REAL ESTATE AND ENERGY LAW PROJECT

ENCUMBRANCE CLEARANCE DURING DUE DILIGENCE

SUPERVISED BY: SUBMITTED BY:

DR. GURMANPREET KAUR SHIKHAR MITTAL
(ASSISTANT PROFESSOR ROLL NO. – 18174.
OF LAW)

RAJIV GANDHI NATIONAL UNIVERSITY OF

LAW, PUNJAB

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 ACKNOWLEDGEMENT

I feel proud to acknowledge the able guidance of our teacher of Real Estate and Energy
Law Dr. Gurmanpreet Kaur, Assistant Professor of Law. I would like to express my
sincere gratitude to the IT Lab for providing excellent tools of research at our disposal.

I acknowledge with pleasure, the unparallel infrastructural support that I have received
from Rajiv Gandhi National University of Law (RGNUL).

I find this opportunity to thank the library staff of RGNUL.

This project bears testimony to the active encouragement and guidance of a host of
friends and well-wishers.

I am greatly indebted to to the various authors, researchers and writers and all others
from whose writings and work I have taken help to complete this project.

DATE: April 23, 2021 SHIKHAR MITTAL

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 CONTENTS

1. INTRODUCTION

2. DUE DILIGENCE AND ITS ESSENTIAL STAGES

3. ENCUMBRANCES AND ITS TYPES

4. ISSUES INVOLVED IN CLEARANCE

5. CLEARANCE AND ISSUE OF ENCUMBRANCE CERTIFICATE

6. CONCLUSION.

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1. Introduction

With the robust rise in the population and increasing trend of migration to urban centres the
need for housing, township, shopping complexes, malls, theatres etc. has also increased
manifold. Any developmental act pertaining to building or establishing any such projects is
referred to as Real Estate Development. All kinds of Real Estate Developments are governed
by the Real Estate Regulatory Authority established under the Real Estate (Regulation and
Development) Act, 2016. Real estate is one of the fastest growing sectors in India evidenced
by a sharp increase in real estate transactions involving buying, selling, leasing and financing
of properties. In addition to transactions in urban areas, we have also witnessed large scale
procurement of land from individuals in villages close to the urban, industrial and
commercial centres. Similarly, there has also been an increase in leasing (both short and long
term) of commercial office space.

The increase in real estate transaction values combined with the growing participation of the
organized sector in real estate has resulted in heightened awareness of the risks involved and,
consequently, the need for ensuring that the risks are identified and minimized in such
transactions

In this paper we shall discuss the importance of an important stage during any real estate
development which is often considered as the very first act to be done, this is Due Diligence.
Due diligence in real estate transactions refers to reasonable measures which every individual
should adapt before executing an agreement in relation to the real estate and immovable
property. By conducting due-diligence, you assess the risks associated with the property you
are planning to purchase. You review the documents and ensure that there are no legal
encumbrances on the property. It basically means to do your homework before actually
making the purchase.

Due-diligence is performed by a property lawyer, but it is crucial for the developer to

understand the basic terms used in the report and what do they imply in order to make a wise
decision. There is no law that makes it mandatory however it is the most crucial step to be
done before any development as it forms the basis of one’s true and unhindered enjoyment of
a property and gives full legal rights and authorities attached to it or which are desired by the
real estate developer.

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Due Diligence is a lengthy and cumbersome process which involves detailed scrutiny and
inquiry into the nature, antecedents and the titleship of a property since a considerable
amount of time. It requires detailed search of every such titleship documents, going through
numerous files and official records, seeking information from numerous government and
municipality offices. In this paper we shall discuss one of the most important stages of Due
Diligence, which is to check for the encumbrances on the property and to clear such
encumbrances and the pending charges over the property.

2. Due Diligence and its Essential Stages

As discussed above Due Diligence is the most important stage before investment into any
Real estate Project and must be carried with utter care and caution. Due diligence is
conducted mainly to verify the ownership of title over the property and any encumbrances
over the property, so as to protect one against pre-existing claims over the property. Such
claims could either effect the ability of the transferor to transfer the property or could attach
themselves to the property even after it is transferred.1
The primary objective of a due diligence is therefore to gather information. The extent and
type of due diligence to be undertaken by the purchaser's lawyer will depend on the
following:
(i) the risk profile and business objectives of the purchaser/ lessee; (ii) the type of real asset
involved; (iii) nature of the real estate transaction (i.e., whether it is a purchase, long term/
short term lease, mortgage or financing of the real property); (iv) the time frame for
completion of the transaction; and (v) whether the purchaser is looking at obtaining third
party financing either pre-transaction or post-transaction2.

