Builder NOC – 11 Important Points to Check

Builder NOC is one of the must crucial document for direct transfer of under construction property. Normally, Builder NOC is a standard format by a builder. As i keep highlighting that there is no concept of standard format except for legal and govt issued forms/documents. As i promised in my previous post, Direct Transfer of Under Construction Property to dedicate a post on Builder NOC. This NOC is also referred as a Resale NOC. As i explained in my previous post that buyers should prefer tri-party agreement instead of bi-party agreement with the seller based on builder NOC. If the situation demands and builder/seller is adamant then in that case buyer has to be extra cautious. The entire transaction rests on Builder NOC. In this post, i will highlight 11 imp points which a buyer should check in Builder NOC to avoid any future hassle.

Builder NOC – Imp Points

1. Check the Authenticity: Before a buyer act on Builder’s NOC, it is imp to check the authenticity of the same. In many cases, i observed that Builder NOC is on a plain paper. The builder NOC should be on the official letterhead of the builder. The best way to check is with the builder only. You may visit his office to check the authenticity.

2. Authorized Signatory: An “authorized signatory” is a mockery in India. In one of the builder NOC, i observed that it is signed by front desk executive. Any NOC signed by an unauthorized person has no relevance or legal standing. Tomorrow builder may dispute that it is issued fraudulently by his ex-staff. If you have noticed, the employee churn is very high in real estate and any document signed by staff who is not authorized is null and void. A power of attorney is issued by the builder or his company in favor of an authorized signatory.

3. Latest NOC: Before executing transfer or assignment deed with the seller. You should check with the builder that the NOC is latest and last one issued to the seller. A seller may be in discussion with multiple buyers and can get multiple Builder NOC’s issued. In order to avoid any financial fraud or being duped, you may check recency of builder NOC. You can check with the seller whether he is in discussion with any more buyers. Also, check whether any other copy of builder NOC is issued besides the one shared with buyer. If yes, you should destroy all past builder NOC’s at the time of execution of assignment deed or sale agreement with the seller.

4. Conditional/Provisional NOC: In most of the cases NOC issued by the builder is either conditional or provisional in nature. In layman terms, builder NOC is valid subject to fulfillment of certain conditions. Though the NOC should not be conditional or provisional but it is not feasible in all the cases. A buyer should check all the conditions attached to NOC issued by the builder. It is important to clarify the same from both the seller and the builder.

5. Name and Address of the Buyer/s: Normally small builders issue white label NOC i.e. seller can handover the same to any buyer with whom the deal is finalized. To safeguard his/her interest, the buyer should insist on the inclusion of his Name, PAN and address in builder NOC. It is required to stop misuse of NOC. Also builder cannot give an excuse in future that he is not aware of the new buyer.

6. Payment Details: To avoid any confusion, Builder NOC should clearly mention the amount due to the builder. For example, the seller bought an apartment for 50 lacs from the builder. At the time of sale, an amount due to the builder by the seller is 25 lacs and he is selling the apartment for 75 lacs to the buyer. In this case, builder NOC should mention that amount due to the builder is 25 lacs. In sale agreement between the buyer and the seller, the buyer will mention that out of 75 lacs he will pay 50 lacs to the seller and 25 lacs directly to the builder. The payment terms and conditions are complex if the seller has running Home Loan. In the same scenario, if the seller has a home loan outstanding of 21 lacs then 75 lacs will be divided into 3 parts. The buyer will pay 25 lacs to the builder, 21 lacs to the sellers bank to close the home loan and 29 lacs directly to the seller. In almost all the cases, seller insists on paying 50 lacs directly to him and promising to close the home loan. I will not suggest this arrangement as the risk is much higher in case seller fail to clear home loan from the amount received from the buyer.

7. Transfer Fees: This is one of the contentious issues between the buyer and the seller. Builder NOC does not mention transfer fees though it is mentioned in the agreement between the builder and the seller. Builder NOC only mentions that all the terms and conditions of the original agreement will be complied by the new buyer. The transfer fees is normally Rs 200 psf but may go up to Rs 500 psf. Therefore, the buyer should clarify who will bear this cost and whether it will be paid to the builder or to the seller. Also, whether Transfer fees will be over and above consideration value or part of same.

8. Landowner’s share: The transaction is much more complex in case under construction property is of Landowner’s share. In this case, only builder NOC will not suffice depending on case to case basis. The payment terms and conditions will also change in certain cases. Therefore, a buyer should go through the builder’s agreement with the seller to understand the exact nature of the transaction.

9. VAT and Service tax: Based on my experience, this is another disputed area in case of transfer of under construction property. Normally, builders charge VAT and Service and don’t issue payment receipts. In this scenario, you should discuss with the seller whether VAT and Service Tax is paid or not. If it is paid then kindly include it in your agreement with the seller. In transfer cases, builder again raises VAT and Service Tax demand even if it is already paid by the seller.

10. Terms and Conditions of Existing Agreement: As i mentioned that buyer should carefully go through the terms and conditions of existing agreement. In many cases, the builder put a condition in existing agreement with the seller that some of the T&C’s will not be applicable in a case of transfer. The most common clause which is not applicable in the transfer case is, penalty payment in case of delay in under construction property. In short, the builder will not comply with penalty clause in case the original buyer sell or transfer the property. Similarly, there can be multiple clauses which may harm the interest of a new buyer. You may go through the same and insist on inclusion/relaxation of such clauses in Builder NOC.

11. Indemnity Bond: Last but not the least, the direct transfer of under construction property based on Builder NOC is riskier. Therefore, the buyer can safeguard his/her financial and legal interests by demanding indemnity bond from a seller. The terms and conditions of this indemnity bond may vary from case to case basis. Only builder NOC is not sufficient to close the transaction as entire risk is of a buyer. This indemnity bond can be notarized.

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