POINTS TO REMEMBER WHILE ACQUIRING PROPERTY FROM VARIOUS SOURCES

Acquiring a land/property warrants a proper due diligence on numerous issues, especially in geography like India where property laws are cumbersome, manually kept in various state jurisdictions and there can be multiple litigations pending against the property in question. Further the nature of such due diligence shall vary from transaction to transaction and shall be dependent on numerous factors including but not limited to source from which the land/property is being acquired, purpose for which the land/property is being acquired, tenure of the lease (in case of leasing transaction) and so on. Also the degree of detailed due diligence shall also vary from transaction to transaction. In this article, I shall describe the nature of due diligence which a company should do before acquiring the land/property. The check list presented below is not exhaustive and merely indicative since the same shall depend on multiple factors which may be known at the start of due diligence and the entire process of due diligence should be flexible enough to care of any unforeseen eventualities. Having said that, one needs to bear in mind that essence of all the legal due diligence shall be same irrespective of the transaction and the outcome desired to be achieved by entire exercise of due diligence shall be to have a clear picture as to title of the land/property, land/property usage restrictions and other miscellaneous restrictions / hurdles present in acquiring the land/property and ways and means to overcome such hurdles. Further to this due diligence report shall also propose the ways and means to structure the transaction in a manner that the incidence of taxes (stamp duty, registration charges etc.) are minimal to the organization.

There can be numerous sources from where the property can be acquired by the company. Some of the major sources are listed below.

Sources from which Land may be Acquired

1. Government/Government Companies/Instrumentalities of State covered under Article 12 of Constitution;

2. Companies/Co-Operative Societies/Other Artificial Persons (hereinafter mentioned as ‘Company’);

3. Partnership Firms/Proprietorship Firms (hereinafter referred to as ‘Firm’);

4. Individuals;

5. Complex Issues

Legal Due Diligence aspects with respect to each of the above listed sources are discussed in detail in following pages.

1. Government / Government Companies / Instrumentalities of State covered under Article 12 of Constitution;

Government or its instrumentalities can partake many forms such as Central Government/Federal Government or State Government or Instrumentalities of Government such as Government Companies, Government Corporations or Public Sector Undertaking. Following check list needs to be adhered to while purchasing land from the government:

(a) Check whether the land is a vested land in the government vide some Land Revenue Act or has been acquired under Land Acquisition Act or any other State Land Acquisition Act;

 If under Land Revenue/Land Reforms Act, Check –

o Concerned Land Revenue Act;

o If there is any Instrument/Order/Notification vide which such land was vested in the government and conditions attached to such instrument / order / notification;

o Whether under the said notification/instrument/order, the land was acquired for some larger objective or specific purpose. If yes, what was the objective or purpose?

o Whether that objective or purpose fits into the objective or purpose for which organization are acquiring the land;

o If no, whether the larger objective/specific purpose can be changed and government can sell/transfer/convey the land to us for our specific purpose?

o If the purpose can be changed, whether such change requires any notification from government or any special authorization from the concerned?

o Generally the disposition of land by Government or its instrumentalities require certain procedure to be followed. Check if there is any such prescribed procedure and same is being followed?

o Whether the process of vestation has gone through any litigation?

o If yes, relevant papers of that litigation needs to be looked into;

o If yes, whether there has been any adverse orders against the government;

o Whether there is any other kind of dispute with respect to the Land in question;

o Whether the land falls in abadi or is arable land?

o If yes, whether such land can be utilized for our purpose at all in view of Land revenue Act;

 If under Land Acquisition Act, Check:

o Land Acquisition Act along with State Amendments;

o Whether the land was acquired under Part II or Part VII of Land Acquisition Act;

o If under Part II of Land Acquisition Act; Check:

• Whether it was for some government department or for a government company;

• Public Purpose or Purpose for which the land was acquired;

• Do the purchase of land fits into the purpose for which land was acquired;

• If No, Whether the law, under given facts and circumstances, permits the change of public purpose to the purpose it is sought to be applied;

• Whether the acquisition proceedings have gone through litigation;

• If so, from what corners the litigation came?

