Know the Home Truths

Pritam P Hans        Print Edition: September 2012

Most booking agreements for real estate projects start by emphasising the importance of being aware of the terms and conditions mentioned therein. But how many of us take the trouble of going through these agreements, drafted in detail by lawyers hired by developers?

This is important because most clauses in these agreements are aimed at protecting builders from legal troubles while giving very few rights to buyers.

If you do not have the time or inclination to go through the legalese, we take you through the key points you must consider while booking a property.

TIPS:How to minimise risks in real estate investment



READ IN DETAIL

1. Agreement clause: The company expects that before signing the allotment letter, the buyer will read each clause carefully, analyse the legal implications and understand their own as well as the company's obligations and liabilities.

Implication: When you sign, it implies that you have gone through all the details. So, it is advisable to ask the developer for a copy of the booking agreement before writing the cheque. If you do not agree with any point, negotiate hard and get it modified.

2. Agreement clause: If the allottee fails to execute and deliver to the company the signed allotment letter in its original form within 30 days of booking the property, his application shall be cancelled and earnest money forfeited without any notice or reminder.

Implication: Even when you get a copy of the agreement after applying, you can refuse to sign the document. In such a case, some developers will return the amount paid in entirety. However, you may forfeit the booking amount paid with the application if you haven't taken note of this clause in the application form.


TENTATIVE PLANS

Agreement clause: The allottee has seen and accepted the plan, design and specifications of the property. The layout plan is tentative and subject to approval by the authorities. Any changes or conditions imposed by the authorities will be binding on both the allottee and the developer. It will not be necessary for the developer to seek the buyer's consent for any changes to the design or layout plan made to comply with the government's directions.

Implication: The layout and design shown to you during the sales pitch is not final. The plans may be altered to any extent without you being informed. If you buy after the project has got all the necessary clearances, the possibility of any change is eliminated.


INSPECTION CHECK

Agreement clause: The allottee has demanded and has been allowed inspection of various approvals, licences, ownership records and other documents related to the land title and rights of the developer. The allottee has agreed that there shall be no further investigation or objection in this regard.

Implication: While signing the agreement, you confirm receiving all the necessary documents about the project. Developers also include a clause that your queries about the project have been satisfied. Go through the documents and get answers to all your queries before signing the agreement.


OWNERSHIP MODE

Agreement clause: According to the hi-tech township policy of the Uttar Pradesh government, the land acquired by the state government is on lease. The buyers have the option of getting land on a 90-year lease or get it converted into freehold by paying 12% sale price to the government at the time of registering the sale deed.

Implication: Most properties in places such as Uttar Pradesh are offered on a leasehold basis (there is a proposal to enable developers in Uttar Pradesh to sell freehold properties). The property agent may not tell you this in advance. Ask about ownership. If the property you are buying is on lease, consider the cost of getting it converted into freehold.


EARNEST MONEY

Agreement clause: The amount paid by the allottee to the extent of 20% of the basic sale price of the property will be considered earnest money for the purpose of the allotment agreement. The earnest money will be forfeited in case of payment default or violation of the agreement.

Implication: When you book a property, a certain portion of the sale price is marked as earnest money. This helps the developer ensure that you have genuine interest in the property. You must know how much you have paid as earnest money. This is because the developer will refund the rest of the money after deducting other charges if the agreement is annulled due to any default by you.


CANCELLATION OF PROJECT

Agreement clause: The buyer authorises the company to treat the allotment letter as cancelled if the plans are not approved by the authorities or it is not in a position to implement the project. The company will refund all payments and pay a simple 4% interest per annum for the period for which it held the money.

Implication: This gives the developer the right to abandon any project at any time. So, the builder can scrap the project for any reason, including absence of approvals, unsustainable property rates and sudden increase in prices in the locality.


PREFERENTIAL LOCATION

Agreement clause: If the property ceases to be in a preferential location, the company will refund the preferential location charge by adjusting it in the last instalment. If the location becomes preferential due to any change in the layout, the allottee agrees to pay the preferential location charge calculated at the rate mentioned in the payment plan or as demanded by the realty company.

Implication: Even though you want a premium location, there is no guarantee that you will get it. What's more, you may have to pay more if the location of the property becomes premium, even if you do not want it.


SUPER AREA

Agreement clause: The super built-up area (total area of your apartment along with your share of common areas such as lobbies, corridors, service areas, staircases and lifts) mentioned in the agreement is tentative and subject to change during construction. The cost of the property is re-calculated after confirmation of the super area. If there is an increase, the buyer will have to pay the increased price on demand. If there is a reduction, the refund will be adjusted in the final instalment. In both cases, no interest is payable.

