How Property Owners Can Avoid Cracks in Joint Development

Property is illiquid, more so if it is high-value. Rather than sell your plot or redevelop an old home, you may want to consider joint development. One clear advantage is getting a home that fits your current needs, without spending money for construction. Also, it can enable one to partly cash-out on the asset. But this can be a complicated and sometimes, a financial mis-step, if not done with a clear understanding of the issues. Not just from the legal and operational perspective to complete the home, but also the tax implications are important for homeowners.

FIRST THINGS FIRST

In a joint development, owners enter into an agreement with a developer to develop their plot or redevelop their building. In exchange, the builder is given a share of the land that offsets the cost of construction.

The value of what you pay and get in return depends on the market condition in the local area. If the demand is strong, you can negotiate better financial terms from multiple builders. So be sure to time it well and work with a good agent to get competing quotes.

While fair price is a key consideration, analyze the non-financial aspects also. Verify the builder’s reputation — for quality, timely completion, responsiveness thorough reference checks. Ensure they have local expertise and currently have financial and operational capability to avoid risks such as bankruptcy.

The process and terms are similar for empty plot and re-development. But one small difference is that when there is an existing structure, planning permission for demolishing is required. The builder adjusts the project cost accordingly and owners. Also, if the property has multiple owners, the co-owners must fix their rights and interest first so that their entitlement and specific area of construction is clear. If the compensation to the owners is not uniform — as cash or property — it must be clearly apportioned before any agreement with the builder.

AGREEMENT GOTCHAS

There are two agreements that owners enter into with the builder — the joint venture agreement (JDA) that covers the rights and liabilities of the developer and the owner and the construction agreement, which addresses the rights of the developer for construction.

Rather than go by the agreement terms of the builder, be sure to engage a lawyer to review and raise issues, even if it delays the start. Common issues where owners are short-changed include the rights of developers on the land and penalties for delays.

“Owners must be protected for delay in completion of project by inserting clauses on compensation payment in the agreement, by fixing the amount for every day, week, month,” says S. Thiruma valavan, Advocate, Val6avan Associates. “If no amount is fixed, it can be resolved through the Alternative Disputes Resolution (ADR) for which necessary clauses should be incorporated in the agreement”, he adds.

Another frequent point of contention is deviations/variations of the plan. Thiruma valavan ad vises adding specific clauses that the builder shall construct in accordance with the sanctioned plan issued by the local authority.

Additionally, if the builder altered the structure or made some deviation to cope with the contract value or area of construction, there must be clauses to entitle the landowner to ask the builder to restore the building. He suggests owners can also consider engaging a private engineer to verify the construction from time to time — also to ensure that the quality of materials such as sand, cement, steel and wood matches the agreement.

Further, pay attention to aspects regarding maintenance for a specific period after completion of construction. You must also be aware of indemnity clauses that relate to pre-existing litigation with regard to title of the property under development and charges/liens attached to property.

TAX ISSUES

Tax implications of registered joint development can be some-times complicated and subject to a certain level of interpretation.

For instance, tax liability on capital gains is chargeable to in-come tax as income of the previous year in which the certificate of completion (for the whole or the part) of the project is issued.

However, if the agreement is worded such that the land owner transfers their share in the projection or before the date of issue of such certificate, the capital gains shall arise early, says Venkat Krishnamurthy, Chartered Accountants, V Ramaratnam and Company.

Also, tax deduction at source (TDS) for cash consideration received under JDA varies based on residential status. In case of resident, TDS is 10 per cent under 1941C but higher for non-residents.

It is advisable for NRIs to obtain a lower tax deduction certificate from the income-tax deparments in certain situations, suggests Venkat.

He also advises working with valuers to assess the land value and the built area to calculate the gains. Owners should also be aware about GST for JDAs — it will be borne by developers under the Reverse Charge Mechanism and owners need not register and pay.

Source: www.thehindubusinessline.com