• Whether the litigation is still pending or has been finally decided;

• Check the relevant papers pertaining to the litigation along with the court orders;

• If the litigation has been finalized, what are all probabilities that exist which can lead into the litigation on purchase of property;

• Whether the government has some concrete plans regarding the utilization/area adjoining the property in question;

• If yes, what are those plans;

• If the property can be sold to us by the government, what all formalities, modalities or permissions government needs to do to sell the property;

• Is there any need to structure the transaction on the part of government so as to sell/lease the property;

o If under Part VII of the Land Acquisition Act; check:

• What is the status of company for which property has been acquired;

• Whether it is the government company formed under Companies Act, 1956 or Government Company enacted under special statute;

• If it is a special company enacted under some statute, then check the charter of the company and whether such charter permits the sale of property to private company;

• Whether the company for which the property is acquired under this chapter, can sell the property to us;

(b) Check with the government authorities whether the property in question can be put to commercial / desired use.

(c) If not, check the restrictions that are placed for conversion;

(d) It is advisable that govt. should in principally agree that it will allow the conversion of Property to commercial use.

2. Companies/Co-Operative Societies/Other Artificial Persons (‘hereinafter mentioned as company’)

(a) Check as to how the Company acquired the property;

(b) Whether it was allotted to the company or company purchased the same from Third Party;

(c) In case of original allotment, Check

- Concerned Authority who allotted the property;

- Letter of allotment and conveyance / perpetual lease deed thereto;

- Whether the allotment is made for any specific purpose;

- If yes, what is the purpose and whether the property can be utilized for any other purpose;

- Check the letter of allotment or conveyance deed, especially as to whether there is any restriction on selling/transferring of property;

- Whether there is any other terms and condition which restrains the company from selling the property.

(d) In case the company acquired the property from third party, for verification of title, check:

- Pass book incase of Agricultural Lands-as per State laws;

- Khata (Municipal Certificate)/and or similar certificate as per State laws;

- Encumbrance Certificate – Last 30 years – Verification of charges – Search in Registrar of companies – Form 13 ( Registration of Charges), Form 17 (Satisfaction/Modification of Charges);

- Verification of Kharab Land;

- Obtain necessary documents from Revenue Office;

- Obtaining Urban Land Ceiling Clearance Certificate, if any and if applicable;

- Making a survey of Property if necessary by proper authorities;

- Property tax Assessment Orders/tax paid receipts for the Last 5/10 years;

- Verification of current & Earlier registered sale deeds / gift deeds / conveyance deeds (Link Documents) (Check all the originals)

- Necessary transfer entries in respect of linked revenue records i.e. pass books, EC, etc.

(e) Check Memorandum & Articles of Association of Company

(f) Balance Sheet & Profit & Loss Accounts for all years. Study notes and contingent liabilities for details of claims in relation to property, dues of labour, statutory dues, secured loans etc;

(g) Board Minutes;

(h) Get an independent search and status report from ROC Records for charges, if any;

(i) Security/Guarantee given by the company – implication on the property in question – take proper indemnifications;

(j) Verify the pending winding up petition(s) or any other court cases impacting the properties;

(k) BIFR, proceedings, if any and their status;

(l) Any labour related problems under various Labour Act and their impact on properties;

(m) Financial institution involved in hypothecation and verification of agreements thereto;

(n) Check whether there are any acquisition proceedings pending or liable to be initiated by the government with respect the property in question;

(o) Check whether there are any Govt. dues with regard to property in question.

(p) Apart from the points stated above, it is important to verify as to how any co-operative institution or public institution acquired the property and documents thereto. If there was a grant of property from government, generally non-transferability to third party is a pre-condition for such grant. If it is so, then one needs to take approval from the granting authority and pre-check the feasibility of such approval.