Implication: Though builders try to stick to the plan, you must be prepared for a 10% variation in area during construction. If the area of your property rises, so will the cost. You must keep some extra money for this.


RESERVED PARKING

Agreement clause: The allottee agrees that the reserved parking allotted to him/her is with the flat. The buyer will not sell or transfer the space independent of the flat.

Implication: Though you pay extra, your flat and the parking space are a single entity. You cannot deal with the parking space independent of the flat.


COST ESCALATION

Agreement clause: The construction cost is free of escalation. So, expect price rise due to increase in super area, government rates, taxes and levies or an inordinate increase in the cost of raw materials such as steel and cement.

Implication: The clause clarifies that an increase of more than 15% in prices of raw materials from rates specified by the Central Public Works Department (which does construction work for the government) will trigger a price increase. This protects the builder from any rise in costs. Owing to inflationary pressures, raw material costs have been on the rise. The Centre for Monitoring Indian Economy expects steel prices to rise 7% in 2012. If the agreement has such a clause, the builder can pass on the rise in cost to you once the threshold is breached.


TIMELY PAYMENTS

Agreement clause: Timely payment of instalments and other applicable charges is the essence of this agreement. In the absence of any demand notice issued by the developer, the allottee will have to strictly comply with the payment schedule, failing which the allotment will be cancelled and earnest money forfeited.

Implication: Though developers intimate buyers about payments, it is not mandatory. When you book a property under a construction-linked or an instalment-based payment plan, the responsibility for payments prescribed in the agreement rests on you. Take note of the payment schedule and get in touch with the developer if there is no demand on expected time.


NO LIABILITY

Agreement clause: The allottee agrees that after taking possession of the flat, he/she will not raise any claim against the developer regarding design, specifications, building materials used, etc, which may be alleged not to have been completed according to the agreement. If the allottee fails to take possession of the property in time, he/she will deemed to have been fully satisfied and have no right or claim in respect to any work in the property.

Implication: Once you accept possession, you forfeit any right to complain about the property. Developers also make you sign undertakings and indemnities freeing them from future liabilities before handing over the property. Read all such undertakings.


FORCE MAJEURE

Agreement clause: If the project is delayed due to non-availability of materials or water/power, strike, dispute with construction agencies, civil commotion, war, natural disaster or notification by any competent authority or any reason beyond the control of the developer, the delivery of the flat will be extended by a reasonable time. If the developer abandons the project for any reason beyond its control, its liability will be limited to refunding the amount paid by the allottee.

Implication: If the builder can invoke the force majeure clause, you have very limited options. For instance, the projects in Noida Extension in the National Capital Region have been on a standstill for more than a year over the land acquisition row. One of the projects was scrapped by the builder, but those who have invested in the affected properties have their investments locked without any relief.


DELAYED POSSESSION

Agreement clause: If the company is unable to deliver the flat within the time (including any extension) mentioned in the agreement, the allottee can give it notice within 90 days of the expiry of the deadline for terminating the allotment letter. If the allottee fails to exercise this right within this period, he/she will not be able to terminate the agreement thereafter.

Implication: The same agreement that has this clause mentions that the developer will refund the money without interest only after the said property is sold to a third party. As flats usually have a delivery time of 42 months (including the grace period of six months), you lose the interest you could have earned on your investment. In addition, no time is given for executing the sale to a third party. So you might have to wait for a few months if the builder cannot find a buyer due to any reason such as a downturn in the market or the project not being favoured by buyers.


RESTRICTED FREEDOM

Agreement clause: Plot allottees will be bound to start constructing the house within three years of the date when the developer sends the intimation about taking possession, failing which the developer will be entitled to allot the plot to any party. In such a case, the sale price will be refunded without interest. Allottes will not submit any building plan directly to the controlling authority without a no-objection certificate from the developer. Any breach of this clause will attract penalty.

Implication: While buying a residential plot, you might have been motivated by the freedom to build as you wish. However, as you can see, this freedom is bound by a lot of rules and regulations.


ADDITIONAL CHARGES

Agreement clause: In case any railway overbridge or under-bridge or any other infrastructure facility has to be built in the township and the competent authority requires any onetime cost or a recurring payment for it, the cost will be borne by the allottees in proportion of their holding in the project. The recurring payment will be included in the maintenance charge.

Implication: Though the clause is futuristic and talks about a possibility, you should be aware of such clauses. If there is a railway line near the housing project, you might end up paying for the infrastructure that will have to be built for the use of the residents in the project. Paying for such infrastructure can be a big irritant for the occupants. As the maintenance cost of the property will go up, it might also deter future buyers.

Deliberate Omissions


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