Buying a home? Pore over the agreement

The week gone by witnessed a key development in the real estate sector in India, one which may have far-reaching implications. The Competition Commission of India (CCI) imposed a hefty penalty on prominent builder DLF for delaying a project in Gurgaon and for imposing one-sided contract clauses on apartment buyers. This case may open the doors to redress grievances of many home-buyers across the country, who, after investing large sums find themselves at the mercy of builders. Inordinate delays in handing over possession, low compensation for delays, changing project scope or house specifications without buyer approval, and many such – the litany of complaints if you talk to home buyers, tends to be quite long. In extreme cases, home buyers are even victims of outright fraud with the builder's title to the property being defective and relevant statutory approvals for development not being obtained.

A key reason for this state of affairs is the largely unregulated nature of the real estate sector in India. Often, buyers do not conduct necessary checks or pay attention to the builder agreement details. Even if they do and ask builders to modify unfavourable terms, the latter using their dominant position are able to have their way citing “standardisation of agreements” for all buyers.

It remains to be seen whether the CCI ruling opens the floodgates for complaints against errant builders. In the meantime, caveat emptor (buyer beware) has particularly high importance in real estate dealings, given that a house is probably the single-biggest investment many people make in their lifetime. Here are some important aspects buyers should look into before signing the agreement.

Proper and clear title - Home buyers should ask for and check certified copies of the title deeds to the property on which the building is being constructed. This is to ensure that the builder's right to sell the property is clear and free from legal claims. Buyers should ideally get these documents examined by someone well versed in law.

Proper approvals - Buyers should inspect whether proper approvals for development on the property and for the building plans have been obtained. An important document in this regard is the plan approval from the relevant governing authorities.

Encumbrance certificate - Encumbrance certificates for the last few years including the latest certificate for the property should also be inspected. This is to ensure that previous transfers have been in order, the builder is an authorised transferror, and to ascertain whether there are any loans or mortgages on the property.

Plans and layouts - Copies of the construction plans and layouts of the project, buildings, floor and individual houses will help buyers assess the property, and also whether it matches with the approval granted by the authorities. This will also come handy for buyers on a later date if actual construction deviates from the plans.

Built-up area and carpet area - An important aspect is the difference between the area mentioned in the agreement and the actual living space which will finally be available. Agreements usually state the super built-up area which includes proportionate share of common spaces such as staircases, lifts, building lobbies, etc. The carpet area which is the actual living space available could be around 20-35 per cent lower (known in industry parlance as loading) than what is mentioned in the agreement. Higher the loading, lower the actual living space.

Penalty for delays - Check for clauses which provide for penalties in case of payment delay by the buyer, and also in handing over possession by the builder. Generally, buyers are heavily penalised for payment delays and charged interest at around 18 to 24 per cent per annum. Also forfeiture in case of default beyond a certain period could be between 15 to 20 per cent of the total sale consideration. On the other hand, penalty for delays by the builder are relatively much lighter, attracting charges of around Rs 5-7 per square foot per month of delay, after providing for a grace period. Though the quantum of penalty may not be adequate compensation for the buyer, such a clause could cut losses for the buyer and at the same time incentivise the builder to stick to schedule.

Early exit charges - Buyers should also check for penalties in case they wish to terminate the agreement. Forfeiture charges in such cases could be quite high ranging from 15 to 20 per cent of the total sale consideration. Also, the builder may not return the balance immediately and may do so only after re-sale of the house to a third party.

Tax liabilities - Check whether the agreement clearly lays out the obligations of the builder and the buyer regarding payment of various charges and tax obligations, and the periods from which they apply. Ambiguities in this regard could be a drain on the buyer's pockets.

Preferential location charges - Such charges could include floor-rise charges (extra cost for apartments on higher floors) or additional payment for apartments with preferred views. Buyers should confirm that the agreement clearly mentions any such extra charges, so that they are not caught unawares later.

In addition to the above, buyers should check that the amount of advance collected is not unreasonably high, and confirm that the facilities sought to be provided in the agreement match those originally promised by the builder. Also, check for other clauses including maintenance charges to be borne by the buyer, and the period from which these become applicable.

Check how the undivided share of land (UDS) has been apportioned among buyers and conditions regarding the same. A higher number of units constructed than approved will reduce the UDS for each unit.

It is also a good idea to see whether banks have appraised the project for giving loans. Though not a substitute for buyers conducting their own checks, this could provide an additional level of comfort about the veracity of the builder's documentation.