Avoiding cracks in property 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 — often helpful for many seniors.

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 to know before signing up.

Also read: How land owner calculates gain in case of joint development?

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 and other 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, analyse the non-financial aspects before your decision. Verify the builder’s reputation — for quality, timely completion, responsiveness — thorough reference checks. Ensure they have local expertise and currently have financial and operational delivery capability to avoid risks such as bankruptcy or abandoning the project.

Read also: Tax implications on sale of flat built under joint development agreement

The process and terms are similar for empty plot and redevelopment. 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 must ensure this is done fairly.

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.

Read more: Capital gains from joint development of residential plot

“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. Thirumavalavan, Advocate, Valavan 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. Thirumavalavan advises adding specific clauses that the builder shall construct in accordance with the sanctioned plan issued by the local authority and strictly prohibiting alterations. 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 in accordance with the sanctioned plan. He suggests that owners can also consider engaging a private engineer to verify the construction from time to time — also from the quality aspect to ensure that the quality of materials such as sand, cement, steel and wood matches what is stated in the agreement. 

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

Tax issues

Tax implications of registered joint development can be sometimes complicated and subject to a certain level of interpretation. For instance, tax liability on capital gains is chargeable to income 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 project on 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 194IC 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.

The author is an independent financial consultant