Bank has done Property Title Search, Why should i waste my money on same?. This was a reply from one of my clients when i suggested him independent due diligence i.e. property title search. Fair enough but can you rely on Bank’s Property Title Search?. The answer is Definitely NO. This was proved beyond doubt when today one of my client along with other buyers lost long-fought court case in High Court against one of the leading banks. It is very sad for me as my client is on the verge of losing her lifetime savings and suffered a major financial setback. The case was fought between 3B’s i.e. the Bank, the Builder and the Buyer related to Property Title Search. The villain was Defective Property Title. In my post on 10 reasons for Defective Property Title, i discussed possible reasons for the same.
This topic was discussed briefly in my earlier posts but after my client’s experience, i thought to discuss it in detail with my readers. In the above-mentioned case, the builder sold flats to 40 buyers and project was pre-approved by one of the leading banks & few HFC’s. As i keep highlighting and suggesting that independent property title search should be carried out at the time of purchase. In case of a pre-approved project, normally banks carry out property title search at the time of providing project approval. After that bank is not bothered to carry out property title search at regular intervals. In this case, the court issued orders to maintain status quo till builder resolve his dispute with the Govt Authorities. My client approached builder 6 months after the court order for the purchase of said flat. Though i suggested her Property Title Search but as the builder is reputed and Project is approved by the leading bank and few HFC’s therefore she decided against it.
Bank disbursed 60% of Home Loan to the builder under Construction Linked Plan. After few months, my client came to know about the current standoff between Builder and the Govt Authorities & subsequent court order. She accidentally found out as the court notice was posted in one remote corner of the project. My client and other buyers stopped EMI payment when they came to about the court order. This was the 2nd blunder. Bank declared property NPA and CIBIL Score of my client plummeted to 539. Based on her lawyers advice, She, and other buyers filed a case against the bank for “Failure to carry out proper Property Title Search” before Home Loan Disbursement. They lost the case in Civil court and then High Court also ruled in favor of Bank. This is one of the cases of a defective property title. There can be any no of possible reasons. Bank or Housing Finance Company cannot be held responsible for defective property title or failure to carry out property title search.
What is Home Loan?
One of the common misconceptions is that Home Loan is sanctioned against the property. Let me clarify that as per the definition of Home Loan, “it’s a loan advanced to a person to assist in buying a flat or house“. It clearly implies that Home Loan is provided to an individual, not to the property. In other words, Home Loan is another form of personal loan which is sanctioned to an individual against the security/collateral. This personal loan (read Home Loan) is approved only for the purpose of house/flat purchase. Most important point is that Property or a Flat is only a Security / Collateral against the home loan.
What is Security / Collateral?
As per the Home Loan Agreement of Kotak Mahindra Bank definition of “Security” is as follows
“Security” shall mean such security as may be created or agreed to be created by the Borrower in favor of the Bank to secure the payment of the Dues by the Borrower to the Bank and/or the performance of the engagement under this Agreement by the Borrower”
This clause clears all doubts on the status of the property. The property is mortgaged and only act as Security/collateral for recovery of dues in case borrower default on the payment.
Who is responsible for Property Title Search?
Another important clause in Home Loan Agreement related to Property Title Search is
“The Borrower hereby represents and warrants that there is no charge, lien, mortgage, lis pendens, attachments, demands, trust, inheritance or other encumbrance or legal dispute of any nature on the Borrower or the whole or any part of the Security. The Borrower has a clear and marketable title to the Security“
Besides this borrower also confirms that
(a) There is no acquisition or requisition issued/published/received against the property
(b) Borrower has checked the approved layout plans and other govt permissions.
(c) Property is not included or affected by any Govt scheme i.e. property is not marked for govt acquisition
Above mentioned clauses in Home Loan Agreement related to property title search clearly states that responsibility of a Property Title Search solely rests with the Borrower and in no ways, Bank is held responsible for the defective title of the property.
Borrower Guarantees Repayment of Home Loan
I would like to ask my readers, How many of you have gone through the terms and conditions in your Home Loan Agreement?. I know that we sign each and every page of Home Loan agreement but how many of us have gone through the same. Based on my experience, i can say that only handful. You must be wondering, its a standard format & bank is not going to change the same for single borrower. I agree with this argument but if you go through the same then it will help to understand the various possible scenarios. It also helps in decision-making, if something goes wrong. If everything goes fine then Home Loan Agreement is just a wastage of paper sheets.
As we discussed that Property Title Search is the sole responsibility of a borrower. At the same, if you check your Home Loan agreement , Borrower also provide a personal guarantee to repay the Home Loan through Promissory note and bank also take undated cheques equivalent to total Home Loan value / EMI’s. It is being done so that the bank can recover money in case of default. One of the most common reason for payment default in case of under construction property is that a bank failed to carry out proper title search.
Options for the Bank to recover Home Loan dues
One of the most common reaction of a borrower in case of defective property title or dispute with the builder is that they stop Home Loan EMI. Its a catch 22 situation for a bank on how to recover their dues if the property title is defective. Though it is very subjective but the bank may approach the court to attach existing assists of a borrower to recover their dues or attach assets of a Home Loan Guarantor.
Summary: While buying a property, It is always advisable to go for independent due diligence. When we are spending our lifetime investment on a property, an extra few thousand rupees doesn’t matter. The risk is much higher in under construction properties and there is always a potential risk related to the title of the property.
As we concluded that the responsibility of property title search rests with the borrower and borrower guarantees the repayment of Home Loan. Therefore, i will never suggest to default on Home Loan repayment even if the property title is found to be defective in future. Depending on the case to case basis, the matter can be resolved with the builder/govt authorities/court of law. Property purchase is always risky and trust me no one can guarantee 100% clear and marketable title.
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