The wake of the ongoing global COVID-19 pandemic coupled with growing health and wellness concerns has pivoted people’s focus’ towards buying spacious holiday homes in areas remote from the compact metro city limits, a space that is very unlike close packed apartments.
The current Work-From-Home model implemented by most offices and the periodical quarantine rules are rendering a part of the urban working population looking to leave their city apartments in search of larger and clutter free open spaces preferably within a reasonable travel distance from their residences.
We have attempted at identifying certain important legal aspects that prospective investor should look out for while purchasing their holiday home. These aspects are important as they enable the holiday home buyers to be more aware and to help them understand the nuances of investing in a holiday home.
Important legal aspects to consider when buying a holiday home
1. Title Due-Diligence: Undertaking a title due-diligence of the property one proposes is a key step prior to purchasing the property. This would include all aspects including verification of title documents, search in public registries like offices of the sub-registrar of assurances, revenue records etc., publishing public notices to invite claims etc.
Since documents related to immovable properties are generally available under extant laws of registration in India, this exercise would enable the home buyer to verify the chain of title from the first owner to the current owner of the property.
2. Ascertaining the tenure and nature of Property: Holiday homes are typically situated at the outskirts of the metropolitan city limits and on parcels of land that are predominantly agricultural tenure or have been converted to residential farmhouses. Ascertaining the agricultural status of the investor/home buyer in the event the property has not been converted to non-agricultural tenure is something that the prospective home buyer must look into prior to purchase as there exist certain restrictions for non-agriculturists with respect to purchase of agricultural lands in the country.
Further, local municipal laws in relation to planning and development applicable to each region must also be taken into consideration, for e.g.: development regulations, planning restrictions, zoning regulations, whether there are any setback/ set-forward rules or reservations on the property which restrict or impact the construction and development in the property.
Additionally, checking for the easementary rights, pre-emptory rights, whether or not there is any private/public road approach rendering the property easily accessible. At times, prior permission of local authorities may be required before acquiring the land. Whether such permissions have been acquired by the Seller or the predecessors in title should be looked into.
3. Conducting a physical Survey: Undertaking a physical survey of the property is an important factor as it demonstrates the limits, the size of the land, the boundaries and everything else that runs through the Property. The presence of lines for water, other utilities and easements under or on the property that the local authorities would have access to can all be revealed by a survey.
It also classifies zones and related restrictions, helps eliminate disputes over boundary corners and lines, gives sub-division details, eradicates issues related to demarcation, fencing etc. Also, it is often seen that the actual area of the property in possession of the vendor is different than the one specified on the revenue records. Therefore, a physical survey of the property prior to purchasing land or farmhouse is highly recommended.
4. Investing by NRI’s/PIO’s etc: Laws relating to sale or purchase of property by an individual resident outside of the country is governed under the provisions of the Foreign Exchange Management Act, 1999 and the regulations made thereunder (“FEMA”). FEMA directs and regulates the purchasing of properties by Persons of Indian Origin (“PIO”), Non-Resident Indians (“NRI”) and foreign citizens.
Under the extant FEMA laws, an Indian citizen outside India can acquire an immovable property in India save and except an agricultural land, a plantation or a farmhouse. Citizens of certain countries can however take prior permission of the Reserve Bank of India and acquire the aforementioned. This aspect has to be ascertained by the prospective purchaser if he/she falls into the ambit of FEMA or is attracted by its provisions prior to entering into any arrangement in respect of property.
5. Tax Deducted at source: Typically when a buyer purchases immovable property (i.e. a building or part of building or any other land other than agricultural land) exceeding Rs. 50,00,000/-, he has to deduct tax at source (TDS) when he pays sale consideration to the Seller in a sale transaction under the provisions of the Income Tax Act, 1961. However, there are certain exemptions in the Income Tax Act, 1961 in relation to TDS on sale consideration for purchase of agricultural land. This is another aspect which the potential purchaser needs to consult with their tax consultants before completing a sale transaction.
6. Outgoings/penalties/statutory dues: A review of the documents with respect to this will help discover what are the nature of monthly /quarterly outgoings for the property. Further, this also evidences whether there are any outstanding dues, penalties levied by the local authorities for non-assessment taxes, non-payment of local taxes etc. (whether statutory or otherwise) attached to the Property.
7. Miscellaneous Costs and taxation to be incurred
: A prospective purchaser would typically incur the following costs in a sale transaction:
- Stamp duty – Stamp duty is a tax levied primarily by the state government on various types of documents recording legal transactions of immovable properties between the Parties.
- Registration charges – These are charges payable to the Office of the Sub-Registrar at the time of registration of a document
- Brokerage charges – Brokerage charges are generally in the range of 1%-2%
A prospective investor who wishes to purchase a holiday home/farmhouse should keep the aforementioned in mind. Since property laws are state and region specific, it would be most prudent for a prospective purchaser to ensure that everything goes seamlessly, and to protect one’s rights, the prospective buyer must above all this consult with an experienced real estate legal expert/attorney having expertise in the region where the property is located.