3. Partnership Firms/Proprietorship Firms (hereinafter referred to as ‘Firm’)

(a) Check, whether the firm is a registered partnership or not;

(b) Check as to how the firm acquired the land/property;

(c) Whether it was allotted to the firm or firm purchased the same from Third Party;

(d) In case of original allotment, Check

a. Concerned authority who allotted the land;

b. Letter of allotment and conveyance deed thereto;

c. Whether the allotment is made for any specific purpose;

d. If yes, what is the purpose and whether the land can be utilized for any other purpose;

e. Check the letter of allotment or conveyance deed, especially as to whether there is any restriction on selling/transferring of land;

f. Whether there is any other terms and condition which restrains the firm from selling the land;

(e) In case the firm acquired the land from third party, for verification of title, check:

a. Pass book incase of Agricultural Lands-as per State laws;

b. Khata and/or similar certificate as per State laws;

c. Encumbrance Certificate – Last 30 years – Verification of charges – Register of Mortgages in case of other than Equitable Mortgages – Check the records of Concerned Sub-Registrar

d. Verification of Kharab Land;

e. Obtaining necessary documents from Mandal Revenue Office;

f. Obtaining Urban Land Ceiling Clearance Certificate, if any;

g. Making a survey of Land if necessary by proper authorities;

h. Property tax assessment orders/tax paid receipts for the last 5/10 years;

i. Verification of current & earlier registered sale deeds/gift deeds/ conveyance deeds (Link Documents) (Check all the originals)

j. Necessary transfer entries in respect of linked revenue records i.e. pass books, EC, etc.

(f) Check Partnership deed and as to whom all are the partners therein. Further check whether there has been any change in constitution of firm and any partners are admitted or have resigned thereto. In case of proprietorship concern, verify as to who is the proprietor of the firm and look for the documents establishing the same;

(g) In case of partnership concern check, as to who all partners are authorized to execute the property sale documents;

(h) Ensure, all the partners execute the property documents since single partner has no implied authority/powers to sign the documents;

(i) Check, if any of the partners are minor;

(j) Balance Sheet & Profit & Loss Accounts for all years. Study notes and contingent liabilities for details of claims in relation to property, dues of labour, statutory dues, secured loans etc;

(k) Get an independent search and status report from the office of Sub-Registrar;

(l) Security/Guarantee given by the firm – implication on the property in question;

(m) Verify the pending dissolution petition by any of the partners/ex-partners or any other court cases impacting the properties;

(n) Check if there are any insolvency proceeding pending in the Court;

(o) Any labour related problems under various labour Acts and their impact on properties;

(p) Financial institution involved in hypothecation and verification of agreements thereto;

(q) Check if, there is any acquisition proceedings pending or liable to be initiated by the government with respect the property in question;
(r) Check if, there are any Govt. dues with regard to property in question.

4. Individuals/HUF

Hindu

1. Check as to how an individual acquired the property;

2. Whether a self acquired property or ancestral property;

3. Check whether the property belongs to HUF

4. Title documents of the property;

5. Check the zoning of Land i.e. whether the land can be used for the desired purposes if presently not allowed to be used for the same or there is any absolute prohibition for use of land/property for desired purpose from environmental authorities – relevant document shall be current master plan applicable for the city / town;

6. Check if the land/property has been mortgaged or hypothecated by the company with any person or any financial institution;

Muslims

1. Check the status of Muslim individual, if one is from Shia or Sunni sect;

2. Check as to how an he acquired the land/property i.e. by inheritance, testamentary disposition, gift or third party acquisition;

3. Title document of the property;

4. Check the zoning of land i.e. whether the land can be used for the desired purposes if presently not allowed to be used for the same or there is any absolute prohibition for use of land/property for desired purpose from environmental authorities – relevant document shall be current master plan applicable for the city/town and rules applicable from environment department;

5. Check if the land/property has been mortgaged or hypothecated by the company with any person or any financial institution;

5. COMPLEX ISSUES

(a) Company under Restructuring / Bankruptcy – (Since it is a Company, all the steps listed above under the heading Companies should also be followed in addition to what is stated herein below).

Situation 1: Where the Company is in troubled waters.

