Joint Development Agreement – A Checklist Before Signing The Agreement

Published on: 2017/08/31

Meera Siva, CFA, Director, RaNa Investment Advisors, India

Abstract

Those with older homes typically enter into a joint development agreement with builders. Before signing, there are a few points to consider.

Interest Category

Joint development agreement, home development agreement

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The real estate industry has seen a huge growth in all parts of India over the past decade. For a landowner, constructing a building is a big problem that involves many issues which needs an experienced hand. A landowner must consider many factors like getting approval, finding a surveyor, building codes, registration, tax laws, etc.

A builder, on the other hand, cannot invest all the money in purchasing lands, given the soaring real estate costs. In order to ease this process, a landowner and a builder enter into a joint development agreement.

What is a joint development agreement?

This is the agreement between landowner and builder before constructing a building. For example, if you own a land and you plan to construct an apartment there, by approaching a builder. With the help of a joint development agreement, the landowner need not sell his land and the builder need not buy the land.

There are conditions in the agreement about the purchase and consideration that would protect the interest of both the landowner and the builder. On entering a joint development agreement, the builder deposits a lump sum to the landowner as a refundable security deposit.

With a joint development agreement, the consideration for the landowner can be either monetary or non-monetary. Monetary consideration is where the builder shares a percentage of sale consideration with the landowner as that he collects from his customers. In the case of non-monetary consideration, the builder shares a percentage of build up area with the landowner.

What are the advantages of a joint development agreement?

For the landowner:

The landowner need not undergo the tough process of getting approval, which will be taken care of by the builder.
If the residential land is located in a developing area, the landowner has an advantage of selecting the best builder. This helps him to get the best quality.

For the builder:

The builder need not invest heavily in land. The builder can use the funds for construction and approval
The builder can obtain a loan from banks by pledging the land.

Joint development agreement – Tax implications

For a landowner, the proceeds of the joint development agreement are treated as capital gains. For a builder, it is treated as a business income.

Capital gains from transfer of property is governed by Transfer of Property Act, 1882. (TOPA). According to Section 53A of TOPA, for a JDA to be legally enforceable, it has to fulfil certain conditions.