In case of a prospective purchase, a lease of the property or real estate financing, a title search
is performed primarily to answer three questions:

Does the owner or lessor have sufficient authority, interest or right to enter into the
transaction involving the property in question?
Do any liens exist on the property which needs to be discharged before the consummation of
the transaction in question? These could be in the nature of mortgages, charges, acquisitions,
unpaid taxes, litigation, easements and other assessments
1
Singh, Vandna and Komal, 2009, “Prospects and Problems of Real Estate in India,” International
Research Journal of Finance and Economics, ISSN 14502887, Issue 24, 2009.
2
Bhatia, Tarun, “Developer Due Diligence- a key part of real estate investment process” Kroll.com, Available at
- https://www.kroll.com/-/media/kroll/pdfs/publications/developer-due-diligence-a-key-part-of-real-estate-
investment-process.pdf
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Apart from undertaking title search/ due diligences for purchase or lease of properties, a title
search/ due diligence is also performed when an owner wishes to mortgage the property with
any bank, financial institution or a lender. Such bank, financial institution or lender may
require the owner to submit a due diligence report of the property or may conduct such
diligence on its own.
Types of Due Diligence or Title Search:

Depending upon the nature of the transaction, the property involved and the objective of the
participants, a due diligence can be divided into two broad categories: Full search; and
Limited search.
Full Search
A full search is usually done while giving a title certificate of the property in instances of
sale/ resale/ long term lease transactions and for transactions that involve obtaining of
financing by mortgaging the property in question. In a full search, the search regarding status
of ownership of the property is generally conducted for a period preceding thirty (30) years to
99 Years(or more) from the date on which the seller in question came to acquire the property.
It also includes a detailed search of all aspects relating to the history of that property such as
the status of encumbrances over the property, the status of disputes relating to the property,
the applicable regulations and the status of compliance of such applicable regulations relating
to the property in question.3
Limited Search
A limited search is generally conducted in transactions where the property is taken on lease
for a short term (usually under 9 years). In such instances, the period for which the preceding
ownership of the property is traced is generally restricted to fifteen (15) years (or less) from
the date on which the current owner of the property came to acquire the property.
Unlike full searches, in a limited search, the search relating to the history of the property may
be limited to restricted aspects such as recent title history, encumbrances on the property,
disputes related to the property etc.
Steps and Stages
In order to conduct a title search/ title verification, the following aspects would require to be
examined:

3
Singhania, Ravi, “Legal Due Diligence in Real Estate Transactions” Corporate and Commercial law Journal,
October 13, 2016, Available at- https://singhania.in/blog/legal-due-diligence-in-real-estate-transactions
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Legal capacity of the present owner of the property (whether the person is legally capable of
entering into a binding contract for sale or lease of the property or for mortgaging the
property);

i.Nature of current owner's right over the property, and whether such right is transferrable;
ii.Source of right or title of the current owner;
iii.Legality of the construction;
iv.Encumbrances over the property; and
v.Whether the property is a part of any acquisition process.
Out of these stages, the present paper deals with the Search regarding encumbrances and
further clearance of such encumbrances if any. Let us discuss it in detail in further sections of
this paper.4
3. Encumbrances and its Types
An Encumbrance is a defect in the true title to the property, it can be a claim against a
property by a third person who might not be related to the transaction in issue. In case of
encumbrances the property cannot be transferred without clearance or removal of such
encumbrances Encumbrance can be of any type, it can be either in case of mortgage, lien,
easements or tax related. Encumbrance is also possible if the seller of the property is an
illegal occupier or is in any kind of illegal possession. Encumbrance is not defined in
Transfer of property act however the term is used in section 57 specifically in the case of
mortgages.
Some encumbrances affect the marketability of a security: an easement or a lien can make a
title unmarketable. While this does not necessarily mean the title cannot be bought and sold,
it can enable the buyer to back out of the transaction, despite having signed a contract, and
even seek damages in some jurisdictions5.
Types of Encumbrances
Encumbrance when it comes to real estate, due to its many applications, has many different
types. Each type is meant to both protect parties and specify exactly what each claim entails
—and is entitled to.
Easement

