11 Must have clauses in the Agreement to Sell and Construction Agreement

Identifying a property to buy, is indeed an all-consuming endeavour. After crossing this hurdle, the next herculean task is to make sure that your investment goes through in a systematic and diligent manner. This not only safeguards your investment but also secures your future interests arising out of this property.

Always remember, when you pay the advances towards purchase of a property, the first thing you are required to do is to execute an “agreement to sell” with the seller. This agreement to sell document should record the total consideration or price, and advances agreed to be paid for the property. If it is an ‘under construction property’, the builder may ask you to sign two documents i.e. Agreement to Sell and Construction Agreement. By signing these documents, you agree with the terms and conditions set out there. However, most of us don’t read these documents carefully, or rather, we don’t know which are those essential clauses which need to be specifically looked into.

So here they are, with a brief description of each. Please remember these clauses are not captured in any serial manner and you may need to read the documents fully to ensure these are captured appropriately.

Under the Agreement to Sell document, check for:

  1. Consideration: Consideration amount is the total price at which you as the buyer has agreed to purchase the property from the Seller. This will typically be the actual market value. In certain cases the consideration value may also include extra charges such as charges to be paid towards water and sewage, electricity transformer, cable accessories, sales tax, service tax, water contract tax, VAT, registration charges, maintenance, membership, corpus fund etc. It is crucial to identify the charges included in the consideration and to know specifically the extra costs that you need to bear over and above the consideration value. This will help you in identifying all costs involved in the buying process and prevent sudden surprises. It is important that you ensure proper description of the consideration value and the break-up of various costs included.
  2. Delivery of Possession: Ensure that the date of delivery of possession is recorded in the Agreement. Further, look out for the clause which captures penalty on account of delay on the part of the builder. The Real Estate (Development & Regulation) Act, 2016 (the Real Estate Act), ensures that the penalty fixed by the builder for delay in making the payment should be equivalent to the penalty to be imposed on the builder. Hence compare the penalties for both the conditions, before signing the Agreement.
    If you are buying the property from a seller where it is a second sale, then you need to record the time line for execution of the sale deed and it’s registration. The Agreement to Sell should specifically mention the schedule of payments to be made such as advance and balance payable and the timelines for all such payments.
  3. Penalty, forfeiture clauses in case of default and termination clauses: The buyer needs to carefully read this clause which records the penalties in case of default in payment. Usually the builder incorporates such terms like, “default in payment can lead to termination of the agreement and the buyer would require to forfeit money advanced towards the property”. Therefore you need to negotiate and agree on terms which sounds reasonable. Upon termination the standard terms defined by the builders are that “they would refund the amount within one month from the date of resale of the Property”. This needs to be exhaustively negotiated, the effect of such a condition will make your investment/money dead, [we call it dead as no interest will be accruing till the time it is refunded].
  4. Indemnity Clause: Just as any builder does, it is important that you as a buyer also indemnify yourself from any possible loss arising from the purchase of the property. This clause shall protect the buyer from the losses which the buyer has to bear or to be born on account of unwanted third party claims, any recovery proceeding or court order, cess, charges etc. imposed on the property due to negligence on the part of the builder or the seller.
  5. Condition Precedents to be recorded in separate clauses: There are lots of terms which a builder often promises to comply before or at the time of execution of the sale deed. It is always advisable to record these commitments under the Agreement to Sell, so that compliance of all the terms becomes binding on the builder. For instance, the builder promised a 10000 square feet club house, but constructs only 5000 square feet one, or promised an extra kids pool, but delivered just a normal swimming pool. In the absence of any written undertaking by the builder, it is difficult to get these terms enforced when the builder fails to honour the promises. Similar will be the situation when a builder fails to honour his commitments on amenities and facilities if these promises are not recorded in your Agreement to Sell.
    Further, if it’s a completed property and given on lease by the Seller, you need to specifically clarify in the Agreement whether you require the tenants to move out or you would like the tenancy to continue and accrue the benefits arising out of the Property.
  6. Specific Performance and Arbitration Clause: This clause becomes very crucial if any of the Parties is not willing to fulfil his/her part of the contract by not coming forward to execute the Sale Deed or has committed breach of any of the conditions enumerated in the Agreement. In such situations, the other Party(ies) can approach the Civil Court to make those terms binding. If there is a provision to appoint Arbitrator, an Arbitrator can be appointed who shall resolve the issues by mutual consent and discussion.
  7. Representations and warranties given by the Builder/Seller: To safeguard yourself from future losses or adverse orders and/or actions by any statutory body, it is important to look for the specific mention by the seller in the document with regard to his absolute ownership, possession and marketable title of the property; undertaking of having paid all taxes and levies and that the property is free from any encumbrance, charges or adverse statutory proceedings. These need to be specifically captured under the representations and warranties by the seller.
  8. Property Description: Verify all the details related to the Property are captured accurately, i.e. Property number, extent, super built up area, carpet area, undivided share, car park, exclusive terrace area, Project name, location etc.

Under the Construction Agreement:

  1. Defect Liability Clause: The Real Estate Act has made it mandatory for the Builder to protect the Buyer from any structural defect on the Property for a period of five years. In case you find the term mentioned in your agreement to be less than that, then it is a time for you to remind the builder of his obligations under the Act. Further, always check from which date the defect liability clause takes effect. The best term shall be from the date of hand over of possession.
  2. Specifications: Read the specifications carefully as that would determine the quality and standard of construction. If there is any compromise on quality, it tantamount to breach of the terms in the Agreement, which can be specifically enforced as described above.
  3. Payment Schedule: One other important aspect to be recorded in the Agreement is the Payment schedule. If you find any deviation to the terms orally agreed, this can be flagged out before giving your written consent to the same.

There are instances where there may not be two separate agreements as we discussed above, but the agreement to sell and construction agreement are combined into one single document. Even in such cases it is important to ensure the clauses discussed above are covered or incorporated into the document before you affix your signature of acceptance.

We hope you find this article useful. Visit RealDocs Blog for more such articles.

RealDocs Team

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