AN OVERVIEW OF DEVELOPMENT AGREEMENTS

 

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A person who wants to derive some monetary benefit or revenue out his existing property, he has many alternatives to choose from. The first option being an outright sale of the land, second being to rent the land for a commercial purpose, third option is to construct a building and sell parts of it and last option is to jointly develop his land. Development Agreements are one of best options when it comes to making profitable revenue out of land. Such Agreements save time of the land owner, his construction cost, and legal hassles of complying with statutory bodies. Development Agreements have caught pace since the ever increasing prices of land. Nowadays, the builders having capital, only enough to construct, look for a land that doesn’t require a huge investment instead of the primitive method of buying land in outright sale and then constructing on it. From the land owner’s point of view, a developed property fetches him either more consideration or a new asset with modern architecture which he perhaps wouldn’t have in the first place.

What is a Development Agreement or Joint Development Agreement or Joint Venture?

A Development Agreement or Joint Development Agreement (JDA) is synonymous to each other. A DA or JDA comprises development of land specifically. Whereas, a Joint Venture is a broader concept that could be a merger of two more individuals, associations, companies or LLP. A Joint Venture may carry out various types of collaborations, not just restricted to land.

Therefore, a Joint Development Agreement is a contract between a land owner and a builder (developer) wherein the owner contributes his land to the builder and the builder further contributes to the construction cost. This fruit of this formal arrangement is divided into a percentage of shares mutually decided by both the parties.

WHO TAKES WHAT?

If the builder is constructing a residential building or a commercial property, then of course he keeps such number of units or flats that cover up his construction cost and also gain him a profit in the decided ratio. The builder and owner keep such number of units or flats as decided in their profit sharing ratio 

OR

To share the built up area according to agreed proportion of profit sharing

OR

The owner pays the consideration to builder only to develop the land into plots and the owner sells them as plots. Here the builder only gets the cash consideration for his services. 

ESSENTIALS OF A DEVELOPMENT AGREEMENT:

While entering into development agreements may sound easy, but a DA is a highly exhaustive contract consisting of a lot of terms and conditions, modes of payment, statutory compliances, declaration as to title and ownership, registration, accounts, finance, litigation, time limits, etc. One must analyze the agreement and its clauses carefully before entering into the contract. It is always advised to scrutinize and validate the enforceability of D.A’s from civil litigation experts as they can foresee the consequences of such heavy investments.

The essentials of a Development Agreement are:

