Real Estate 2024 Comparisons

The Indian legal system comprises civil law, customary and personal law, and common law. Real estate transactions are subject to central and state legislation, personal/religious laws, judicial precedents and subordinate legislation (including rules, regulations and by-laws made by local authorities such as municipal corporations, gram panchayats and other local administrative bodies). Real estate laws can be categorised as follows:

• laws applicable to the acquisition, transfer and registration of immovable properties, such as the Transfer of Property Act 1882 (TOPA), the Registration Act 1908 (Registration Act), the Real Estate (Regulation and Development) Act 2016 (RERA), the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act 2013, the Benami Transactions (Prohibition) Act 1988, the Indian Stamp Act, 1899, stamp duty legislation enacted by various states, land revenue codes and various other local laws, policies and customs;
• exchange control regulations for foreign investors, such as the Foreign Exchange Management Act, 1999 and the rules and regulations framed thereunder (FEMA), including the Foreign Exchange Management (Non-Debt Instruments) Rules 2019 (Non-Debt Rules) and the Foreign Exchange Management (Debt Instruments) Regulations 2019 (Debt Regulations);
• corporate laws such as the Companies Act 2013 (Companies Act) if any party to the transaction is a company, and the Limited Liability Partnership Act 2008 (LLP Act) if a limited liability partnership firm (LLP) is involved; and
• personal/religious laws that determine title acquired through inheritance or succession.

The real estate sector has seen more instances of fully developed assets being acquired in “platform” deals, where a developer sells an entire portfolio of assets. Several acquirers are funds looking to acquire and operate fully developed commercial/leasable assets. Investment in debt has continued to decline, including due to corporate restructurings initiated by lenders. Lately, investors have shown significant interest in logistics and warehousing assets outside Tier-1 cities and in cities developed as “smart cities”. The government continues to emphasise the development of infrastructure in Tier-2 and Tier-3 cities, resulting in development and the appreciation of land value in these cities.

There have been several high-value transactions in real estate in the past year, whereby large private equity funds have acquired completed assets and are in the process of moving or have moved such assets into REITs. Leasing documents have become significantly more sophisticated and, in several cases, facilities over 1 million square feet have been taken on lease in single transactions.

Inflation and increases in interest rates may have impacted the residential market, as the cost of acquisition for retail purchasers may have increased, including in smaller cities. Reports indicate that there has been an increase in demand for commercial real estate due to the increased development of global capability centres in India and an increase in work-from-office mandates by companies in India.

Real estate has been revolutionised by the adoption of disruptive technologies, notably blockchain and proptech, the latter of which streamlines and connects the processes for participants in all stages of real estate transactions, including buyers, sellers, brokers, lenders and landlords.

The Andhra Pradesh government has partnered with a Swedish start-up to build its blockchain-based solution. In recent years, NITI Aayog highlighted its efforts towards IndiaChain, a blockchain infrastructure for managing public records and building social applications, which will also be used for maintaining land records. Many state governments are working to integrate blockchain-based ledgers in the digital land record system. Various state governments, such as the Karnataka government, are also implementing measures to digitise records and make the process of land surveys and other procedural aspects (including payment of taxes) easier. Many states have adopted technological solutions to facilitate the payment of registration charges and stamp duties, increasing transparency.

The sector is attracting private credit funds’ debt investment where traditional bank financing is unavailable, especially in early stages of development. In addition, family offices in India have become significant investors in real estate and private credit.

A growing trend in the real estate market is the fractional ownership of commercial real estate, allowing retail investors to participate in a high-yield market. According to market data, the market size of fractional ownership properties in India is growing at an annualised rate of 10.5%, and is expected to expand to USD8.9 million in 2025. The Securities and Exchange Board of India (SEBI) amended the SEBI (REIT) Regulations 2014 to introduce a framework for SM REITs on 8 March 2024, to regulate fractional ownership platforms.

The government has taken steps to ease restrictions applicable to real estate development under FEMA and made certain amendments to the policy applicable to FDI in real estate. While there are currently no significant indications from the government, foreign investors are hopeful that the next progressive step will be to liberalise multi-brand retail trading. The government has announced various initiatives to increase investments in the warehousing and logistics sectors and to develop sustainable and smart cities, and Tier-2 and Tier-3 cities. The National Logistics Policy and other steps taken to develop the logistics sector in India have yielded positive results, which is expected to result in growth in the real estate sector as well.

Freehold Rights

Here, a person acquires absolute right, title and interest (including undivided interest) in a property and becomes the sole owner of the property, with unfettered freedom and the right to deal with the property.

Tenancy (Lease) Rights

Here, a person acquires limited interest and rights to a property, with the right to occupy and deal with the property in the manner contractually agreed between parties. Indian law also recognises statutory tenants, who are protected under the applicable rent control statute and can be evicted only on limited grounds. However, most modern developments leased to corporates are not affected by rent control legislation, as corporates do not generally derive protection under it.

Since land is a state subject under entry 18 List II of the State List of the Seventh Schedule to the Indian Constitution, states formulate their own laws for rent and tenancy. Tenancy matters are governed by state-specific statutes, and matters not covered by state legislation are governed by TOPA, which is central legislation.

In addition, the Model Tenancy Act, 2021 aims to increase the efficacy and convenience in regulating the renting of premises in a transparent manner. States are at liberty to adopt this template with necessary changes or to make changes to their existing tenancy and rent laws.

Licences and Easements

Licences are governed under the Indian Easements Act 1882 (Easements Act); easements are also recognised separately. A licensee acquires the permission of the owner to use the property, and use is restricted to contractual terms without de jure possession being granted to the licensee. An easement is a right to compel the owner of another property to allow something to be done or to refrain from doing something on that property, for the benefit of the holder of the easement right.

Generally, a person can acquire title to immovable property through:

• an act of the parties, including sale, gift, exchange or lease, governed by TOPA and RERA;
• succession; or
• allotment by government organisations/agencies.

