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Land owners may have a piece of land that has the potential to generate huge monetary benefits. However, it may happen that they do not have the required finances or the know-how or both, to carry out large-scale development. Developers, on the other hand, may have the cash flow and the know-how of real estate development but may not be in possession of land in prime locations.
This situation provides the landlords, as well as the developer community, with an opportunity to join hands and enter into joint development agreements (JDAs) that are beneficial to both parties.
What is a joint development agreement (JDA)?
A JDA is a legal contract that allows land owners and developers to come together, for the purpose of developing land. At present, JDA is a common form of property development in India across sectors.
In this arrangement, the landlord would provide the land and the entire responsibility of carrying out the development of the property will lie with the developers. This includes getting all the necessary approvals for future development and marketing the project. The landlord can either ask for a specific share in the sales revenue, under what is known as a revenue-sharing JDA, or claim a certain portion of the developed area, under an area-sharing JDA. This will depend on the terms and conditions in the JDA.
See also: What is a tripartite agreement and how does it work?
Capital gains tax on joint development agreement
Under sub-section (5A) in Section 45 of the Income Tax (IT) Act, in case of an individual or a Hindu undivided family (HUF) that enters into a specified agreement for development of a project, capital gains tax liability arises on income of the previous year in which the certificate of completion for the whole or part of the project is issued by the competent authority.
The stamp duty value of the land owner’s share in the project, on the date of issuing of the said certificate of completion, will be deemed to be the value of the consideration received or accruing, as a result of the transfer of the capital asset.
Note here that the sale of development rights under the JDA is not taxable under the Goods and Services Tax (GST) regime.
Can builders sell the properties developed under JDA?
It is important to understand here that the partnership between the two parties is restricted only till the project’s development and the JDA does not allow the builder to sell properties on his own. This is because Section 53A (which deals with part-performance of a contract) of the Transfer of Property Act, 1882, stipulates that developers cannot be the transferee or the buyer of the development work under the JDA.
To make this happen, the landlord will have to assign the right to the builder to sell the property, by signing a general power of attorney (GPA) agreement. Basically, the builder can only sell the units in such projects on behalf of the land owner. Even then, it would be the landlord who would grant the conveyance deed in favour of the buyers.
Both the documents – the JDA and the GPA – must be registered, for the contract to become legal.
Advantages of joint development agreements
A JDA offers several benefits to both parties, as long as they continue to cooperate with each other. Here, communication and paperwork play a crucial role. The terms and conditions in the JDA must categorically elucidate the rights and responsibilities of the builder and the landlord. Since entering into such agreements mean you are in there for a long haul, consistent and clear communication between the contracting parties remains key. In case any issues arise pertaining to these two aspects, it might not take long for the entire deal to get sour and consequently stuck.
Is GST applicable on development agreement?
GST is not applicable on joint development agreements.
How does a joint development agreement work?
A JDA is an arrangement, where the land is contributed by the land owner, while the development of the land, obtaining approvals and marketing of the project is done by the developer.