Legally bind your property transaction

A legal agreement of sale prevents buyer and seller from going back on their word

Buying and selling in the secondary market can be tricky. The owner always fears the buyer might be evaluating other properties and could change the decision at a crucial juncture. The buyer is always worried the seller might get a higher value from someone else and scrap the deal.

To get around this, both parties can go for an agreement to sell. In this contract, the buyer and the seller include mutually agreeable terms that ensure the deal goes through smoothly. It is a road map that mentions how and by when the transaction will be completed. The document is legally binding on both parties and the person not sticking to the conditions can be taken to court.

"This agreement is different from a sale deed, which is signed in front of a registrar while concluding the deal. Sometimes, an agreement to sell is converted into a sale deed," said Pravin Mahurkar, associate director, JLL India.

Experts said most disputes happen when the property price rises and the seller changes his mind or when an owner's relative stakes a claim in the house or when the buyer gets into a financial difficulty.

Making it watertight
Property buying can be divided in two stages. First, when buyer and seller show interest in transacting with each other, the earnest money is exchanged, the buyer starts the due-diligence and arranging funds. In the second stage, both sign papers for transfer and possession of the property at the registrar's office and the final payment is made.

There are times when the parties decide to go for a Memorandum of Understanding or Expression of Interest, rather than agreement of sale. In these, they usually include a clause that it will be non-binding. Such a clause can give exit options and cannot be forced in a court.

To ensure the buyer fulfils his promises, the property owner should first look at timelines. The agreement for sale should spell out deadlines for the buyer to finish due-diligence and arrange the money. If these are not done in the stipulated time, the contract should mention that the advance paid will be forfeited. The seller should provide a copy of the bylaws of the housing society in question in states such as Maharashtra. And, mention in the agreement that the person buying the house should adhere to these.

In some societies, there are restrictions on members from selling a house to certain communities or non-vegetarians or people in certain professions. "If the buyer finds out later that such information was not shared or kept hidden, and the society does not accept him despite the deal going through, he can initiate a criminal case against the seller," says Ramesh Vaidyanathan, managing partner of Advaya Legal.

CHECKLIST
Include these 5 key clauses

• TIME FRAMES: Both parties need to mention deadlines for arranging documents and funds
• INDEMNITY: Buyer needs to include this clause to protect against relatives staking a claim after the transaction
• EARNEST MONEY: Seller needs to specify conditions under which advance will be forfeited. Buyer needs to include terms on return of the token amount
• WATCH OUT: Don’t let the other party include exit clauses that insures them against dishonouring the agreement
• DUE DILIGENCE: While buyer should look for a clear title and disputes on the property; seller needs to ask for a bank statement or pre-approved loan to check eligibility

The buyer, too, needs to focus on deadlines and refund of the token money. Buyers also need to check if the house has a clear title, there are no existing loans on it, and the owner can arrange all the required no-objection certificates (NOCs). He should, therefore, give the seller a timeline to produce these documents. The agreement should say that failing any of these, the buyer will cancel the deal and should be refunded the earnest money within a timeframe. And, in case of a delay reasonable interest will be levied.

To protect against a relative staking a claim, the seller needs to spell out an indemnity clause, whereby the owner of the property protects the seller in case of a lawsuit. In high-value transactions, many prefer to make a separate indemnity agreement.

Experts said it's also necessary in a big city like Mumbai that the agreement spell out transfer of parking, any club membership and other amenities. In many cases, sellers later ask for extra money to transfer these at the time of registration.

When doing due-diligence, the buyer also needs to check if there's any litigation or dispute pending on the property, by going through the records. Every sub-registrar records this information on a court's order and it helps to alert prospective buyers.

When no one is at fault
In case of a scenario such as the property getting damaged due to rain or storm or one of the parties dies, the seller or the buyer cannot enforce the agreement. Another common scenario is when the buyer doesn't get a loan from a bank, in which case no one can be held responsible. That's why experts suggest signing an agreement after the bank pre-approves a loan.

Registering
The agreement should be executed on stamped paper, to hold legal sanctity. A court won't entertain such a contract if carried out on a blank paper. Though it's optional to register the document, experts say it's always better to do so.

"Though the registered document holds the same value in a court as an unregistered one, it gives the paper a greater sanctity," said a lawyer.

Dishonoured
If the owner sells the flat to a third party after signing a contract, the affected person can go to a court and get an injunction preventing the other party from selling the house. This is called specific performance of the agreement, in legal terms.

If the property is already sold to a third party and the new buyer has moved in, the court first examines whether the transaction took place without informing the first potential buyer. If not, a court has the power to set aside the sale. In a typical situation, a court orders refund of the token money with interest and damages such as legal fee and other financial loss suffered due to dishonour of the agreement. If the buyer says he's now not interested to buy, the court usually orders damages.

Lawyers say the best option is to settle disputes amicably, as such cases go on for up to 15 years in lower courts and for a similar period in upper courts. "A person can spend a lifetime in fighting such a case," said Vaidyanathan.