Certain states prohibit companies/firms from purchasing/leasing agricultural land, and prohibit people with income above a certain threshold or who are not already agriculturalists from purchasing agricultural land. Certain states also have land ceiling laws that restrict the acquisition of land beyond specified limits.

Documents governing rights/transfers of immovable property are registered before the jurisdictional Sub-Registrar of Assurances (SRA). Registrations are mandatory for instruments evidencing a transfer of interest in immovable property of a value more than INR100. Once registered, documents become part of the public record. Such transfers also require the payment of duties (such as stamp duty, registration fee and other cess applicable to each state) and are recorded by the revenue departments, which maintain a separate set of records for each property. Where transfer is effected through succession, revenue records are updated to reflect the inheritance; these become publicly available once recorded.

Insurance companies in India do offer title insurance, although establishing title is often very complicated. Measures are being taken to simplify the manner in which title can be verified, and governments are taking steps to make such records electronic, although it will take some time to do so.

During the early stages of the COVID-19 pandemic, certain state governmental authorities allowed additional time to register documents governing rights/transfers of immovable property. The process of registering documents has now reverted to pre-pandemic methods, and the COVID-19 pandemic and associated lockdowns have had no continued impact.

Tracing title to property is often complicated, as records are not centrally located and are maintained by different governmental departments. Antecedent documents in each state are often in vernacular languages. Typically, title due diligence is conducted on properties proposed to be purchased for the preceding 30–40 years.

When conducting due diligence, it is not possible to discover all litigation (as the details of litigation are not completely computerised), mortgages by deposit of title deeds and unregistered contracts (which do not require registration under the Registration Act) that have a bearing on the title of the property, so it is important to take detailed representations and warranties. In some states, litigation cases are required to be registered with the SRA in order to become binding or to be considered as constructive notice to a person buying immovable property subject to litigation.

Taking possession of the original title deeds at the time of sale is also extremely important, as they can be used to mortgage/encumber a property. Where the original title deeds are not available, one must ensure there has been no mortgage/encumbrance by deposit of the title deeds by the sellers or their predecessor-in-interest.

Due diligence also sometimes requires the issuing of public notices in local papers, inviting claims in respect of the property and making searches before the court offices. As part of the due diligence on vacant land parcels, it is also advisable for the buyer to conduct a survey of the land to confirm the measurement of the available land.

Some companies offer the use of emerging technologies in title due diligence, but given the difficulties in accurately tracing title the use of such technologies may currently be limited. With increased digitisation of records, the use of such technologies may make the process of title due diligence easier.

In most transactions, representations and warranties are comprehensive, except where a transfer is on an “as is, where is” basis, and the liability of the seller is limited to the purchase price or a portion thereof. After the COVID-19 pandemic, more comprehensive clauses pertaining to force majeure (pandemic in particular), termination, etc, are being included, but they are often resisted by landlords given the impact of the pandemic on rental income. Landlords typically insist that, where the lessee retains possession of the premises, there should be no provisions for the abatement of rent or other benefits under lease documents.

No warranties are provided under any particular statute, but comprehensive warranties regarding title, zoning and other aspects are generally provided. Customary remedies would be to enforce the indemnity claims through arbitration or litigation, with arbitration being the most preferred means of dispute resolution. Seller title warranties are unlimited in terms of the time period and the amount of damages, as such warranties are considered fundamental. There have been a few instances of late where sellers have asked to limit their liability, but this is not a prevalent practice.

R&W insurance is slowly becoming more popular due to the reduced cost of procuring such insurance; however, please see 2.3 Effecting Lawful and Proper Transfer of Title regarding title insurance.

The most important areas of law for an investor to consider when purchasing real estate are:

• laws applicable to the acquisition, transfer and registration of immovable property;
• Indian exchange control laws for foreign investors;
• corporate laws where the transferor/borrower/landlord/lessee is a company;
• taxation laws; and
• succession and inheritance laws.

The buyer will not be deemed liable for soil pollution or environmental contamination if they can prove that they were not responsible for it. Typically, the buyer is indemnified against any action initiated by the government for the contamination of a property prior to its purchase. Proceedings for environmental contamination are very infrequent, although this may change as environmental issues are attracting more recognition.

Approvals are issued with respect to the property and pass along with the property under the sale transaction to the buyer. Currently, the seller/buyer has no disclosure obligations toward environmental authorities. However, the owner/developer of the property is required to submit periodic reports to the authorities confirming compliance with the terms and conditions of the approvals. The owner must make the necessary applications for the timely renewal of consents obtained from jurisdictional pollution control boards.

The buyer can ascertain the permitted uses of property based on zoning regulations under state-specific town and country planning statutes. To aid the development of strategic areas, government entities may allot land with certain obligations imposed on its development.       

The Indian Constitution no longer recognises the right to hold property as a fundamental right. However, Article 300(A) was included in the Constitution to affirm that no person would be deprived of their property except by authority of law.

State governments are authorised to acquire land for public purposes. The current land acquisition statute prescribes:

• the payment of compensation of up to four times the market value in rural areas and twice the market value in urban areas;
• safeguards for tribal communities/other disadvantaged groups, compensation for lost livelihood, and caps on the acquisition of multi-crop and agricultural land;
• the return of unutilised land to landowners; and
• the requirement to obtain affected parties’ consent for the acquisition of land for companies, except where the acquired land is controlled by the government.

Land parcels acquired by the state governments vest with the state governments free of all encumbrances and any title defects.

Any transfer of property requires the payment of statutory duties, such as stamp duty and cess and registration fees (which differ from state to state). Where the asset is under construction, GST is also to be paid by the seller. However, GST is an indirect tax, so it can be recovered from the buyer.

In asset transfers, the buyer generally pays the duties, unless they are otherwise agreed to be shared between parties. Most stamp acts provide that, where there is no agreement to the contrary, stamp duty will be paid by the purchaser on sale and by the lessee on lease.

For share transfer transactions, stamp duty at 0.015% of the consideration is payable. Stamp duty on conveyance need not be paid if the property is contributed into a partnership firm. However, in most cases any exit from the partnership by the original contributor will attract the payment of stamp duty as if it is a conveyance.