  • LICENSE: The Development Agreement must clearly specify that the owner grants permission in the form of a license to enter the premises and work upon it. The land owner grants certain rights to the developer only for the purpose of development. Such grant of license does not transfer ownership or title to the developer. The ownership of the land remains solely with the owner. The developer obtains this right usually through a General Power of Attorney executed by the owner in favor of the developer. The GPA shall be essentially registered with the relevant authority. A registered GPA provides authenticity to the document and the buyer can also verify the same by obtaining a copy of it from the Sub-Registrar. Through the GPA, the developer can raise funds, obtain permissions, deal with local authorities and do other ancillary jobs necessary to carry out the construction.
  • TITLE AND OWNERSHIP OF LAND: Under the Development Agreement, the developer undertakes only to develop the land. The land owner remains the owner of the land throughout the completion of the project and till the time all units or flats are sold. The GPA executed in favor of the developer does not pass the title of ownership on him. The clause relating to ownership and title shall be expressly mentioned in the Development Agreement. Whenever, a buyer is buying a flat or unit in the developed property, he must make sure that the builder has given his N.O.C before the final Sale Deed is executed. It is necessary to involve the developer when the buyer is buying the land owner’s share. It is important to note that the title of the property is clear before the developer takes up a property for development from an individual. Whether it is a joint family property, Benami property,co-owned property or property under Lis Pendense. A property without a clear title may land up the project in huge losses to the investment of developer, owner and loss of potential buyers. Therefore, a buyer has to be extra cautious to prevent a fraud upon him.
  • RIGHT TO SELL: The developer and the owner have every right to keep or sell the units if the profit sharing ratio is divided on the number of units. If the profit sharing in the agreement is divided on total cash consideration then it is the developer’s responsibility to sell the units or flats in the agreed time and give the consideration to the owner. If the builder makes a delay in proceeding with the payments due to the owner then he has to indemnify the owner with a penalty interest which may be decided mutually in the agreement. If the landowner wishes so, the builder may also undertake as an agent to sell the landowner’s share and keep the brokerage in exchange for his services.
  • OBTAIN PERMISSIONS: The execution of a Development Agreement comes with the due approval of all the permission required to complete the construction. One of the important permissions involved is Land Title, Land Clearance, Zonal Clearance, Building Approval, Completion Certificate, Service and Utilities Installation, Occupancy Certificate, Environment Clearance etc. Obtaining all these permissions is mandatory so that the sale of the project would not be hindered. As a usual practice, as per the Development Agreements it is the responsibility of the builder to obtain these permissions and do the needful compliances as the developers can get through this process quite easily.
  • HOME LOAN APPROVAL: When it comes to buying a flat in big cities, finance is one the biggest question that arises in front of buyers. Buyers try to get a home loan to ease the payment process. Reputed banks do not provide a loan if the JDA is not registered with the Sub-Registrar. Recently, a bank declined the loan request of a buyer as the title of land was not clear and the flat number was not clearly stated in the Agreement. A loan request may also be declined if there are too many corrections in the Agreement and that raises a question on the authenticity of the document. A buyer shall be cautious if the owner or developer insists on a sole Housing Loan Institution. Hence, you should verify the track record of a developer before buying an under-construction property. The interest on home loan does not stop if the project is not completed on time.
  • SUPPLEMENTARY AGREEMENT: A Supplementary Agreement is an additional agreement signed between the parties after the JDA. If the parties feel that they need to make changes in some of the clauses of the agreement then without altering the existing document, they may mutually sign a Supplementary Agreement. Not all Supplementary Agreements are fraudulent in nature or meant to change the nature of the document. this could also be used as a trick by the builders to change the terms of agreement which may remain hidden from third party i.e. buyer.
  • PROFIT SHARING RATIO AND SECURITY DEPOSIT: Profit sharing is the distribution of sale proceeds among the builder and land owner. Ideally, the land owner shall get a larger chunk of the sale proceeds. The land owner shall make sure that he gets consideration in the form of cash or kind which is more than the actual cost of the land. The builder to make sure that his construction cost is compensated and he gets a surplus from the sale proceeds. Mostly the profit sharing ratio ranges between 50-50% or 60-40%. Another important aspect of JDA is the security deposit given by the developer to the land owner. The security deposit shall be 50% of the construction cost but in reality no builder is able to give such a big security deposit in one transaction. Whatever deposit amount is agreed to in the terms is paid back to the developer in fixed slabs of percentage every month from the date of obtaining environment clearance.
  • TAXABILITY: The account of taxes is a large talk when parties think of entering into JDA. The category of tax attracted is “capital gains”. In short, as per Section 45 of the Income Tax Act,1961 the liability of capital gains is in the hands of the land owner as soon as he transfers the right to develop the property in favor of the developer. The taxability arising out of JDA is an exhaustive topic in itself which shall be discussed in the next article in detail.

These were some of the essentials of a Joint Development Agreement. There are many other angles to be seen from the individual perspective of the builder, owner and the buyer. A JDA not only saves the investment of the builder but also the time and efforts of the owner in constructing as an amateur in the real estate field. A JDA when executed with complete co-operation from both the parties can be a very beneficial outcome. We are coming up with exhaustive and in depth discussions on the above individual perspectives. 

"This article is written by Ms. Shreya Sali, you can reach out to her at shreyasali@gmail.com" 

"Special thanks to Ms. Kanika Jain  for editing this article"

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