Introduction to development agreements
Imagine you own a plot of land. The city expands and your land becomes a prime property. Now you want to develop the land and make money. How will you do it?
The ideal way forward would be to appoint a real estate developer who would invest the necessary capital for constructing a residential or commercial building and then selling or leasing it out in the open market and sharing the profits. To achieve this, once you have identified a suitable builder, a development agreement will have to be prepared. Once this development agreement is prepared, signed and registered, it becomes valid and binding on both the parties who then have to abide by its provisions.
What is the object and purpose of a development agreement?
The primary objective of a development agreement is to determine the manner in which both the landowner and builder. A well-drafted development agreement ensures that the landowner and the developer do not come into conflict at a later date. Further, it also ensures that the development of the land is carried out in a manner that complies with the law and that statutory authorities do not take any penal action against the project.
What are the contents of a development agreement?
While development agreements can be vast and complex, their primary components can be distilled into a few key requirements. Firstly, the development agreement should specify the particulars of the particulars, This means that the survey number, landowner’s name, boundaries and area and extent of the property must be properly mentioned. Along with this, proof of the ownership of the land such as title deeds, 7/12 extracts, agricultural to non-agricultural conversion certificates and every possible document that proves the landowner’s ownership and possession of the property should be attached along with the agreement. This will ensure that any real estate developer is satisfied with regard to the rightful claim of the landowner upon the property and will not raise any disputes at a later date regarding the same.
After the particulars of the property have been listed, the landowner and the developer should then decide what would be the ratio of sharing of profits. Construction cost usually hovers around Rs. 2000 to 3000 per sq.foot. This means that in areas where land is expensive, a profit-sharing ratio of 50:50 or even more in favour of the landlord can be adopted. On the other hand, if the plot is situated far away from the city centre, in a remote area, then the developers share might increase if construction costs account for a greater share of the total market value of the project.
Determination of a proper profit sharing ratio is very important in a development agreement. For instance, there do arise situations where the project is implemented in phases. After the first phase is constructed the value of the land might even increase and if the profit-sharing ratio remains locked at a fixed rate, the landlord may feel that he deserves more and may want to renegotiate the agreement. This is likely to create a dispute between parties and can prove to be a logjam in the proper implementation of the agreement. Therefore in such cases, the parties can work out a structured plan to increase the profit-sharing ratio in favour of the landowner if the land value appreciates over a period of time while the project is still under construction.
Statutory permissions, compliances, and liabilities – who should be responsible?
This is one of the more serious paths in any landowner – developer relationship. Real estate is one of the most compliance – heavy industries in the country. Any real estate developer or landowner has to comply with myriad laws, regulations, and notifications in order to bring his project to fruition. The project proponent will have to apply for building permission, agricultural to non-agricultural use conversions certificates, RERA registration, environmental clearances and many more. All these procedures are extremely demanding in terms of time, energy and monetary expenditure. Here too the landowner and the developer will have to determine who will be responsible for what.
Ideally, if a person is developing the land, in so far statutory responsibilities are concerned, it is the developer who bears the burden of securing all construction permits and complying with the requirements of the law while developing the project. To achieve this, the landowner executes a registered power of attorney in favour of the developer which authorizes the latter to approach the authorities on behalf of the former and apply for approvals. For example, once a landowner gives power of attorney to the builder, then the builder can straightforward as an agent of the landowner and apply to the municipal corporation for building approval, the fire department for fire clearances and the real estate regulatory authority for RERA registration.