Exemptions from the payment of stamp duty and certain tax benefits are available to entities operating out of free-trade zones known as “special economic zones”.       

Generally, capital gains tax would also be payable by the seller on the transfer of property (directly or indirectly). In the case of tax residents of India, the tax rate would range from 20% (plus surcharge and cess) for long-term capital gains to 30% (plus surcharge and cess) for short-term capital gains, depending on the period for which the asset being transferred is held. Unlisted shares or immovable property held for more than 24 months are considered as long-term capital assets, else they are considered short-term capital assets and taxed accordingly.

Persons resident outside India can acquire property or invest in real estate in India only in accordance with FEMA.

While foreign investment into real estate construction and development has been liberalised significantly, certain restrictions remain. An important restriction is that the investment has to be locked in for three years, calculated with reference to each tranche of investment, except in cases where the construction of “trunk infrastructure” is completed. The transfer of a stake from a person resident outside India to another person resident outside India, without repatriation of the foreign investment, is subject to neither lock-in nor government approval. The lock-in is also not applicable to the construction of hotels and tourist resorts, hospitals, special economic zones, educational institutions and old-age homes.

FDI is permitted in certain completed projects, such as the operation and management of townships, malls/shopping complexes and business centres, with three years’ lock-in as mentioned above being applicable to investments in such completed projects. The earning of rent/income on lease of property not amounting to transfer will not be considered as real estate business.

Exchange control laws regulate foreign investments in India by entities in countries that have a land border with India. If the investing/acquiring entity or beneficial owner in an investing/acquiring entity is an entity set up in – or an individual resident in – China, Pakistan, Afghanistan, Nepal, Bhutan, Bangladesh or Myanmar, such investing/acquiring entity would require prior government approval for their proposed investment or purchase of shares (or other equity-linked securities) in an Indian company. “Beneficial ownership” has not been defined, but it is typically pegged to 10% of the shareholding held by the beneficial owner in any investing/acquiring entity. Accordingly, authorised dealer banks (AD Banks) have been authorised by the RBI to secure the necessary declarations from foreign investors certifying that the necessary threshold of beneficial ownership has been complied with. This approval requirement will also be triggered in the event of transfer of ownership of any existing/future FDI in an Indian entity that directly or indirectly results in the beneficial ownership falling within the restriction set out in this paragraph.

Certain additional conditions may apply, especially under any project-specific approvals obtained, lease documents, etc, if, for instance, a foreign entity is investing in, or gaining control over, an Indian investee entity, or if there is any reconstitution of the board of directors of the Indian investee entity, or where the Indian investee entity takes on additional debt and if any charge is created on the project land, pledge of shares, etc. In any change of control, there may be additional compliance requirements, including obtaining pre-facto approvals in connection with the transaction under such project-specific approvals and/or lease documents.

Typical fundraising means for real estate companies include FDI, REITs, alternative investment funds (AIFs) and debt financing, including loans, debt capital markets and external commercial borrowings (ECBs).

FDI

The foreign exchange regime prohibits foreign investment into companies that are engaged purely in “real estate business” – ie, companies dealing in land and immovable property with a view to earning profit therefrom (not including the development of townships, the construction of residential/commercial premises, roads or bridges and REITs regulated under the REIT Regulations). FDI up to 100% is permitted under the automatic route for companies engaged in these sectors, subject to certain limited conditions.

Entities engaged in real estate broking services are also permitted to receive up to 100% FDI under the automatic route. Earning rental income is also not considered real estate business, as mentioned above.

FDI may be through subscription to equity shares/compulsorily convertible instruments, and must comply with pricing guidelines and reporting obligations prescribed by the RBI.

Each phase of a construction development project would be considered as a separate project, so an investor can potentially exit before the completion of an entire project, subject to a lock-in period of three years (see 2.11 Legal Restrictions on Foreign Investors).

REITs

REITs in India are private trusts set up under the Indian Trusts Act, 1882 and compulsorily registered with SEBI. The set-up of REITs would include the sponsor (who sets up the REIT), the manager (who manages the REIT’s assets, investment and operations) and the trustee (a SEBI-registered debenture trustee who is not an associate of the sponsor or manager, and who holds the REIT assets in trust for the benefit of the unitholders/investors). REIT Regulations have been modified to permit REITs to issue debt securities for raising funds, among other things. Furthermore, SEBI has recently amended the REIT Regulations to introduce the concept of SM REITs, with a reduced size of qualifying assets between INR500 million and INR5 billion. This is in contrast to the requirement to have REIT assets with a value of INR5 billion for an initial public offering for non-SM REITs and a minimum initial offering size of INR2.5 billion.

AIFs

AIFs are privately pooled investment vehicles that collect funds from investors (Indian or foreign) for investments, and are regulated by the SEBI (AIFs) Regulations 2012. AIFs must be registered with SEBI, and may invest as private equity or debt funds, or both. The RBI has sought to prevent AIFs from being used by regulated entities (banks and non-banking financial companies (NBFCs)) to evergreen loans, by restricting the ability of AIFs to invest in the securities (other than equity shares) of debtor entities of such regulated entities, if such regulated entities are also limited or general partners in the AIFs. This is the subject of ongoing discussion.

Debt Financing

The most common means of fundraising for real estate developers is by the issuance of non-convertible debentures (NCDs) to NBFCs, banks, financial institutions and other private credit funds. Debt investments by banks are subject to certain prudential norms relating, inter alia, to bank exposure to such investments, as stipulated by the RBI. While previously a preferred means of raising funds, market conditions have affected investments by NBFCs of late. Effective from 1 October 2022, the RBI has stipulated that real estate developers must obtain all the permissions required from the relevant government/other statutory authorities for the project prior to funding by such NBFCs for the development of the real estate project – this has restricted access to funds by the real estate developers in the early stages of the project development from banks and NBFCs. Private credit funds have stepped into this space and typically invest in debt or hybrid securities issued by real estate developers for funding requirements.

