Know Your REITS

RUPALI SHARMA AND DIVYA MALCOLM delve deeper into the role and responsibilities of the manager in Real-Estate Investment Trusts. There has been much talk about the regulations notified by the Securities and Exchange Board of India (SEBI) on September 26, 2014, to set up Real-Estate Investment Trusts (REITS). A REIT cannot be formed without a trustee, a maximum number of three sponsors (with a collective net worth of at least Rs 100 crore, and individually at least Rs 20 crore), and a manager with a minimum net worth of at least Rs 10 crore. The focus of this article is on the heavy cross cast on the manager by SEBI under Regulation 10 (1) and (2). He is not only responsible for making investment decisions with respect to the underlying assets but also for ensuring that the real-estate assets have proper legal and marketable titles. Equally onerous is his responsibility of ensuring that all material contracts, including rental or lease agreements, are legal, valid and enforceable. He is also bound to oversee the progress of development and approval status of properties under construction. Each state has its own laws governing immovable properties, making the obligation cast on a manager, with respect to titles, even more burdensome. Closer home, restrictions have been placed on the transferability of land under certain provisions of the Bombay Tenancy and Agricultural Lands Act, 1948 (BTAL), the Bombay Inferior Villages Watans Abolition Act, 1959, and the Maharashtra Land Revenue Code (MLRC), just to name a few. It is not uncommon to come across instances when issues arising under these acts have affected projects even after the land has been converted from agricultural to non-agricultural user, building permissions have been obtained and the land ceases to be agricultural. Instead of making a clean breast of things, land owners tend to give a warped picture to seek a price that their property otherwise would not fetch. Typically, an exemption available under any one provision of a statue is projected as a panacea for all types of encumbrances. A good case in point is BTAL and how the limited exemption available under Section 63 is projected as a cure-all. The ensuing paragraphs, from our experience, shall testify to this. Title issues At one time, BTAL was primarily used as an instrument of change by the state government to ensure that tillers who cultivated their land became landowners by purchasing the land personally tilled by them at the price fixed in accordance with the provisions thereof. The farmers, however, did not come to hold the land on freehold basis, and the Collector´s prior permission under Section 43 of BTAL is a must for any transfer by such a farmer. Now, the above-mentioned Section 43 is completely unrelated to Section 63. Simply put, Section 63 prohibits a non-agriculturist from acquiring agricultural property without the permission of the Collector. Section 63-1A carves out an exception from this very restriction if the land is proposed to be acquired for bonafide industrial use including tourism or a special township project. Section 63-1A also lays down a stipulation regarding payment of nazaran if the property in question is of the nature described under the preceding paragraph and affected by Section 43. However, this does not imply that the restriction imposed under Section 43 of BTAL is waived. In other words, even if an industrialist or a township developer being non-agriculturist pays nazaran and avails Section 63-1A, he would also have to obtain the Collector´s permission as stipulated under Section 43 of BTAL. The state government is known to have initiated action for violation of Section 43 even after the land ceased to be agricultural and the building permissions have been obtained. The authorities are able to wash their hands of all acts of commission or omission as there is no such thing as a statutory estoppel. Yet another fertile ground for a chequered title is Section 36A of the MLRC. The said section imposes restrictions on transfers of occupancies by tribals without the previous sanction of the Collector and the state government. One cannot scoff at such provisions especially as an enquiry can be held at any time within 30 years from the date of the transfer for any breach thereof - a veritable Damocles´ sword. Even within the city limits of Mumbai and Pune where BTAL is not applicable, many projects have been found lacking a good and marketable title for having been constructed on forest land, land owned by public trusts or wakfs, or held by the custodian of enemy property. Not that such land are untouchable but there are compliances to be fulfilled and permissions to be obtained. There is great temptation to be lax about ancestral properties as the tenure of such properties is generally freehold. In such cases, too, one cannot let one´s guard down even if searches at the offices of Sub-Registrar of Assurances have not sprung up any red flag issues. A hiba or gift of immovable property under Muslim law is not required to be registered. Another encumbrance affecting immovable properties, which the aforesaid searches may not reveal, is the pre-emption right in favour of all other co-inheritors granted under the Hindu Succession Act, 1956. Rental agreements Moving on to the other essential role of the manager - ensuring that rental or lease agreements are valid and enforceable - the challenges are just as acute as those of title verification. Tenancies in most states are historically protected under the individual state legislation. In case the grounds set out in these legislation are met, the occupant of any premises can claim to be a statutory tenant. Eviction of a statutory tenant from the premises by the owner or landlord is strictly governed by applicable laws and is possible only in the limited contingencies spelt out therein. Landlords or owners in Maharashtra, therefore, let out their property on leave-and-license basis, giving the occupant nothing more than a bare permission to use the premises on the terms and conditions detailed in the Leave and License Agreement. Even non-registration of such agreements can result in the licensee claiming to be a statutory tenant. The Maharashtra Rent Control Act, 1999 (MRCA) is uniformly applicable to all premises, whether commercial or residential, whether housed in new buildings or old and cessed structures, and even if the rental amount runs into several thousands as against the Tamil Nadu Buildings (Lease and Rent Control) Act, 1960, which provides for suitable exemptions in each one of such cases. With regard to enforceability and the correct forum for resolution of disputes, there is no straitjacket formula. Interestingly, the Apex Court has ruled that an arbitration clause in a Leave and License Agreement with respect to disputes regarding eviction and rent is not tenable and the matter, if the premises are situated in Mumbai or Maharashtra, can be entertained only by Small Causes Court or the forum mentioned in MRCA. Given that at least 80 per cent of the assets of REITS ought to be invested in completed and rent-generating properties, the legalese ´Caveat Emptor´ must find its way into a manager´s dictionary. About the Authors: With over 19 years of experience, Rupali Sharma is a Senior Partner at Kochhar & Co, Mumbai and Divya Malcolm is a Senior Associate in the company. To share your legal perspective, write in at feedback@ASAPPmedia.com