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Legal considerations for acquisition, sale and leasing of land

Saturday, October 13, 2018

By Sandeep Shah, Partner N. A. Shah Associates LLP

Land by definition is fixed in supply and also perfectly scarce.  Moreover, each parcel of land is perfectly unique in itself and cannot be replicated. It is therefore imperative that land which is being acquired or leased is capable of being used for the purpose for which is being bought.  If the title to land is defective or cannot be used for the end purpose the investment will not yield the desired objective.

There are various legal consideration which has to be considered while acquiring or leasing land. The categorization of land is very essential as that will define whether one can buy it or not. Agricultural land or plantation property are highly regulated. Under Foreign Exchange Management Act, a person resident out of India cannot buy agricultural land/ plantation property without specific approval. Similarly, various states in India has specific condition as to whether the agricultural land can be only bought by farmer and also there are agricultural land ceiling laws.

Similarly if a person resident out of India is leasing a property for a period greater than 5 years, specific approvals under FEMA is required. Other laws which requires consideration is Income Tax Act under which the buyer is required to deduct tax at source at 1% of the purchase consideration if the value of purchase is exceeding 50.00 lacs. Similarly, if the seller is a non resident, the purchaser is required to deduct higher rate of TDS unless certificate for lower deduction of tax is provided. Similarly if the purchaser does not want to get involved in the controversy with the tax department later on, it must insist on getting the certificate under section 281 of the Income Tax Act.

In order to ensure that title to the property is not defective, the antecedents of the ownership should be verified with help of lawyers. Some of the considerations are whether the seller is a minor or not, in case the transaction is being conducted by a Power of Attorney holder whether the power is valid or not including compliance with stamp duty etc should be verified. Some of the other matter which requires consideration as arrears of land revenue/ gram panchayat tax, existing tenancy/ occupiers, mortgage for obtaining loan or land given as a security, permission of the Lessor in case of lease including payment of unearned premium, restrictions imposed by the lessor needs consideration.

Some of the land is demarcated for specific purpose and hence compliance with Development Control rules is necessary.

As regards seller of land is concerned, the authority of the buyer to purchase property should be ensured. Say if the buyer is a company, whether the requisite authority has been granted by the Board of Directors or shareholders should be looked into. Similarly, it is essential that restrictions imposed under land ceiling laws or who are permitted buyers including under FEMA should be enquired into.

Many times, the sellers believes that realizing sale consideration or getting security deposit in case of lease of land is the only care to be taken. This understanding is fraught with fallacy as the seller may be required to refund the sale consideration and still not get vacant possession of land or the lessee after obtaining possession of land stops paying the lease rent and at the same time continues to remain in possession of land.  Compliance with Goods and Service Tax on lease of land, Stamp Duty Act depending on the state in which land is situated should be ensured.

In conclusion, acquisition/ disposal / leasing of property is a highly complex transaction and help of relevant professionals should be sought.

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