Purchases and selling of property also come at the top list of financial decisions that people make for themselves or on behalf of their companies. In most of these transactions, the rules of the Indian Contract Act, 1872, the Indian Property Act 1929, and the Real Estate (Regulation and Development) Act, 2016 (RERA) apply, collectively. This blog will seek to explain real estate contract law, its main clauses, controversies and consequences of breach with reference to enabling legislation and real life scenarios
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What are Real Estate Contracts
Real estate contract refers to a legally enforceable agreement regarding the acquiring or disposing of property which includes sale, purchase, lease as well as development of the property.
Real estate contracts differ from general contracts in the sense that while general contracts may refer to anything ranging from services to goods, real estate contracts are limited to immovables.
For example, where a buyer and seller negotiate for sale of an agreement for sale of land, then the parties need to comply with the provisions of property law and registration under the provision of the Registration Act 1908.
Unlike other tangible goods which have short term use and ownership, real estate contracts have long-term effects like transferral of ownership and rights pertaining to the property as compared to a contractual relationship of service where the contractual obligations are only for a short time .
There are certain laws that have to be followed while entering the real estate contracts such as RERA, 2016 to protect the buyer which is not generally applicable in other legal instruments. This makes real estate agreements more complex and legally involved.
Also, Get to Know Types of Real Estate Contracts
Key Elements of Real Estate Contracts
Real estate contract can be defined as a legal agreement between consumers, businessmen and companies in relation to the selling, buying or renting of land and buildings. The essential elements of a valid real estate contract under the Indian Contract Act, 1872 include:
Offer and Acceptance: As per Section 2(a) & Section 2(b) of Indian Contract Act, 1872, the buyer makes an offer, and the seller accepts it or vice versa. For example, in the sale of property, an offer made by the buyer needs to be at a specific price in order to be accepted by the seller.
Lawful Consideration: The transaction has to be for lawful business or services such as exchanging of cash. Section 25 of the Indian Contract Act, 1872 specifies that consideration plays a significant role in making contracts legal and enforceable.
Competence of Parties: As per Section 11 of Indian Contract Act, 1872, one of the requirements of forming a contract is that the parties entering into the contract must be legally capable of doing so. For instance, we have minors and individuals under the insolvent law, who are barred from entering valid contracts.
Lawful Object: In addition, the purpose for which the contract has been made should not be of unlawful nature and should not operate against the public policy as provided in Section 10 of Indian Contract Act, 1872.
Certainty: Contract terms must be specific for it to be enforceable by the law of the land; there must be no ambiguity in any form. Section 29 of Indian Contract Act, 1872 also labels an agreement as void if, for instance, a seller has agreed to transfer property at some time in the future.
Written Agreement: In real estate transactions, particularly in the buyer- seller relationship, the written agreements are provided by the Registration Act, 1908 so as to guarantee enforceability and credibility of the relations contained in the written agreements.
Essential Provisions in Real Estate Contracts
It is important to note that real estate contracts are very likely to contain certain provisions regulating the rights and duties of the contracting parties. Here are some critical ones:
Earnest Money Clause: This clause defines an amount of money paid upfront by the buyer to show his earnest intention of completing the contract. If the buyer fails to go through with the contract the seller can keep the earnest money paid to him, on the other hand, if the seller defaults the buyer can ask for the money to be returned plus interest on that money. This is in support of Section 73 of the Indian Contract Act, 1872 on the basis of which claims can be made for loss or damage occasioned by non-fulfilment of the contract.
Force Majeure Clause: This saves the parties from contracting for responsibilities that may lead to loss due to events that are beyond the control of parties such as natural disasters or government interference that hinders the performance of the contract. It draws its indirect support from Section 56 of Indian Contract Act, 1872 which talks about frustration of contract.
Dispute Resolution Clause: This specifies how the dispute will be addressed, whether through the use of an arbitrator, a mediator or a legal process. All these clauses are well retained with the Arbitration and Conciliation Act 1996 that deals with arbitration contracts in India.
Time is of the Essence Clause: In real estate contracts there are time-bound stipulations that relate to payment, possession or completion. Inability to adhere to these deadlines may result in contract cancellation or fines as provided in section 55 of the Indian Contract Act, 1872.