ECBs

The RBI has eased the definition of beneficiaries eligible for ECBs to include all entities that can receive FDI. Funds borrowed under ECBs cannot generally be used for real estate activities, except for:

• the construction/development of industrial parks/integrated townships/special economic zones;
• the purchase/long-term leasing of industrial land as part of a new project/modernisation or expansion of existing units; and
• any activity under the “infrastructure sector” definition.

All eligible borrowers are now permitted to raise up to USD750 million or equivalent per financial year under the automatic route.

The following types of security are typically created or entered into by commercial real estate investors borrowing funds to acquire or develop real estate:

• mortgages;
• hypothecation or escrow of project receivables and cash flows (subject to compliance with RERA);
• a pledge of shares of the developer company, its parent and/or associate entities; and
• the provision of corporate/personal guarantees, typically created in favour of a security/debenture trustee acting for the lenders’ benefit.

To create mortgages, a mortgage deed must be registered with the SRA. Where an equitable mortgage is created by the deposit of title deeds, recording of the deposit of deeds may need to be registered in certain states in India. The security interest created on such assets (tangible/intangible) must be registered with the Registrar of Companies (ROC) and the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI), a central database for all security interests created and established to check and identify fraudulent activity in secured loans.

FDI in Indian companies cannot be secured, and investors must bear the risks typical to equity investments. Accordingly, foreign investors investing under the FDI route are not permitted to have assured returns at the time of exit.

However, investments made in NCDs can be secured, including where issued to permitted foreign investors. Security in such cases is typically created in favour of a trustee. In ECBs, a pledge over shares of an Indian company in favour of a foreign lender requires compliance with the ECB guidelines and the approval of the AD Bank. The creation of a charge over assets situated in India in favour of a foreign lender will be subject to compliance with the Non-Debt Rules and Debt Regulations, and approval from the AD Bank.

Stamp duty is payable on documents, according to the applicable central and state-specific statutes. Insufficiently stamped documents may be impounded and may not be admissible as evidence in Indian courts until the deficient stamp duty (along with any applicable penalties) has been paid. Some documents need to be registered under the Registration Act, with payment of the applicable registration fees. Certain documents, such as powers of attorney, are also required to be notarised and are subject to notarisation fees.

Certain corporate authorisations are required under the Companies Act, such as board resolutions and shareholder resolutions. Any charge is required to be filed with the ROC and, in the case of non-compliance, such security interest would be held void against the liquidator and the other creditors of the company in the event of the winding-up of the company, although the obligation for the repayment of money secured by the charge will continue to subsist.

RERA restricts the ability of companies and real estate developers to secure their borrowings.

Where the borrower in default is solvent, it is not particularly difficult for a lender to seek to enforce its security pursuant to the provisions of the Insolvency and Bankruptcy Code 2016 (IBC).

Separately, banks and financial institutions that have lent monies to a borrower are entitled to enforce their security interest without the intervention of a court/tribunal, subject to strict compliance with the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI Act). The SARFAESI Act defines borrowers to mean any person who has been granted financial assistance by any bank or financial institution, or who has given any guarantee or created any mortgage or pledge as security for the financial assistance granted by any bank or financial institution, and includes a person who becomes the borrower of an asset reconstruction company consequent to the acquisition by it of any rights or interest of any bank or financial institution in relation to such financial assistance or who has raised funds through issue of debt securities. However, it should be noted that action under the IBC and the SARFAESI Act cannot be taken simultaneously, since a moratorium is declared upon the admission of an insolvency application under the IBC by a National Company Law Tribunal.

Many lenders are successfully using proceedings under the IBC to enforce their rights under the loan documentation.

Generally, where the priority of security is not contractually agreed between parties, the security created earlier in time will rank in priority to the security that is created subsequently. A first-ranking charge will have priority over a second-ranking charge at the time of security enforcement. However, it is possible for existing secured debts to become subordinated to new debts when an intercreditor agreement setting out the ranking of debt or a subordination agreement is signed.

In Indian lending transactions, shareholder/promoter loans are typically unsecured and subordinated.

Lenders will not ordinarily incur liability under Indian environmental laws simply by holding a security interest. If a lender takes over management and control of the borrower after the enforcement of security, such lender may incur liability as the person in possession of the polluting premises, or as a person responsible for the conduct of the borrower’s business.

The ideal outcome of an insolvency application under the IBC is a successful corporate insolvency resolution process (CIRP), failing which liquidation is commenced. There are also provisions for voluntary liquidation. Where such a debtor goes into liquidation, the IBC provides the manner in which secured debt will be discharged. Typically, dues to workmen (employees whose rights are protected under the Industrial Disputes Act, 1947) are prioritised over dues to lenders who have relinquished their security interest to the liquidation process. Similarly, wages and dues owing to employees (other than workmen) are ranked pari passu with lenders who have relinquished their security to the liquidation estate.

As noted in 3.2 Typical Security Created by Commercial Investors, mortgage deeds need to be registered with the SRA in order to be enforceable. All lending documents need to be adequately stamped as per the stamp duty rates applicable in the relevant state in India.

CERSAI is a central registry set up under the SARFAESI Act, where banks and financial institutions subject to the SARFAESI Act are required to file charges subject to a nominal fee. Registration must be done within 30 days from the date of the transaction and is not required if:

• the creditor is not a bank, financial institution or asset reconstruction company, etc, referred to as a “secured creditor” in the SARFAESI Act; or
• the security interest is in the nature of a lien on goods, pledges of movables, etc.

Apart from the above, there are no existing, pending or proposed rules, regulations or requirements mandating the payment of any recording or similar taxes in connection with mortgage loans or mezzanine loans related to real estate.

Planning authorities are constituted for the implementation and governing of zoning regulations. Considering the changing dynamics of a city, every state facilitates the updating and revising of an existing master plan at least once every ten years, by carrying out a fresh survey of the area within its jurisdiction, to revise the existing master plan and indicate the manner in which the development and improvement of the entire planning area is proposed.