4
Just, Tobias. (2017). “Real Estate Due Diligence: A Guideline for Practitioners.” 10.1007/978-3-319-62510-2.
Available
at-https://www.researchgate.net/publication/320709723_Real_Estate_Due_Diligence_A_Guideline_for_Practiti
oners/citation/download
5
Pratik Balasaria, “Real Estate laws in India: Everything you need to know”, PS Group Blogs, Available at-
https://psgroup.in/blog/real-estate-laws-in-india/
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An easement refers to a party's right to use or improve portions of another party's property, or
to prevent the owner from using or improving the property in certain ways. The first category
is known as an affirmative easement. For example, a utility company may have the right to
run a gas line through a person's property, or pedestrians might have the right to use a
footpath passing through that property.6
An easement in gross benefits an individual rather than an owner of a property, so that a
person might have the right to use her neighbor's well, but that right would not pass on to
someone who bought that person's property. A negative easement restricts the title-holder, for
example, by preventing them from building a structure that would block a neighbour's light.7
Encroachment
Encroachment occurs when a party that is not the property owner intrudes on or interferes
with the property, for example, by building a fence over the lot line (a trespass), or planting a
tree with branches that hang over onto an adjoining property (a nuisance) 8. An encroachment
creates an encumbrance on both properties until the issue is resolved: The property housing
the encroachment has its free use encumbered, while the owner of the encroaching
improvement does not have title to the land it's built on.9
Lease
A lease is an agreement to rent a property for an agreed-upon rate and period of time. It is a
form of encumbrance because the lessor does not give up title to the property, but one's use of
the property is significantly constrained by the lease agreement. 10
Lien
A lien is a type of security interest, an encumbrance that affects the title to a property. It gives
a creditor the right to seize the property as collateral for an unmet obligation, usually an
unpaid debt11. The creditor can then sell the property to recoup at least a portion of their loan.
A tax lien is a lien imposed by a government to force the payment of taxes;. A mechanic's
lien is a claim on personal or real property the claimant has performed services on. An
example is if a contractor made adjustments to your property that were never paid for.
Judgment liens are secured against the assets of a defendant in a lawsuit.
6
Vasudeva R.Y., (2013), “Legal framework on valuation and challenges faced by valuers, Indian Valuer,
Journal of Institution of valuers”, Vol: XLV, Issue: June 2013, pp. 736-740.
7
Ibid
8
Rangwala S.C. (1978), “valuation of real properties”, second edition, Charotar book stall, Anand, India.
9
Sayali Sadbhor, “Legal Aspects of Real Estate Valuation in India” International Journal of Applied
Engineering Research ISSN 0973-4562 Volume 10, Number 11 (2015) pp. 29749-29759 © Research India
Publications http://www.ripublication.com
10
Ibid
11
Supra note-6
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Mortgage
A mortgage is one of the most common types of security interests. Essentially, it is a lien
against a real estate property.12 The lender, generally a bank, retains an interest in the title to a
house until the mortgage is paid off. If the borrower cannot repay the mortgage, the lender
may foreclose, seizing the house as collateral and evicting the inhabitants. It is amongst the
most commonly found encumbrance in India.
Mortgages that create a charge on the land are registered. The Central Registry of
Securitisation Asset Reconstruction and Security Interest of India (CERSAI) was recently set
up to record all mortgages against property. However, CERSAI does not include
reconstruction loans outside the provision of the SARFAESI Act, loans given out by entities
other than banks,13 and loans prior to 2011, when it was set up.
Restrictive Covenant
A restrictive covenant is an agreement that a seller writes into a buyer's deed of property to
restrict how the buyer may use that property. There might be a provision that requires the
buyer to leave a building's original facade intact, for example. As long as they do not break
the law, restrictive covenants can be as specific and arbitrary as the parties are willing to
agree to.14
In India there is a problem in finding about these encumbrances which makes the entire
process of Due Diligence a cumbersome one as entire transaction is based upon non-
existence of any such encumbrance. Let us discuss some issues faced by real estate
developers in ascertaining the encumbrances on a property
.
4.Issues Involved in Ascertaining Encumbrance
Due to the complex nature of laws governing land transactions, there are multiple legal
entities and laws under which land can be alienated or encumbered, but there is no single
nodal agency to track these encumbrances. Moreover, not every document is registered at the
registrar’s office and hence to locate such documents encumbering the land is a difficult
process.