Risk Involved

(i) Claims may come in future from unknown corners;

(ii) And if such claims come, organization may not have any recourse against the company since it is already in troubled waters.

Process

(i) Due Diligence;

(ii) Seek indemnities from the company so as to secure the future liabilities and consideration already paid by the Organization;

(iii) Watertight agreement

Steps to Ensure Mitigation of Risk

(i) Invite objections to the sale of land/property by giving public notice in news paper having wide coverage so as to bridge the gap that may not be discovered in due diligence process;

(ii) Consideration money to be deposited in escrow account for a certain fixed period;

(iii) Seek NOC from lenders/workers so as to minimize the claims in near future and to ensure the smooth transfer and occupation of land;

(b) Company under restructuring / bankruptcy – (Since it is a company, all the steps listed above under the heading companies should also be followed in addition to what is stated herein below).

Situation 2: Where the Company has approached the BIFR for declaring it as sick company or where a winding up petition is filed before the court and is still pending before the court.

Risk Involved

(i) If the company has not been declared as sick company and is declared sick after organization purchases the land from company or during the course of such purchase then Doctrine of Lis Pendens will apply.

(ii) If ultimately organization purchases the land with the permission of BIFR, organization will have no further recourse or indemnity in case the land/property happens to be a polluted one or in any such other exigency.

Process

(i) Due Diligence;

(ii) Understanding the status of BIFR process. In other words whether the company has made only reference for it being admitted as sick company or it has been declared as sick company.

(ii) Permission from BIFR/court for purchasing the Land/property.

- Organization may have to involve the creditors in process of negotiations and work out with creditors

Steps to Ensure Mitigation of Risk

(i) Money may be kept in escrow account for certain fixed period or till the final order of BIFR is pronounced.

(ii) Purchase may be made subject to final order of BIFR;

(iii) Comprehensive pollution check of property may be done before entering into purchase agreement instead of sample check.

(c) Situation 3: Where a final order for restructuring or dissolution has been made by BIFR or an order of winding up has been made by the court and the assets of the company are being disposed of by official liquidator or by creditor with due permission of the court.

Risk Involved

(i) If ultimately organization purchase the land/property with the permission of BIFR / Court, organization shall have no further recourse or indemnity in case the property happens to be a polluted one or in any such other exigency.

Process

(i) In this situation, sale can be made by public auction as well as private treaty. However it is advisable, that land should be purchased by public auction route, since Courts have not viewed the private treaty route with much favour;

(ii) Whether it be by private treaty or public auction, adequacy of consideration will be the test for upholding the sale;

(ii) Generally, in such cases, it is official liquidator who is authorized to sell the property. However court can in its discretion may grant permission to creditor to sell the land;

(iii) If organization is purchasing from secured creditor, official liquidator must always be kept in the loop and informed;

(iv) Sale is only complete after the confirmation from the court;

(v) Once the sale is confirmed, it is unlikely that the sale would be challenged on any ground other than inadequacy of consideration.

Steps to Ensure Mitigation of Risk

(i) Consideration needs to be adequate;

(ii) Comprehensive pollution check of land may be done before entering into purchase agreement instead of sample check.

(B) Government Land vis-à-vis Public Purpose & Public Auction
Situation 1 – Where the land is acquired for Public Purpose and is sought to be given to organization vide private treaty

Risk Involved

(i) Sale may be invalidated due to non-transparency in sale of property and consideration amount paid may get struck;

(ii) Sale may be questioned in the court on the ground of public purpose or inadequacy of consideration;

Process

(i) Due Diligence

Steps to Ensure Mitigation of Risk

(i) Application of mind by the government in selling the land/property to organization;

(ii) Due recording of reason at each and every stage of the proceedings as to why government wants to sell land/property to organization;

(ii) Before purchasing the land, government should invite public objections to the sale of land through public notice;

(iii) In such cases decision should be taken by a high level committee.

(iv) It is advisable, that public auction route should be followed to avoid any controversy.

(v) Consideration needs to be adequate so as to reflect the market value of the property.

