An undeniable fact of life is that every adult is keen to own a house and then invest in Real Estate Investment as well. But usually keen to keep it secretive so as not to reveal personal financial status to others while not having enough support system a hand to do thorough check if the investment would not go sour by lack of knowledge, access to information and awareness of the process as well.
Real estate investment in India, for instance, we do not have title insurance, i.e. guarantee that the ownership of the real property, once granted by the seller will not be challenged. So Due Diligence is utmost necessary for any buyer of property. But do the lawyers verify every property ownership documents in detail however small the transaction is or whatever the size of asset it? Lawyers would answer affirmatively to this, but we do not think, titles are verified immaculately. This may not be by design but because of the complexity of the subject, lack of information availability at ease and to maybe some extent competency of the lawyers as well.
Real Estate Due Diligence is actually a misnomer. In legal parlance this is referred to as investigation of title. It means verifying the title to the property in order to ensure that the same is clear, marketable and not bogged down by litigation, fabrication, or incorrect/ imperfect documentation and is compliant with the various statutory provisions of the region where property is located.
The term “Title” means the right of ownership in any property. A certificate of title is often a statutory requirement. Determining the status of title is the first and most essential step in any transaction involving real estate. Title which is free and clear of defects is clear title and therefore transferable. While marketable title is not perfect, it is free from most defects and reasonable doubts and is unlikely to expose the buyer to litigation.
Importance of title investigation is because it ensures that the vendor is entitled to transfer the property and any restrictions on the transfer. A title investigation will uncover any claims of third parties on the property, such as mortgages and charges. A diligent investigation of title will minimize the risk of litigation with respect to the transaction of any property.
How to conduct a title investigation and what is the process?
Any title examination to immovable property revolves around following four key areas.
(a) Root of Title
(b) Chain of Title
(c) Nature of Title
(d) Character of Title
Root of the title is revenue based and acquisition based. The Chain of title is the flow of title from its root to the present owner. It could get transferred voluntarily or by statute of law. Character of the title refers to the land-use status of the property in discussion. E.g. the property can be either agricultural or non-agricultural.
Nature of the title can be broadly classified into three categories:
(i) Freehold – is the most superior form of ownership.
(ii) Leasehold – Land held by lease and in subjected to the terms and conditions of the lease.
(iii) Grant – The title holder has ownership but may be subservient to the restrictions.
What is the investigation process?
To ascertain the title of any property it is necessary to follow some steps listed here.
(1) Authentication of original title documents
(2) Issuing Public Notice to check if someone has ownership which is not reflected in the documents.
(5) Verify Zoning and Reservations, if any
(6) State and Central government laws. In India, property is under state jurisdiction
(7) Other considerations
A careful investigation of title helps avoids litigation and drain on energy, resources and time of stakeholders involved. It helps us understand the complex legal and regulatory issues affecting the asset in question. Title investigation gives a clear picture of the overall status of the real estate in question, its true value, potential and issues that may arise by its transaction.
The process described above is sometimes cumbersome depending on what is deciphered by the investigation and due-diligence reports. Thus it is imperative to not save costs and rather avail services of professionals who can advise from all perspectives including legal due diligence.
One way to look at things could be that laws are not always implemented in practice due to malicious intent, unavailability of proper records and more so due to ignorance of stakeholders. So while many end users buy property not many are aware of the issues involved until they suffer.
Pinvest, real estate investment advisory services advises investors on all aspects of property investments including legal and tax due-diligence.
Contact Pinvest and investing now.