premises agreed between the parties which include:

  • Legal fees;

  • Society formation charges;

  • Building maintenance (generally maintenance fees are paid in advance for two years or three years);

  • Share application money (if there is a building society to be formed); and

  • Goods and services tax

To know of the exact cost and charges, at the time of allotment, developers share a cost sheet which lists down the total cost to be paid for the flat and all the other ancillary charges. Thus, it is advisable that the purchasers study the cost sheet carefully and ensure that all costs tally. This is done to ensure that the developer cannot later change these.  Also, as an increase in costs can have significant impact on ability of purchasers to purchase the property.

Transfer Charges: Transfer charges arise when, after execution of the agreement for sale and before handing over possession, the flat purchaser wishes to transfer the property. What is to be noted is that a typical builder-buyer agreement does not allow this transfer until the full consideration amount is paid and the possession has been handed over.

Termination: Termination clauses in the document should be reviewed very carefully. This is to ensure that there are no additional penalties and costs leviable on the purchaser, in case of defaults. Further, the ability of the purchaser to exercise termination rights and the right to receive refund should spelt out clearly.

Conclusion

When it comes to purchasing a property in a ready to move-in premise or an under-construction property, both options have their advantages, disadvantages and challenges. To make the right decision, it is very important that the purchaser is aware of all legal aspects so that he is able to weigh the pros and cons and based on the options that are most favourable to him, take informed decisions.

In this regard, legal advisors can help property purchasers make better decisions. Legal experts have a better understanding of the agreements of sale, of matters related to permissions and approvals, know when and how to discuss the modification of certain clauses and also can help purchasers in negotiation with the developers for more equitable clauses.

Home buying is one of the most important decisions one can take and hence its best to know exactly what one is getting into while buying a property.

The author is a real estate partner at Veritas Legal
Vineet Nalawalla is Partner – Real Estate, Veritas Legal
first published: Apr 11, 2021 01:10 pm

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