(vi) Initial payment should be in an escrow account and organization should give a wide publicity of acquiring the land vide public notice in newspaper.

(vii) There shall be a cooling period of 2-3 months before organization start constructing on the property.

(B) Government Land vis-à-vis Public Purpose & Public Auction

Situation 2 – Where the land is acquired specifically for organization.

Risk Involved

(i) Acquisition necessarily to be in public interest though it may be for acquisition of organization.

(ii) Risk of public interest litigation challenging the acquisition proceedings.

Process

(i) Due Diligence

Steps to Ensure Mitigation of Risk

(i) Govt. should take an in principle policy decision and classify the business of organization as public purpose and a purpose useful to public at large;

(ii) Acquisition notice at all stages to clearly specify the purpose of acquisition for organization;

Note:

1. Some of the above points may not be applicable in case of leasing transaction generally;

2. Built to Suit transactions can also have different requirements and the agreement needs to be structured depending upon the specific requirement of transaction;

3. Responsibility/obligation of obtaining regulatory approvals may vary depending upon the nature of transaction. For eg. In leasing transaction, generally all the regulatory approvals pertaining to property should be on Lessor/Landlord/Developer. Similarly, in a sale transaction, an obligation can be casted upon to seller to obtain regulatory approval such as land conversion etc though the cost can be borne by the organization. However all the operational clearances shall be the responsibility of purchaser in case of sale transaction.

4. Legal due diligence shall also lay emphasis on all the regulatory clearances which may be required for operating from the property so far as purchaser is concerned and the risks in obtaining such clearances must be adequately highlighted in legal due diligence.

5. FCPA/anti bribery issues should be dealt/handled properly at all stages of due diligence and the entire process of due diligence needs to be transparent enough to avoid any controversies at a later stage.

Contact Information

advocate_lokesh@yahoo.co.in
+9619047279

AUTO – GRAVES AMENDMENT – VICARIOUS LIABILITY – VEHICLE & TRAFFIC LAW § 388 – RENTAL VEHICLE
Sigaran v. ELRAC, Inc.
(Sup. Ct., Bronx Co., decided 12/23/2008)

Since August 10, 2005, the "Graves Amendment"has provided vehicle lessors and renters with a statutory basis for dismissing vicarious liability claims in motor vehicle accident lawsuits.  In pertinent part, the Graves Amendment provides:

§ 30106. Rented or leased motor vehicle safety responsibility(a) In general. An owner of a motor vehicle that rents or leases the vehicle to a person (or an affiliate of the owner) shall not be liable under the law of any State or political subdivision thereof, by reason of being the owner of the vehicle (or an affiliate of the owner), for harm to persons or property that results or arises out of the use, operation, or possession of the vehicle during the period of the rental or lease, if: (1) the owner (or an affiliate of the owner) is engaged in the trade or business of renting or leasing motor vehicles; and(2) there is no negligence or criminal wrongdoing on the part of the owner (or an affiliate of the owner).

In granting ELRAC's motion, Bronx County Supreme Court Justice Dominic Massaro held:

The Court finds that the terms of the Graves Amendment validly apply here because the statute regulates and protects things in interstate commerce and because it regulates activity that substantially affected interstate commerce. Congress has legitimate authority under the Commerce Clause to regulate liability imposed upon a rental car company and the Graves Amendment constitutionally preempted state laws that imposed vicarious liability on rental car companies (see, Garcia v. Vanguard Car Rental USA, Inc., 540 F.3d 1242 (11th Cir. 2008); Flagler v. Budget Rent a Car Systems, Inc., 538 F. Supp. 2d 557 [ED NY 2008]).^{[FN3][FN4][FN5]}

Clearly, the Graves Amendment voids Vehicle & Traffic Law §388 to the extent that the Transportation Equity Act applies (see, Hall v. ELRAC, Inc., 52 AD3d 262 [1st Dept. 2008]); Hernandez v. Sanchez, 40 AD3d 446 [1st Dept. 2007]; Graham v. Dunkley, 50 AD3d 55 [2nd Dept. 2008]; Jones v. Bill, 34 AD3d 741 [2nd Dept. 2006], rev'd, 10 NY3d 550 [2008] [reversed on effective date of the amendment]; Williams v. White, 2007 Slip Op 02227 [3rd Dept. 2007]; Castillo v. Bradley, 17 Misc 3d 1107(A) [Sup. Ct. Kings 2008]; Infante v. U-Haul Co. of Fla., 11 Misc 3d 529 [Sup. Ct. Queens 2006]). 

