Due Diligence in Property Transactions: Why Every Buyer Must Look Beyond the Sale Deed

1. Introduction

The acquisition of immovable property represents one of the most significant financial involvement for any individual or entity for once in a lifetime. Central to this process is the sale deed, a legal document that formally transfers title from the seller (vendor) to the buyer (vendee). Once registered, it serves as the main evidence of ownership. However, placing full reliance on sale deeds is a perilous approach.

The Indian jurisprudence in case of immovable property is mostly based on the principle of caveat emptor (buyers beware). This doctrine imposes a heavy burden on the buyer to make everything crystal clear or do due diligence to make themselves sure about the quality and extent of the title that they are about to acquire.

A sale deed, while legally crucial, does not cure inherent defects in the seller's title. When one person sells something he does not own, and another buys the same, he acquires no more than the seller possessed (assuming that estoppel or fraud does not intervene), and if the seller’s title is wrong, he takes a wrong title under the deed. Consequently, before the sale deed is executed a very important period is there. It is at this point that a potential purchaser will need to carefully consider a wide range of legal, regulatory and physical considerations in order to discover any risks that may be lurking beneath the surface.

This article sets out the procedural course of action that needs to be followed for proper due diligence in the purchase of real estate in India. It is easy to get swamped in this legal and procedural quagmire, and not only that, there are serious risks involved if you don’t have access to proper legal advice as a purchaser. The article below explains why every purchaser must go beyond the apparent safety of a sale deed.

2. The Doctrine of Caveat Emptor and Statutory Framework

The basis of the duty of a purchaser is the doctrine of caveat emptor. Although the concept of principle has been diluted by consumer protection legislation in transactions involving movable goods, it still prevails in cases of transactions involving immovable property. The rights and obligations of the seller and the buyer are codified under the provision of Section 55 of The Transfer of Property Act, 1882 (TPA) and it provides the statutory background of this principle.

The TPA, subsection 55(1)(a), provides that the seller is required to disclose a latent defect in the property or in the seller’s title that the seller knows of or has notice of and that the buyer does not know of, and about which the buyer could not have informed himself with reasonable diligence.

On the other hand, section 55(1)(b) provides that in relation to patent defects (i.e., those which would have been discoverable by a purchaser acting with reasonable diligence), it is no breach of the seller’s duty to remain silent. It places an unambiguous duty on the purchaser to make a reasonable enquiry as to the property and its legal character. Judicial pronouncements by the Indian Supreme Court have reiterated this principle on numerous occasions, noting that a purchaser who does not take reasonable steps to ascertain the title, i.e., actively investigate the title, then cannot later by his own pleading, set up that he is a bona fide purchaser without notice of an infirmity in the title.

3. The Procedural Anatomy of Comprehensive Due Diligence

Effective due diligence is a multi-pronged investigation. It is not merely a document-checking exercise but a forensic examination of the property's history, legal standing, and physical attributes. The key procedural components are as follows:

3.1 Title Verification: Tracing the Pedigree of Ownership

The primary objective of due diligence is to confirm that the seller possesses a clear, valid, and marketable title. This involves:

·       Establishing the Chain of Title: The commencement of the search should start from the earliest available parent document and most often referred to as the ‘mother deed.’ It is necessary to trace an uninterrupted and unbroken series of subsequent transfer documents for not less than 30 years which will include sale deeds, gift deeds, release deeds, partition deeds, and wills. Each connection in the chain has to ascertain that it was carried out, stamped, and registered in compliance with the prevailing laws of the time.

·       Searches in the Sub-Registrar's Office: All registered documents pertaining to the property are possessed by the Sub-Registrar of Assurances. The indices are to be searched exhaustively to establish the title documents produced by the seller as genuine and to ascertain other registered dealings or claims pertaining to the property. This process is necessary under the Registration Act of 1908. Section 17 makes it clear that most documents pertaining to immovable property must be registered The panel comprising Section 49 of the Act makes it clear that the deed, unregistered, and which has to be registered, does not affect the property ascribed to it, or confer any power of adoption.

·       Encumbrance Certificate (EC): An Encumbrance Certificate (EC) is a Document issued by the Sub-Registrar’s office and encompasses activities associated with a specific property for a particular duration. A prudent buyer is likely to request an EC covering a period of more than 30 years. The document is intended to show any registered associated encumbrances, including mortgages, charges, liens, or court attachments which can impede the transfer of a clear title.

3.2 Litigation and Encumbrance Search

A property that is not registered with encumbrances can be in litigation. Section 52 of the TPA provides the law of lis pendens, which stipulates that a property whose subject matter is a suit pending does not pass or otherwise deal with any party to the suit so as to prejudice the rights of the other party thereto. Therefore, a purchaser of such a property buys it with the fate of the lawsuit hanging in the balance.

