As property gets increasingly scarce in prime city areas, older homes are increasingly in demand by developers. One of the most common alternatives to an outright sale is the joint venture development. Builders enter into an agreement with landowners where the latter retain ownership of the plot and the builders demolish the existing structure, erect an apartment building in its place, and offer a few apartments or flats as compensation to the owner.
For example, assuming the plot size is 5,000 sq. ft with a market value of Rs. 2.5 crore. The builder who intends to develop the plot and convert it into an apartment building could offer to develop a four-storied building consisting of 16 individual flats, of which he would offer four flats to the owners along with some cash consideration.
The number of apartments offered to the landowner as part of compensation would be based on factors such as prevailing cost of the land, construction cost and other related expenses required to demolish the old house and complete the new project.
Often, apart from apartments, a portion of the total cost is given as cash. Usually, the ratio will be 70:30, where the flats are worth 70 per cent of the total cost and the rest is given as cash (but not necessarily hard cash).
In some cases, while the plot is being developed, the landowners are accommodated in another house. In this case, the rent and other costs are borne by the builders until the flats are fully ready to be handed over for occupancy.
The precautions
The concept has mostly been a win-win one for both landowners and builders. But landowners have to be careful to enter into joint venture agreements only with well-known builders or construction companies and ensure that the agreements (clauses) are drawn up meticulously with the help of a good advocate.
A formal agreement between landowner and developer is essential, although registering it is not mandatory. This document should have all the vital points mentioned and signed by both the parties. Important points include the total number of floors and number of apartments or flats being built, the number of apartments offered to the landowner, and the cash component, if any, mentioned clearly.
Further, if any advance payment is being made, then the timeline for the payment of the balance amount must be given. Also insist on seeing the building plan and size, split into carpet and built-up area, in writing, with the amenities provided inside the living areas and common areas marked properly. Ask for the final approved plan as well as the approvals and sanctions obtained for water, electricity and sewage connections.
Check that all the taxes have been paid at the time of handing over possession. Make sure the agreement mentions the date of completion of construction and the date of handing it over. No building violations must ever be mentioned in the agreement.
Play it safe
Usually, the joint development agreement is drafted by the builder’s lawyer, and should be vetted by the landowner’s lawyer who will look for any points that are not as per the orally agreed terms at the time of discussion. Any additions, deletions and/or modifications can be done before formally signing the document.
The landowner then gives a General Power of Attorney to the builder, allowing him to seek the necessary approvals and sanctions from various authorities. The GPA also gives the builder the rights to sell and register the portion of land, undivided interest by way of flats to other prospective buyers, who will buy the rest of the flats in their names.
When the construction is completed, the landowners can take the developer’s assistance to sell any flats from their share that they don’t want to keep. Or they can let them out on rent or lease.
The builder’s final responsibility is to take active part in setting up an apartment owners’ association and to formally hand over the building to the association. All clearances and documents should be handed over to the association as well.
It must be understood that the landowner is only allowing the builder to develop the plot, create sale deeds in favour of the new apartment owners, and hand over the rest of the flats as consideration to the landowner. Thus, a formal legal agreement is very essential and engaging a lawyer is strongly advised.