Indemnity Clause: This helps to ensure that one party pays the other for losses that results from special breaches, or events, for example title issues. The law of indemnity is provided in Section 124 of Indian Contract Act, 1872.
Also, Learn Who Is A Real Estate Lawyer?
Common Disputes in Real Estate Contracts
Even when a lot of attention is paid to the drafting of the contracts in the real estate business, disagreements are always expected. Here are some common disputes that arise in contracts of real estates:
Title Defects: Sometimes the buyers find that the seller lacked a clear and marketable title to the property after they have completed the purchase. In Chheda Housing Development Corporation v. Bibijan Shaikh Farid (2007), the Bombay High Court highlighted the duties of the seller that he has to pass a clean title to the buyer.
Delay in Possession: Developers often also take time to formally transfer the possession especially of flats. The buyers can seek compensation or can even exit the project as per Section 18 of the RERA.
Breach of Contract Terms: Disputes arise where parties fail to meet certain contractual provisions for example, non-payment of instalments as agreed, failure in construction plan and design among others.
Fraud: Sometimes, sellers or developers can deceive their customers by providing fake information. For example the size of the property, or the facilities within the premises, and buyer dissatisfaction can force legal action under Section 17 of Indian Contract Act.
Unregistered Agreements: Most property agreements face difficulties in proving ownership or the ability to implement them in court because they are not registered.
Also, Learn 10 Essential Elements of a Valid Contract in Indian Contract Act, 1872
Remedies
In Indian legal systems, there are many civil remedies for a party which has been adversely affected by the breach of a contract. These include:
Specific Performance: According to the provisions of Specific Relief Act of 1963, the court has the powers to order the defaulting party to perform contractual duty. For example, a court may compel a seller to convey the property to the buyer as provided in the contract.
Damages: To seek legal redress, an aggrieved party can seek an award of monetary damages for nominal and general damages that it would have suffered in the event of a breach of contract. In Kailash Nath Associates v. Houses of Delhi Development Authority (2015), the Supreme Court elaborated that damages must correspond to the actual loss suffered and cannot serve as a penalty.
Rescission of Contract: In another way, the parties can look for an annulment of the contract and a return to the status quo before the formation of the contract.
Refund with Interest: Section 18 of RERA, 2016 requires developers to refund with interest in case of delay or other acts of violation by the developers to the buyers.
Injunctions: Recourse through the court can come in the way of preventing the parties from engaging in acts that are prohibited by the contract like the sale of the house to another buyer.
Summary
Real estate agreements in India refer to formal legal documents that govern property deals, including purchase and sales as well as leasing and other real estate development agreements. These contracts are regulated by the Indian Contract Act, 1872 and some other laws such as the Indian Property Act, 1929, and RERA, 2016. These elements include; offer, acceptance, lawful consideration, competency of the parties and written records. In basic conditions such as earnest money, force majeure, indemnity clauses are provided in order to defend buyer and seller interests. Some of the most common issues that could arise include issues to do with titles, delayed grilled possession, and other terms of the contract being violated. The legal actions available for the parties to invoke in the event of breach include specific performance, damages, rescission or injunctions.
Also, Get to Know Who is a Contract Lawyer
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Real Estate Contract Law: FAQs
Q1. What is a real estate contract?
A real estate contract is a legal agreement for property transactions like buying, selling, or leasing, outlining the terms and obligations of the involved parties.
Q2. What are the key elements of a valid real estate contract?
A valid contract requires offer and acceptance, lawful consideration, legal purpose, free consent, and competent parties. Certain agreements, like sale deeds and leases, must be in writing and registered.
Q3. How can a real estate contract be terminated?
A contract can be terminated by mutual consent, breach, impossibility of performance, or court intervention.
Q4. What remedies exist for breach of a real estate contract?
Remedies include specific performance, compensation, rescission of the contract, or an injunction.
Q5. Are verbal agreements valid in real estate transactions?
Verbal agreements are not ideal, as sale deeds and leases over 12 months must be in writing and registered to be enforceable.