An extensive search for conflicts is thus essential. It entails the following procedures:

·       Litigation Search: This involves searching the records of different courts and quasi-judicial bodies such as Local Civil Courts, District Courts, High Courts, the Supreme Court of India, and specialized tribunals such as the Debt Recovery Tribunal (DRT). The search should be made under the names of all previous and current owners and the description of the property.

·       Public Notices: Checking public notices placed in local and newspapers or on the web portals is vital to find any third-party claims, inheritance notices, or sale notices for the property.

·       Seller's Background Check: A subtle check into the seller's background can uncover legal problems, financial crisis, or litigations that could burden the property or make the sale complicated. It is important that the property be clear of such litigations for a smooth ownership experience.

3.3 Regulatory and Compliance Verification

Property ownership is governed by a network of state and local ordinances. Compliance verification is not negotiable.

·       Land Use and Development Rights: It is the responsibility of the purchaser to obtain a classification in accordance with the Master Plan and zoning ordinances that cover the particular area of the property. The classification often includes a use termed as a “Land Use Certificate,” which is given by the municipality where the property is located as to what the property can be zoned as (i.e., Residential, commercial, industrial, and agricultural). It is prudent to undertake a due diligence investigation on the property for a possible “Transfer of Development Rights,” as such rights will influence the future development of the property. Acquiring agricultural land located in a specified area as a residence is, without the conversion certificate is illegal and may attract significant legal liability.

·       Building Approvals and Occupancy: The more serious offense is the violation of building and zoning regulations as set out by a local government. In the case of existing properties, a consumer is entitled to, and must, insist on a provided set of documents that includes the approved building plan, the commencement certificate, and perhaps the most significant, the Occupancy Certificate (OC), which is often referred to as the Completion Certificate (CC). The person in charge, by definition, of the construction determines the OC and states that “the construction of the building works according to the approved plan and it is fit for habitation”. The legal case is the Wing Commander Arifur Rahman Khan & Ors. v. DLF Southern Homes Pvt. Ltd. & Ors. (2020) is one of many in which the Supreme Court has commented on the fact that building approvals must be followed. It is clear that one of the most serious violations is the absence of which would make the occupation illegal and could result in demolition orders or the denial of essential services.

·       The Real Estate (Regulation and Development) Act, 2016 (RERA): The Act provides significant transparency for the properties in projects registered under RERA. State-wise RERA websites contain important project information, including reports on land titles, approvals for construction and encumbrances. While RERA empowers buyers, it does not eliminate the need for independent due diligence. It is a primary source of information; however, it should be treated as the starting point of verification, not the endpoint.

3.4 Physical Survey and Inspection

Legal due diligence must be supplemented by a physical inspection and survey of the property. A qualified surveyor should be engaged to:

·       Measure the property and verify that its dimensions and boundaries match the description in the title deeds and official survey records (e.g., FMB sketch, City Survey plan).

·       Identify any physical encroachments on or by the property.

·       Verify the existence and adequacy of legal access to the property.

4. Judicial Precedents Reinforcing Due Diligence

Indian courts have all along embraced the obligation of diligence upon the buyer. In Md. Mustafa v. Haji Md. Isa (1985) case, the Patna High Court held that a buyer has the obligation to inquire into the title of his seller, and if he does not do so, he cannot be a bona fide purchaser for value without notice.  Recently, in Ramjas Foundation & Anr. v. Union of India & Ors. (2010), the

Supreme Court of India again held that a person who purchases a property for which the seller’s title has not been enquired into without reasonable diligence is not a bona fide purchaser. These case laws are a grim warning: the courts give little protection to a careless buyer.

5. Conclusion: Due Diligence as an Imperative

As is customary, the sale deed is the last page of a property transaction, while most relevant information lies in the due diligence procedure. It is not simply a question of risk mitigation, but a legal obligation shaped by the doctrine of caveat emptor and subsequent decades of judicial review. Title confirmation, litigation searches, regulatory compliance checks, and physical inspections, done in a particular order and method, make up the only due diligence process capable of ascertaining a purchase in good faith of a property titled unencumbered and legally proven marketable.

The process shifts the buyer from being a passive receiver of an unencumbered title deed to a legally informed and engaged participant. Given the delicate nature of the transaction, the legal risk and the chance of costly mistakes, this due diligence process needs to be undertaken not exclusively by a legal team, but with seasoned practitioners. In the congelative and intricate legal landscape of real estate in India, a due diligence process that is meticulous and supplemented by legal counsel will serve as the most valuable protection a buyer could ask for, in order to not become entangled in legal battles, financial losses, and loss of their most cherished estate, the peace of mind.