12
Supra Note-9
13
Venkatesh Panchapagesan, “Distortions in Land Markets and Their Implications for Credit Generation in
India” Economic and Political Weekly · May 2016, Available at-
https://www.researchgate.net/publication/301887371
14
Ibid
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Not all land related contract-based transactions are required to be compulsorily registered;
sale agreements on land, which indicate the intent to alienate to a counterparty, need not be
registered.15 Under Section 18 of the Registration Act, 1908, registration of documents such
as court decrees, land orders, partitions, leases, mortgages, power of attorney transactions on
land is not mandatory, but is left to the discretion of the State. Informal credit market
transactions are also, ipso facto, not documented anywhere.

Some examples of transactions that could impair the ability to collateralize land include: 16

a) Agricultural land that is bought by non-agriculturists is untenable as collateral since the

original transaction is invalid: in most cases, agricultural land can only be alienated to
agriculturalists.

b) Similar is the case with SC/ST lands that cannot be alienated to non-SC/ST owners, but
which may have been sold to third parties with or without their cognizance. In this case, all
subsequent transactions are declared null and void.

c) The nature of hereditary/Hindu undivided family land lends itself to a different set of
complexities. All co-parceners (in case of HUF) and joint-owners/heirs- including, for
example, married daughters living elsewhere- who have legal claim on the land have to be
identified and need to sign off during a sale to a third party. There are numerous anecdotal
cases where heirs who were not part of the sale transaction later claim partial ownership and
apply for legal recourse.

All this precludes an ability to have a single comprehensive view of all liens over the land
due to the large number of formal/informal credit markets, instruments and contracts that can
alienate land rights in favour of various participants. 17 While ownership may be traced
through the record keeping system of registrations to a certain extent, the presence on non-
registered liens makes it impossible to keep track of the multiple parties who may have liens
to the land.

5. Clearance and Issue of Encumbrance Certificate

15
Section- 18, Registrations Act, 1908
16
Supra Note-13
17
Supra Note-13
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As we have already discussed that it is extremely important to clear all encumbrances before
purchasing or investing into a property for the purpose of real estate development, it is also
important to subsequently acquire the Encumbrance Certificate, certifying that no
encumbrance exist on the said property.
The clearance of encumbrances can be done by either forcing the seller to acquire the proper
title by any means as specified by the Transfer of Property Act, 1882. The title of the seller
can be declared encumbrance free by the court in case of mortgages under section 57 of the
Transfer of Property Act, 1882.
In the famous Landmark case of M. P. Varghese Vs. Annamma Yacob,18 the Kerala High
court interpreted the powers vested in court under section 57 of TPA, The court held that
“the object of section 57 of the Act to aid any party for effecting a sale of immovable
property subject to an encumbrance to effect the sale at its proper value, by permitting the
buyer of the immovable property to obtain, in deposit either the capitalized value of the
periodical charges or the capital sum on the property as the case may be, together with
subsidiary charges. The amount received from the sale shall be understood as for payment
making the property free from encumbrances.”19
Therefore, encumbrances can be removed by this way or by simply getting a declaratory
decree ion the favour of the seller or the transferor of the property. Encumbrance can also be
cleared by evicting the illegal possessor or the tenant by way of filing a suit for eviction
under Rent Control Acts of respective states or UTs. The ongoing litigation might take time
however and for such time it is advisable to invest somewhere else, however if the property is
required on any cost, the eviction needs to be carried on. Despite that the acquisition of
certificate is of utmost importance in case of a Real Estate Project.
The certificate discloses the encumbrance status of a property. It is issued for a particular
period and does not cover any period prior to or following the period mentioned. It is an
extract of the register maintained by the sub-registrar, which in turn is based on the
documents registered with the registrar. In case a particular document is not registered with
the registrar, it won't be captured in the encumbrance certificate.20

18
MFA No 47/2020, 5 August 2020, Kerala High Court
19
Ibid
20
Gupta, Ashish, “Encumbrance certificate discloses charge on property” Mar 21, 2010 , Economic Times,
Read more at:https://economictimes.indiatimes.com/encumbrance-certificate-discloses-charge-on-property/
articleshow/5707451.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cpps
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Various state governments issues, from time to time, rules and guidelines with respect to
Encumbrance certificates. The Certificates can be derived from Tehsil office or the land
registration offices in every district or tehsil.