Basing their claim upon the Graves Amendment, Defendants say the complaint against the corporation fails to state a cause of action because the allegations, if true, are barred by the statute. In this regard, Defendants focus their attack upon Plaintiffs' allegation that ELRAC, Inc. was negligent because the corporation knew (or should have known) Fernandez's history of operating vehicles in an unsafe, careless, and reckless manner (see, Complaint ¶¶10 to 12). 

*  *  *  *  *

Construing liberally, as it must, Plaintiffs urge that the Court find that a claim is stated against the corporation because the complaint alleges a cause of action under an exception to the Graves Amendment, i.e., actual negligence (49 U.S.C. § 30106[a][2]). In this regard, by the statute's plain reading, while the Graves Amendment absolves rental car companies of vicarious liability, it does not absolve rental car companies for their own negligence (see generally, Novovic v. Greyhound Lines, Inc., 2008 US Dist. Lexis 94176 [ED NY 2008]) (see also, American Association for Justice, AAJ Annual Convention Reference Materials, 2 Ann 2007 AAJ-CLE 1873 [2007]).

To decide whether ELRAC falls under the "own negligence" exception, the Court must decide whether the corporation was under an obligation to check Fernandez's driving record and whether failure to carry out such duty places this case under the exemption provided by 49 USC §30106(a)(2) ("no negligence or criminal wrongdoing on the part of the owner"). 

*  *  *  *  *

Plaintiffs' allegations are limited to the following: (1) the corporate defendant had a duty to ensure that any vehicle rented by it would be operated in a safe manner; (2) the corporate defendant has a duty to determine whether any drivers to whom it rented vehicles did not have a history of operating vehicles in a careless way, and (3) ELRAC was negligent in renting to Fernandez (Complaint ¶¶ 9 to 11). Beyond that, no specifications were made concerning the nature of Fernandez's driving record that should have alerted ELRAC not to rent to him.

In their answering papers, Plaintiffs generally argue that ELRAC was, in essence, guilty of "negligent entrustment," but cite no basis or any specifics for claiming that ELRAC was under a duty to check Fernandez's driving record. 

Decision

At common law, owners could be held liable if they knowingly entrusted their car to an incompetent driver. "One who supplies a chattel for the use of another whom the supplier knows or has reason to know to be likely because of his youth, inexperience, or otherwise, to use it in a manner involving unreasonable risk of physical harm to himself and others may be liable for negligent entrustment" (see, Pacho v. Enterprise Rent-A-Car Co., 572 F.Supp.2d 341 [SD NY 2008]) The Pacho Court found "negligent entrustment" applied to the rental company's failure in that case to properly process the co-defendant's driver's license. However, in this case, no allegations exist that the corporate defendant failed to check Fernandez's license.^[FN6]Therefore, the Court must conclude that Plaintiffs failed to state a cause of action that the corporate defendant knew, or should have known, that Fernandez was unlicensed, incompetent, or reckless. Further, Plaintiffs failed to cite any legal authority that ELRAc was under an obligation to check Fernandez's driver's record beyond verifying that he had a valid driver's license (see generally, Vedder v. Cox, 18 Misc 3d 1142 [A] (Sup. Ct. Nassau 2008]).

Based upon the foregoing, the Court finds that Plaintiffs failed to state a cause of action against the corporate Defendant. Likewise, the Court determines that Plaintiffs' did not allege a claim independent of Vehicle & Traffic Law §388.^[FN7]

To read most posts about New York cases involving the Graves Amendment, click here.