Defective Property Title is a nightmare for any buyer. It is true when a buyer come to know about Defective Property Title after paying substantial amount to seller or deal is over. From my experience, i can conclude that each case is different and there can be infinite reasons for Defective Property Title. I always suggest my clients to hire a local property lawyer who can check the title of the property and issue Title Search Report (TSR). Under construction property is riskier compared to resale property. Reason being, Lawyer and Home Loan provider check for Defective Property Title as on date of purchase. What if, builder mortgage the project in future without any intimation to buyers or there is dispute with landowners. A buyer cannot fix 100% loopholes. There can be infinite reasons for Defective Property Title. In this post, it is not feasible to cover all possible reasons but we will discuss 10 most common reasons for Defective Property Title.
Home Loan and Defective Property Title
Before we check core reasons, i would like to clarify the most common query from my readers. Its a biggest misconception that if Home Loan is approved then the title of the property is clear. In case of Defective Property Title, buyers tend to put onus on Home Loan Provider. Borrower stop Home Loan EMI on grounds that bank should have checked on Defective Property Title. I agree that Home Loan Provider independently check title of the property but it is not 100% reliable. Each Bank / HFC has its own risk assessment process. Home Loan is no different from Personal Loan. Only difference is that it is backed by collateral in the form of property. Home Loan is sanctioned to an individual not to the property. Property is just a collateral/Security. To check Defective Property Title is the sole responsibility of a buyer / borrower. Based in my experience, i am sharing the reliability of internal Title Search Report of different types of Banks / HFC’s.
SBI << Large HFC’s / Private Banks << Other PSU Banks << Small Private Banks << Small HFC’s << Regional Banks << Cooperative Banks << Rural Banks
Reasons for Defective Property Title
(a) Lien on the Property: Lien means right on the title of the property till property owner clear the debt or dues of the individual who has put a lien on property. A lien can be private or put through court order. Under private lien, if i borrow some money and register the mortgage agreement in sub-register office. In mortgage agreement, i agree for clause to put Lien on the property till dues are cleared. A lien can also be put through court order. Objective is that owner should not be able to sell the property till the matter is resolved in court. It is common in cases related to inheritance or dispute in family settlement. In few cases, i observed that a court stamp is put on original property documents to restrict sale of property. In short, Lien on property means Defective Property Title. A property cannot be sold or registered with lien. A lien is recorded by sub-registrar. A buyer can check Encumbrance Certificate for any lien on property. Normally encumbrance and lien is used interchangeably but it is not technically correct.
(b) Encumbrance: Difference between Lien and Encumbrance is that in Lien, it is not necessary that property is mortgaged. Whereas Encumbrance means that property is mortgaged as a collateral. Similar to Lien, Encumbrance also restrict property transfer. Under encumbrance the lender has right to sell the property to recover dues as in case of Home Loan. Another possibility is of Loan Against Property. Property Title cannot be tagged Defective Property Title if borrower is paying all dues on time and has not defaulted on payment. A buyer can check Defective Property Title through Encumbrance Certificate. At macro level, encumbrance means property is being offered as collateral / security.
(c) Civil Suit / Case in Family Court: It is not necessary that court always put lien on property. Another possibility is that civil suit is filed against owner related to property matter. Very common scenario is dispute between husband and wife or between family members like father and son. Husband try to dispose off the property before divorce. Lawyers “Title Search Report” check for all these scenarios. In case of any civil suit, it means Defective Property Title & buyer should be cautious. Transactions through power of attorney can be disputed on same grounds i.e. family dispute. Co-owner can claim that POA was executed under force / coercion.
(d) Notified Property: Sometimes govt notify land / site / property for infrastructure project / road widening / flyover etc. The current owners try to sell in a hurry but legally the property title is tagged as Defective Property Title in case owner makes wrong representation regarding title of the property.
(e) Restrictive Rights on Property: It is also referred as Conditional Ownership in property. We can call it as Defective Property Title because title cannot be used freely. Best example is leasehold property in Navi Mumbai. Almost entire stretch of Navi Mumbai is owned by CIDCO and they gave it on a lease of 99 years to builders / developers. Though legally we cannot say Defective Property Title but as it restrict the rights of buyer on property therefore title is not freehold. Another case is restriction put by builder on transfer of property for certain period. Normally when builder mortgage the project, they are restricted by bank therefore they restrict buyers to transfer title freely. All these cases are of Defective Property Title.
(f) Land Conversion: Urbanization in India is restricted only to handful cities. Most of the development activity is happening on outskirts of city. City limits are extended beyond imagination. Most of the land used for residential activity was originally notified as agricultural land. Defective Property Title in this case means that an agricultural land is used for residential purpose without land conversion. Conversion certificate issued to convert land from agricultural to residential purpose is also known as DC Certificate. If you are buying a land or flat on city outskirts then do check Imp documents related to status of Land
(g) Multiple Sale Transactions: This is fraudulent activity where in owner sell the property to multiple buyers and collect money from all the parties. It is very common in small cities/towns or in case of Bank Auction properties. This happens in case of debt trap or owner is not able to pay the Home Loan. In case of Defective Property Title due to multiple stakeholders, it is next to impossible to resolve the case. Case linger on for years and years. You may include relevant clauses in agreement to safeguard your interest.
(h) Encroachment / Right to Access: Another common reason for Defective Property Title. Public / Govt land is included in property or Access is not provided to neighboring residential units. Therefore it is always advisable that construction should be started only after taking approval from local town planning authority. Any illegal construction means Defective Property Title.
(i) Property developed by Govt Authorities: Any property developed by govt authority or under special scheme comes with lot of caveats. In some cases, if certain conditions are not met then govt reserves the right to re-acquire the property. In this case, Defective Property Title means agreement conditions are not fulfilled or breach of agreement terms by the owners. For example, State Govt allotted freehold plots to weaker section of society. The condition was that construction should start within 3 years and it cannot be sold before 7 years. The plots were sold without construction and govt declared “Defective Property Title”
(j) Owner is Guarantor of Loan: Last but not the least. In many cases i observed that owner of property is Guarantor to some business loan or loan of relative / friend. In case of high value business loans, the property details of guarantor is included in loan agreement as bank reserve right to take possession in case of default. In such cases, you can always include clause in sale deed that seller has made representation that he is not a guarantor of any loan. Even if he is guarantor then you can insist on NOC from bank allowing him to sell the property. A bank may declare “Defective Property Title” in case of default on loan or restrict guarantor to sell his assets in possession.
I tried to cover almost all the reasons for Defective Property Title. Property is once in lifetime purchase for middle class therefore it is advisable to be extra cautious. Spending few thousand extra for Title Search Report to buy a peace of mind is worth especially when you are spending millions to buy a property. Trust me reliable and genuine advice will come at a cost. Its better to hire good local property lawyer for title verification.
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