In order to obtain this certificate, these procedures need to be followed:

 Application: Apply on Form 22 (with Rs 2 non-judicial stamp affixed) to the

Tahsildar, giving your complete residential address and the purpose for which the
certificate is required.21
 Proof of address: Copy of ration card or any residence address proof, attested, should
be attached. Title details: Details of ownership of the property, survey number and
address. It is very important that the period, full description of the property, its
measurements and boundaries are clearly mentioned in the application.
 The application should be submitted to the jurisdictional sub-registrar's office. The
requisite fees needs to be paid. The fee is to be paid year-wise, with any fraction of
the year being taken as a full year. 22
The Tahsildar will seek a report from the Patwari if there is any entry in favour of any person
or legal body. In case there is no such entry and the report is favourable, the no encumbrance
certificate is issued after conducting a detailed enquiry. The time taken may be anywhere
between 15 to 30 days. 23

The encumbrance certificate is issued on either Form 15 or Form 16. In case the property has
any charges registered against it, Form No 15 is issued. Form 15 discloses the nature of
charges created, documents of the property registered, amount secured, and the registration
details and references.

In addition, since a mortgage could also be created over the property by way of deposit of
title deeds, the original title documents of the property should be inspected to ensure absence
of such unregistered mortgages.

21
Ibid
22
Mehrotra, Shambhavi, “5 documents home buyers need to arrange when buying property” 11 Jan 2021, The
Economic Times, AT- https://economictimes.indiatimes.com/wealth/real-estate/5-documents-home-buyers-
need-to-arrange-when-buying-property/encumbrance-certificate/slideshow/80211273.cms
23
Ibid
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Further, if an encumbrance is created over a property which belongs to a company then such
encumbrance needs to be registered with the Registrar of Companies. Therefore, if we are
conducting due diligence of a property where the current owner is a company then the
records of Registrar of Companies need to be inspected in order to ascertain absence of
encumbrance over the property in question.

If there is an existing encumbrance, charge or mortgage over the property, it should either be
cleared prior to the purchase or provided for in the consideration.

In case the property does not have any encumbrances during the period, Form 16 is issued.
This means no charge has been registered on the property. Therefore the property is thereby
free from any kind of encumbrances and hence can be transferred easily.
7. Conclusion and Suggestions

Encumbrance ascertainment and clearance is an important stage of due Diligence before

purchasing or investing into any property for the purpose of real estate development. From
the above detailed analysis of how encumbrances might be created in any property even
without the knowledge of the transferee and transferor, we can surely conclude that it is not
an easy task to ascertain the antecedents of the property and to clear all such encumbrances.
We have discussed that there are no central or nodal authorities as of now which can be made
responsible to collect all the information regarding the title and the true ownership of the
property under one roof or at one database. The office of registrar is also not so reliable as all
documents which might create an encumbrance are not required to be registered at the office
under section 18 of the act. In such a situation, the full search of property is often advisable.

From the above research we can see numerous loopholes in the existing system which are
making it more and more difficult for the real estate developers and their legal teams to carry
on due diligence especially with regards to existence of encumbrances. The existing system
requires every developer to go through thousands of files and numerous documents, even the
previously issued encumbrance certificate is not an enough proof of non-existence of
Encumbrances.

A possible solution to this can be to digitalise the entire system and create a database which
holds all information related to the title of the property and the previous records dating back
to atleast 30 years. It is logistically inconvenient however to make the record of each such

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property but it can be started for new properties or for the properties which are now
confirmed to be free of encumbrances.

Overhauling the litigation in land with reduced timelines and fast-tracked courts and judicial
process reforms to handle litigations in property, and investing in alternate dispute resolution
mechanisms too can help early disposal of litigation.

Moreover Rationalizing stamp duty owed when there is a transfer of interest in immovable
property. Reducing the burden of stamp duty would encourage transactors to register all
legitimate rights in transfer of immovable property.

The property registration is a long process in India and the cost of registration is also high, in
such a scenario most people evade registration or may apply different means to get their
property registered, this however forms a defect in their title of it. All such loopholes must be
recognised by the legislatures and one common legislation dealing with ascertaining and
removing encumbrances should be passed to ensure the smooth transfer of property and to
reduce the burden of due diligence on the Legal teams of Real estate developers

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