How to derive revenues out of land ownership
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A person owning a piece of land has various alternatives to get revenues out of it (apart from leasing it out or using it as a commercial property). First alternative is to wait for the price of the land to appreciate and retain it for a good amount of time. Second alternative is to get a building constructed. For that an owner will have to not only arrange for the additional finance required for the construction, but he will also have to get approvals and look after the construction activities. He might not have the requisite expertise, time and money to complete the construction. A builder on the other hand if is willing to construct one, might have to block his funds so as to purchase the piece of land in the first place, because purchasing the land constitutes a large part of the total investment. He might fall short of the funds required for the expenditure that needs to be incurred.
The third alternative is a solution to the problems faced by these two entities i.e. A Joint Development Agreement. This is an arrangement between an owner of the land and a builder where the land owner contributes the land and the developer undertakes the responsibility of obtaining approvals, property development, launching and marketing the project with the help of his financial resources. As beneficial it is, it’s not devoid of any limitations. The landowner in these cases, has to wait for a long time till the construction is complete. During this period, real estate market might suffer changes. The amendments in Income Tax Act impacts the builder and landowner. Prospective buyers have to take due precaution while purchasing flats which are under such form of agreement.
Joint development models
Developing agreement models are of various types
- A land owner may come into an agreement with a developer only to develop the land under a fixed consideration which may be in cash or kind. The developed area is divided into plots and sold as plots only. Here again the Land owner may be owning the land as ‘Capital Asset’ or as’ Stock in trade’. Here the developer only gets paid for his services.
- One or more land owners may enter into an agreement with a Developer to construct a Building and then to share the Built up area in a definite proportion. Here again the Land owner may be owning the land as ‘Capital Asset’ or as’ Stock in trade’.
- A land owner may contribute his land to a partnership firm and then the partnership firm acts as the developer and develops the land. On the completion of the project profits are shared.
The variation might be on other grounds too. The nature of the structure may be commercial or residential; the percentage of the benefit of land owner may be different and the time of passing on the benefits or project period may differ. The form of arrangement will decide the statutory obligations arising out of it.
How the joint development mechanism works
#1 Profit sharing and price determination
Depending upon the land price, the joint development ratio is decided among the parties. In most situations, the builder will agree to allot a few flats to the landowner and will pay a token advance. In consideration for this, the landowner will part with a portion of undivided share (UDS) of land in favor of the builder or his nominee and will also allow the builder to construct and sell the agreed number of flats.The developer is given right to seek prospective buyers, fix sale prices for his share of the flats.
A certain percentage of constructed area is set aside for the owner. Usually he gets a 30-40% share in the total outcome. In the case of sharing revenue from the built-up space, it is the responsibility of the developer to develop the parcel of land jointly with the land owner and sell or lease the built-up space to third-party purchasers/lessees and share the proceeds in an agreed ratio. Owner is entitled to either disposes off the constructed area or may decide to retain the share of his built up area, or sell it at a later stage. The remaining portion i.e. the flats are sold by the builder as per his interest by entering into separate agreement with the prospective owner on his own capacity and not on the basis of GPA holder of the owner.
#2 Property ownership and license to construct
The developer himself does not buy the land/property from the owner.The developer is not the transferee or buyer of the flats as per the Transfer of Property Act, 1882 under the Joint Development Agreement. The sole ownership lies with the owner of the land, but the landowner grantsthe developer along with development rights, a license to enter the land for the purpose of development but not as a transferee/buyer. The license/authority to enter the land is typically given by way of a power of attorney issued in favor of the developer.The general power of attorney should be registered on appropriate value stamp paper with the concerned authorities (registrar) in order to be legally binding on both parties. The stamp duty payable for this kind of GPA given to the builder under a joint development agreement is Rs 1,000. This may vary from state to state.The license gives way to the developer to gain approvals and raise debt by way of mortgage or appoint third parties for advertisement. This power of attorney granted without permission can be revoked by the person granting it unless it’s issued as a part of discharging contractual obligations. In such case revocation would lead to breach of contract.
Once the plan is approved, the owner should get an allocation agreement done recording the constructed area which comprises his share and the area going to the developer. Once the building is ready and the allocation agreement is done, it is better that a deed of declaration is executed recording the constructed area, which would reflect the area constructed for the site owner under the joint development agreement.
#3 Continuous cooperation between the owner and the builder
For the purposes of transfer of the constructed space by the builder, the co-operation of the owner is highly essential. Once the construction of the flat is constructed and occupancy right is granted by the competent authority to the owner, the owner will himself execute the sale deed in favour of the flat buyers. The developer will have the right for specific performance which shall be specifically enforceable in a court of law if the land owner fails to cooperate with the developer in selling/leasing the built-up space on the land.However, in case of breach of the terms of the development agreement, the land owner would have the right to revoke the power of attorney.
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