Certain states facilitate the acquisition of lands by government organisations for industrial and residential developments. Developments in such areas are mainly governed by the rules and regulations framed by such government organisations.

Any exception to the zoning regulations will require prior consent from the state government, and the process for obtaining this is time-consuming.

The construction of new buildings and refurbishments in any state is governed by the National Building Code, the applicable town and country planning statute, and the applicable municipal law, including the building by-laws framed by planning authorities. Building and development control regulations require various approvals to be obtained from different authorities for the construction or refurbishment of buildings.

Zoning regulations sometimes have provisions for the protection and preservation of properties identified as heritage properties. Consents from the pollution control board, environmental department, fire department, airport authority, water supply and sewerage board and electricity board are also required.

There is no single regulatory authority or statute to govern the entire real estate sector, so the relevant authorities have been covered separately hereinabove.

An application must be submitted to the jurisdictional municipal or planning authority along with all relevant title documents, plans/designs/drawings of the development and in-principle approvals from the relevant authorities.

Once it is satisfied that the building will comply with building by-laws once constructed, the municipal/planning authority provides consent. In some jurisdictions, a certificate is also often issued by the municipal/planning authority after the pillars are constructed, confirming that the construction has commenced in compliance with the sanctioned plan.

After completion of the development, the municipal/planning authority also issues a certificate confirming that the building is fit to be occupied. Although minor deviations may be compounded by collecting a fee, major deviations in the development may result in the project not being issued a completion certificate.

The applicable town and country planning/municipal statutes prescribe the timelines within which planning authorities are required to grant approval or reject plans for the development of buildings.

Where a plan submitted for approval to the authority has been rejected or not expressly approved, the applicant may prefer an appeal to a higher authority, which is required to grant or reject the application within a prescribed time period. Where no response is received, the plan is often deemed to have been approved, although such deemed approval is not preferred and developers still seek to receive written approvals.

In the event of any arbitrary action being initiated by a planning authority, the aggrieved party can approach a High Court, invoking its high prerogative writ jurisdiction.

Government entities enable parties to procure land for the development of strategic projects/areas – whether industrial, commercial or residential – by entering into:

• concession agreements;
• development agreements whereunder the developer is required to develop the property and is entitled to lease/sell built-up spaces in favour of third parties; or
• lease-cum-sale agreements.

The property is conveyed in favour of the allottee only upon compliance with the conditions in the agreements.

Where land is allotted by the government, the process of obtaining approvals for the implementation of the project is generally faster. In some large projects, the developer may be required to lease/relinquish a small portion of the property in favour of the electricity supply company for the setting up of a sub-station to supply power to the development.

Authorities enforce the regulations and restrictions fairly commonly; if the development is not in compliance with the applicable laws, approvals such as the completion certificate evidencing completion of the project will not be given.

Real estate assets can be owned/held by private limited companies, public limited companies, LLPs and partnerships, as well as REITs.

Private and public limited companies are required to be incorporated under the Companies Act 2013 and to adopt charter documents setting out the objects and regulating the operations of the entity. LLPs are incorporated under the LLP Act 2008. Foreign investment into LLPs engaged in construction development activities requires regulatory approval.

The costs for setting up companies or LLPs in India are about the same, but the cost of operations for a company would likely be higher than the cost of operations for an LLP.

Partnerships can also hold land, but foreign investment in partnerships requires regulatory approval. It is relatively inexpensive to set up and register partnerships but this may not be a preferred structure since the liability of the partners is not limited.

REITs are set up and operated in accordance with the REIT Regulations 2014.

Typically, foreign investors prefer private limited companies, while domestic investors prefer partnerships and LLPs for smaller holdings. LLPs are also increasingly being preferred for smaller ownership of holiday/luxury rental real estate on a time share basis or under similar arrangements amongst partners of LLPs.

Companies are generally subject to corporate income tax at the rates of 22%, 25% or 30% (subject to applicable surcharge and cess), as may be applicable. LLPs are subject to income tax at the rate of 30% (plus applicable surcharge and cess).

REITs are governed by a special income tax regime whereby they are granted limited pass-through status due to which certain income is taxed directly in the hands of the investors. Income in the nature of interest and dividends received from “special purpose vehicles” as well as rental income received from immovable property held directly by the REIT are subject to tax in the hands of the investors of the REITs, subject to conditions prescribed. Any income that has not been accorded pass-through status would be subject to tax in the hands of the REIT and be exempt in the hands of the investors.

REITs are permitted to invest in land and any permanently attached improvements to it, whether leasehold or freehold, including any other assets incidental to the ownership of real estate. However, there have been a limited number of REITs since the introduction of the SEBI REIT Regulations in 2014.

REITs in India are only permitted to be publicly owned – ie, units of the REIT must be listed on stock exchanges. REITs can raise funds through an initial offer to the public and not private placements, and subsequently through follow-on offers, rights issues and qualified institutional placements. REITs are mandated to distribute at least 90% of the net distributable cashflows to investors on a half-yearly basis, and to conduct a full valuation of all REIT assets on a yearly basis through a registered valuer.

The SEBI REIT Regulations do not prohibit investment in units by domestic or foreign investors. While there are regulatory restrictions on direct investment in real estate under the Non-debt Rules, investment in REIT units is exempted from the ambit of this restriction for FDI as well as foreign portfolio investment entities. The benefits of using a REIT include the following:

• unlocking invested capital for developers, especially in the commercial space;
• investors have access to investment opportunities in real estate;
• net worth and deposit requirements prescribed for sponsor and managers ensure that these platforms have sound and stable financial health;
• as regulated entities, these platforms provide more confidence to investors;
• limitations on the number of investors and the creation of SPVs that apply to private limited companies are not applicable to REITs; and
• the mandatory listing of units provides for liquidity and exit opportunity for investors.

Please see 5.2 Main Features and Tax Implications of the Constitution of Each Type of Entity regarding taxation implications for REITs.

There are no minimum capital requirements for companies, LLPs or partnerships. REITs are required to comply with regulations relating to asset size and minimum offer.

