Overview

Often during registration and purchase of properties, buyers come across the word MoU or Memorandum of Understanding. One of the frequent questions asked includes what is an MoU and how it differs from an Agreement. A memorandum of understanding can be thought of as a statement of intention agreed upon by parties in order to take a particular action or work towards a common goal. MoU is often thought of as a guideline for future transactions and is non-binding in nature. In case the MoU does not state any guidelines clearly without creating any binding effect, then such regulations cannot be enforced on either parties. In such cases, these statements can be considered to be just guidelines meant to encourage future transactions. However, this is just a way for the two parties to reach a decision and does not grant either parties any specific rights. In cases where it is more convenient to go with a simple non restrictive document, it is seems more sensible and less risky to go with a softer document instead of a tight legal document like an agreement. MoUs are especially useful in those cases where the final agreement is dependent on the fulfillment of certain conditions.

MoU is often used in case of real estate deals. Suppose you plan to purchase a house but do not have ready cash in hand. At such times, you could make a small advance payment and draw a MoU highlighting the terms and conditions of MoU and expected sale. In such cases, the seller might also include a clause mentioning that the agreement will become void in case he/she doesn't receive complete payment by the end of an agreed duration. After this time, he /she could refund the booking amount and cancel the booking. The house could then be sold to another buyer.
Situations in which an MoU can be drawn

    To state an intention to buy/sell a property.
    To state the payment that needs to be made for purchase or sale of a property.
    To outline the schedule for payment.

Mistakes made when drawing MoU

    Missing the specifics- Suppose you draw an MoU to redevelop your house. Ensure that you mention a stipulation highlighting that the builder cannot demolish the building. This will ensure clear understanding between both parties involved.
    Exclusion of a termination clause- Suppose you plan to terminate the MoU after registration of an agreement, then this should be explicitly mentioned in the MoU. Even though an MoU is not legally binding, the absence of a condition could lead to higher risk of litigation.

Differences between Agreement and Memorandum of Understanding (MoU)

Some differences between Agreement and MoU are listed below:

    1. An agreement can be legally enforced while an MoU cannot be legally enforced.
    2. An agreement is the final, binding document that highlights the terms and conditions of the deal while an MoU should clearly state the intention of the document and mention the details of a later agreement that shall be drawn.
    3. An agreement is binding in all cases while a MoU is not generally binding. It becomes binding in those cases when it is drawn for some monetary reasons or exchange. Note that a MoU cannot be made binding by just mentioning the word 'binding' in the document.
    An agreement grants rights to the parties involved while MoU does not grant any rights but just states the intention of the parties involved.

Differences between Agreement and Memorandum of Understanding (MoU)

Joint development is a popular method of development of property. Here, an owner of a site and a developer come together to enter into an arrangement to develop a property jointly.

In case the owner of a site decides to develop the property on his own, he will have to arrange for funds, look for a builder, monitor the construction and go through all the associated formalities. The cost of land constitutes a major portion in the cost of development. It is difficult to get finance for the entire cost of a site. An owner has to block a lot of his own funds before he can get any returns.

The option of joint development saves on all these requirements for both the parties. The practice is being followed both by small and large builders without exception. The builder and the owner of the site develop the property on a joint venture basis. The land owner enters into a joint development agreement with a builder. The land is provided by the owner. The builder constructs the flats.

A certain percentage of the area is earmarked for the owner of the site. The owner is entitled to dispose off the constructed property delivered to him under the joint development agreement. The owner may also decide to retain his share of the builtup area, or may sell it off at a later stage without any involvement of the builder. The other flats are sold by the builder directly.

This way, it suits the needs of both the parties. The owner of the site does not have to get into the trouble of constructing the property, nor has he to arrange for funds for construction. At the same time, the builder gets access to land and does not have to raise money for purchase of land. The builder need not block his funds and in fact can use his resources for a number of projects simultaneously. A site owner usually gets 30 to 40 percent share and the balance goes to the builder.

The exact percentage depends on the terms of the agreement. As a procedural aspect, a site owner has to execute an irrevocable general power of attorney (GPA) in favour of the builder. The GPA should be registered on appropriate value stamp paper with the authorities concerned (registrar) in order to be legally binding on both parties. The stamp duty payable for this kind of GPA given to the builder under a joint development agreement is Rs 1,000. This may vary from State to State. After this, the parties enter into a joint development agreement.

The builder then proceeds with the construction of the flats after getting the necessary approvals. In case there is a breach of contract on the part of the builder, either financially or otherwise, the site owner has a right to revoke the GPA. The owner needs to take measures to protect the property till the project is completed and handed over to him.

Once the plan is approved, the owner should get an allocation agreement done recording the constructed area which comprises his share and the area going to the developer. Once the building is ready and the allocation agreement is done, it is better that a deed of declaration is executed recording the constructed area, which would reflect the area constructed for the site owner under the joint development agreement.

Name : ROHIT DALMIA

Law Firm Name : ADVOCATE ROHIT DALMIA & ASSOCIATES

Country : India

City : Mumbai

State : MAHARASHTRA