Private limited companies must have at least two directors on their board, while public limited companies need at least three directors. Public companies also need to comply with additional requirements, such as having independent directors on their board. Companies that have paid-up capital over a prescribed threshold are also required to appoint a company secretary.

One-person companies can be incorporated by Indian citizens who are resident in India. It has been proposed that non-resident Indians should be allowed to incorporate one-person companies.

LLPs and partnerships are required to have at least two designated partners/ partners.

There has been increased attention on compliance with ESG (environment, social and governance) norms in India; although not legally mandated, investors may require companies to undertake certain compliances in this regard. Directors of companies now need to pay heed to environmental issues, and some recent court decisions throw light on such obligations.

The costs for entity maintenance vary based on the type of entity involved. Annual compliance costs for a private limited company would typically be around GBP15,000, and similar or lower costs can be anticipated for compliance by LLPs.

The law recognises leases and licences that permit a person to occupy and use real estate for a limited period of time without acquiring the absolute title to said real estate. The transaction is a lease if it grants an interest in the premises; it is a licence if it gives a right to a permissive user with no interest in the premises.

The law does not differentiate between different types of commercial leases. Most commercial leases are based on fixed rental and fixed term concepts. There are triple-net leases where the tenant bears the cost of the property tax, insurance and maintenance charges, and profit-sharing leases where the rent is based on a percentage of the lessee’s revenue, but these are not as common.

Rent or lease terms are freely negotiable in contracts entered into between parties, except in a few states in India where some properties are regulated by rent control statutes and where there are statutory tenants. Rent and lease terms largely depend on the city, the location of the building and the market rents payable for similar buildings. While some state governments proposed that landlords of residential premises should not evict tenants during the COVID-19 pandemic, such restrictions are not generally in force now.

Duration of Lease Term

There are no regulations governing the term of a lease, which can be contractually agreed and recorded by the parties.

The initial term of a lease is generally three to five years. Tenants can opt for longer leases of ten years. It is common to have an agreement to lease for a longer period (paying nominal stamp duty) and to execute lease deeds thereunder, as such structuring can result in lower stamp duty.

Maintenance and Repair

Maintenance and repair of the actual premises occupied by the tenant are generally the tenant’s responsibility. In most cases, major or structural repairs (that are not attributable to the tenant) are excluded from the tenant’s scope.

Frequency of Rent Payments

In most commercial leases, rents are payable on a monthly basis in advance. For retail leases (malls, hotels and so on), lease rent or a portion thereof can be based on the turnover of the lessee’s revenue at the establishment. Where a furnished space is provided, rent may be payable on the furniture and fittings only until the cost of such furniture and fittings has been fully depreciated.

COVID-19 Issues

Under TOPA, the tenant has the option to terminate the lease if the property is destroyed or becomes unfit for occupation because of fire, tempest, flood, violence by mob or any other irresistible force. After the COVID-19 pandemic, several tenants were not using the premises due to the lockdown imposed, which resulted in claims for waivers and reductions of rents. In some cases, landlords agreed to such requests. The courts have held that a lease is an executed contract where the landlord has performed its part of the contract once it has delivers possession, and the inability of the tenant to use the property due to the lockdown is a temporary event that will not entitle the tenant to seek the abatement of rent, unless there is a clause in the rent deed that specifically exempts the payment of rent during such time.

In a typical commercial lease in India, rent will escalate every three years. The rate of escalation is generally between 10% and 15%.

The concept of rent review and escalation based on market rent is not common in Indian leases. Where a rent review is agreed to in a long-term lease, an independent expert determines the prevailing market rent. The determination of rent is typically subject to certain exclusions, including disregarding:

• goodwill attached to the premises by reason of the tenant’s business or occupation of the premises; and
• the effect of tenant improvements at the premises.

VAT has been subsumed by GST, which is payable on leases of property/assets for commercial use and is borne by the tenant. The tenant can claim input tax credit of such tax paid, subject to conditions. Tax on lease rent is deducted at source in terms of the Income Tax Act 1961 by the tenant prior to paying rent to the landlord.

In most commercial leases, a tenant is required to pay the landlord an interest-free refundable security deposit (IFRSD), which is held by the landlord as security for the tenant’s obligations during the lease term. The quantum of deposit is commercially agreed but the practice differs from state to state and can vary between three and 12 months’ rent.       

In addition to rent, tenants usually pay maintenance charges and a fixed parking fee based on the number of parking spaces provided exclusively to the tenant. The landlord generally takes responsibility for the maintenance and repair of the common areas, the cost of which is charged back to tenants on a fixed-cost basis (with an agreed escalation) or on an actual cost-plus basis, with the landlord receiving a management fee of 15–20% of the cost incurred in providing the services.

All such payments (other than municipal taxes borne by the tenant) made to the landlord for use of the property are subject to withholding tax as well as GST. Any IFRSD is subject to the deduction of tax at source as rent.

Utilities (including power, back-up power, water, etc) are paid by each tenant of the building based on actuals.

In most instances, the insurance obtained is a fire and perils policy covering loss of property. The cost of insurance is sometimes charged back to the tenants as part of the maintenance charges.

In India, business interruption (BI) insurance is not sold as a standalone product and is dependent upon property coverage. BI cover in India can be taken as a separate policy only in conjunction with a fire insurance/machinery/boiler explosion policy, or as part of a package in products such as industrial all-risk insurance, which covers both property damage and business interruption. It offers protection to the net profit, standing charges and an increase in the cost of working to maintain normal output/turnover.

The COVID-19 pandemic and consequent lockdown orders did not trigger payments under such BI policies because they have not resulted in physical damage to the insured property of the policyholders.

The Supreme Court of India has consistently held that, when interpreting insurance contracts, the terms of the policy will govern the contract between the parties and it is not for the court to make a new contract, however reasonable, if the parties have not made it themselves. Thus, it is unlikely that courts will interpret BI policies to cover the COVID-19 pandemic or the lockdown, unless such situations are specifically covered by the policy.

The usage of a project/building is dependent on the zoning of the land and any conditions running with the land. At times, land is allotted to a landlord for a determined purpose, such as biotechnology or IT-related uses, and the landlord would impose the same restrictions on the tenants. Non-compliance with the usage conditions could result in a termination of the lease.

Generally, a tenant is only permitted to perform non-structural alterations at the premises (including fit-outs); structural alterations are only permitted with the landlord’s prior consent, which may be conditional. The landlord may also require the tenant to reinstate the premises to the condition they were in prior to the alteration upon the expiry or termination of the lease.

A tenant that takes land on a long-term lease would have the right to develop the land as they require, subject to the applicable law. Upon the expiry or termination of the lease, development on the land would revert to the landlord, at no cost or at an agreed cost, based on the contractual understanding.

Under Indian law, the owner of the land and the owner of the building constructed thereon can be different people. Any gain on a transfer of development rights in a property is subject to tax as income of the landlord. The transfer of development rights to the tenant for developing the land and for commercial exploitation is subject to GST and is taxable in the hands of the tenant (under the “reverse charge mechanism”). GST payable by the tenant is subject to conditions and is calculated in the manner prescribed under law.

Laws relating to leases do not differentiate between residential, industrial, commercial or retail leases, but commercial treatment may differ from market to market.

No asset class distinctions relating to leases have been introduced due to the COVID-19 pandemic.

It is market practice to include a termination event in the lease that is triggered by the tenant’s insolvency, as the tenant would not be able to comply with its obligations under the lease.

However, where the tenant is under a CIRP process, from the date of the admission of the application by the relevant authority, a moratorium is declared with the effect of, inter alia, prohibiting the recovery of any property by an owner/lessor where such property is occupied by or in possession of the tenant under insolvency.

Payment of IFRSD/premium is the most common security provided to the landlord. At times, the landlord may require the tenant to provide a bank guarantee for securing certain payment obligations.

If contractually permitted, the tenant may continue to occupy the premises as a monthly tenant after the expiry/termination of the lease or if the landlord does not refund the IFRSD in time. In all other cases, the tenant would have to leave the premises on the date of the expiry/termination of the lease, failing which the landlord can approach the court to evict the tenant, who will be a trespasser. The landlord can also claim mesne profits from the tenant for such unauthorised occupation.

Under TOPA, a lessee may transfer absolutely, or by way of mortgage/sublease, the whole or part of their interest in the property, and any transferee of such interest or part may again transfer it, subject to the lessee not ceasing any of the liabilities attached to the lease and there being no contract to the contrary. In respect of a statutory tenant, state legislation (such as the Maharashtra Rent Control Act 1999) also prescribes restrictions on transfers. The sublessee has to abide by the lease agreement executed between lessor and lessee.       

Events of default and termination rights are contractually agreed between parties, including granting a cure period following such event of default. Such events would be standard events, such as breach of lease terms, failure to pay rent for more than two rent cycles, etc.

Leases of immovable properties from year-to-year or for more than 12 months or reserving a yearly rent require mandatory registration at the SRA. The Registration Act requires the deed to be registered within four months of its execution. An additional four-month extension may be granted at the discretion of the SRA, by levying a penalty, provided such non-presentation of the instrument within four months of execution was due to unavoidable circumstances. After registration, the lease is recorded in the local Registry of Deeds.

Stamp duty is payable on the lease deed before it is registered, by the buyer, unless it is otherwise agreed to be shared between the parties. Most stamp acts provide that, where there is no agreement to the contrary, stamp duty will be paid by the purchaser on a sale and by the lessee on a lease.

Although licences are not normally required to be registered, it is mandated by certain states (such as Maharashtra under the Maharashtra Rent Control Act).

Where a tenant is in breach of the lease, the landlord would have to follow the procedure set out in the lease deed to evict the tenant, including giving the tenant an opportunity to cure the default. Thereafter, the landlord can issue a notice of termination and initiate legal action to recover the premises (and mesne profits) where the tenant remains in occupation. Where termination is during the lock-in period, the landlord may seek lease rent for the balance of the lock-in period. The process of tenant eviction may take three to seven years.

A third party cannot terminate a lease unless contractually agreed. If a condemnation event by a government body occurs, the lease will stand terminated as the property will vest with the governmental authority concerned. Compensation for such acquisition is typically paid to the owner of the property, unless the sharing of compensation is contractually agreed between the owner and the lessee.

Such remedies are typically limited to the ability of the landlord to claim remaining rent and mesne profits. Such claims are also subject to limitation laws; claims may be made within three years of the breach pursuant to which the claim has arisen. In India, only direct damages can be claimed, unless a party has undertaken to indemnify the counterparty for any specific kinds of losses. Typically, landlords collect IFRSD and may take bank guarantees to ensure they have adequate remedies in case of a tenant’s breach. Landlords may also pursue arbitration or court proceedings, depending on the terms of the lease deed.

Construction contracts are typically categorised as lump-sum turnkey fixed-price contracts, bill of quantities-based contracts (item-rate contracts), and work package-based contracts.

For projects where a detailed bill of quantities is possible, owners opt for an item-rate contract. For large infrastructure construction projects, lump-sum turnkey contracts and work package-based contracts are common.

Regardless of pricing structure, construction contracts incorporate detailed clauses to address eventualities that may affect completion time and contract price, including change in law, force majeure, change in scope/variation and suspension. Contracts typically provide for mechanisms to adjust the contract price upon the occurrence of such eventualities. Contractually agreed price escalation clauses with thresholds are also negotiated – eg, escalation on account of a change in the price of a specified raw material.

Split structures and design-and-build structures are commonly used for risk allocation and rewards for construction projects.

A split structure (whereby owners appoint an architect for design and a separate contractor for construction) is prevalent for the construction of real estate or manufacturing units. Under this arrangement, the owner bears the sole responsibility for design risks, while the contractor is responsible for executing the construction. Contractors may seek to shift responsibility for construction failures onto design issues, leading to counterclaims.

For design-and-build structures, the owner enters into a lump-sum turnkey contract with a qualified entity responsible for the entire project. Owners have a right to review and certify the contractor’s compliance. Contractors are often responsible even after completion, during an agreed defects liability period.

Warranties as to quality and workmanship, structural stability, fit-for-purpose warranties, adherence to applicable laws, technical specifications and adherence to prudent industry practice are undertaken by contractors, subject to normal wear and tear, with industry-specific and technical exceptions.

Contractors may be required to provide the owner with a corporate guarantee or a fund-based performance guarantee. The retention of payments is also common, and such guarantee/retention amount is released after completion of the defect liability period.

Indemnity for claims due to breach of contract/law, bodily injury, death, loss of property, gross negligence, wilful misconduct or fraud are prevalent in construction contracts. The overall limitation of liability typically varies between 50% and 100% of the contract price.

Contractors are also required to obtain and maintain adequate insurance, including contractor’s all-risk insurance, third-party liability insurance and workman insurance.

Time is of the essence in construction contacts, with fixed project schedules for key milestones and a target completion date. The project schedule is typically subject to the extension of time clauses, which are contractually agreed. To ensure compliance with a time schedule, the owner may require the contractor to furnish a corporate or fund-based performance guarantee. The retention of payments is also common.

The owner may have the contract performed through a third party in case of non-performance by the contractor, at the contractor’s cost, pursuant to the Specific Relief (Amendment) Act 2018.

Corporate guarantees, performance bank guarantees and retention payments are typically sought from contractors to ensure performance. However, in cases where there is a perceived risk regarding the financial standing of the contractor, the owner may negotiate additional security, such as letters of credit, parent guarantees, performance bonds, escrow accounts or third-party sureties. Such additional security is typically required in large infrastructure projects developed under a PPP model.

It is also common to penalise delays in performance of work by requiring the contractor to pay damages, or by prescribing liquidated damages.

Contractors/designers do not typically have a lien or encumbrance on a property in the event of non-payment. In most contracts, a delay in payment attracts penal interest. Furthermore, non-payment beyond a certain threshold of time constitutes an event of default by the owner, leading to the suspension of works and termination. The contract usually provides for a mechanism to address disputed payments, failing which dispute resolution may be invoked by the disputing party. However, in procurement contracts involving the sale of goods, an unpaid seller has a lien under Indian law, on the undelivered goods. Once delivered, the unpaid seller has the right to sue for the price of such goods.

In most states, a building comprising more than a prescribed number of floors can only be occupied after an occupancy certificate has been obtained from the relevant planning authority.

VAT has been subsumed by GST, which is payable on the leasing, licensing or transfer of development rights of land (at 18%), and on the transfer of property that is under construction. The leasing of residential apartments for residential use is exempt from GST.

GST on the transfer of property that is under construction varies, as follows:

• 1% on affordable residential apartments;
• 5% on residential apartments (other than affordable residential apartments); and
• 5% or 12% on commercial apartments, depending on the type of project, with restrictions on the availability of input tax credit.

GST is not applied on the sale of constructed property. The tax burden can be passed onto the buyer commercially.

In certain circumstances/structures, stamp duty on the transfer of immovable property can be lower than the typical stamp duty rates for conveyance – eg, where property is contributed by a partner into a partnership firm. However, such structures have to be analysed individually.

Municipal taxes are calculated based on the location, size, age and occupation of the property (self-occupied/tenanted). Sometimes, taxes are based on rents received. There are no exemptions against the payment of property taxes, except for properties used for charitable purposes/religious institutions.

Tax consequences in India follow the residential status of the income-earning person. Residential status is determined for every tax period (ie, April 1 to March 31 financial year).

Deemed Resident (Individuals)

An Indian citizen having India-sourced taxable income exceeding INR1.5 million during the tax year will be deemed to be India-resident if they are not liable to tax in any other country by reason of domicile/residence/other similar criteria.

A company is regarded as non-India-resident if it is a foreign company incorporated outside India and its place of effective management is not in India.

Any income of a non-resident from property situated in India is subject to tax in India, and withholding tax applies.

A foreign company’s income is usually taxed at 40% (plus applicable surcharge and cess). However, gains on the sale of real estate held as investment are taxed at 20% (plus applicable surcharge and cess) or 40% (plus applicable surcharge and cess), depending on the period of holding. Outward remittance by non-residents is guided by FEMA. Where the payment of consideration for the purchase of property is from a person resident in India, such payment is also subject to withholding tax at 1%, subject to certain thresholds.

Where consideration received on the transfer of an immovable property (whether capital asset or business asset) is less than 90% of the value of the property for the purpose of the payment of stamp duty as per local laws, the value of the property for the payment of stamp duty is deemed as consideration received for the levy of income tax. Similarly, where the consideration paid for the acquisition of immovable property is less than 90% of the property value for the payment of stamp duty as per local laws, the difference between the value of the property for the payment of stamp duty and the consideration discharged is taxed as income of the purchaser, at the applicable rates.

Tax on non-resident taxpayers may, however, be reduced if favourable tax treaty provisions apply.

Rental income also qualifies for the following deductions/rebates:

• a deduction of 30% of rental income (allowance towards repairs and maintenance);
• property taxes paid to the local authority; and
• interest paid on loans used to purchase the property.

However, the set-off of loss arising from interest paid in excess of rental income is subject to certain limitations.

Structured Real Estate Transactions

Gains (long-term) arising on the sale of shares of an Indian company holding real estate assets are generally taxable at 10% (plus applicable surcharge and cess) where the seller is a non-resident or foreign company.

Indian tax laws require the transfer of shares to take place at a fair market value, calculated in a prescribed manner.

It is mandatory for parties entering into a purchase or sale of immovable property to obtain and quote their Permanent Account Number (PAN) allotted by the Indian tax authorities on the conveyance document.

Depreciation/other business expenses may be claimed as deductions only if the taxpayer is in the business of commercially letting out properties, or where plant and machinery inseparable from the property are let out with the property.