All you need to know about a Tripartite Agreement

This article is authored by Nidhi Bajaj, of Guru Nanak Dev University, Amritsar, Punjab. The article provides an analysis of the tripartite agreement which is one of the most important legal documents involved in the home buying process.

Table of Contents

Introduction

The term ‘tripartite’ means involving three parties or between three parties. In the real estate industry, a tripartite agreement refers to an agreement between the buyer, the seller, and the lender/financial institution in case the buyer takes a loan to buy a house in an under-construction project.

A tripartite agreement is one of the most important legal documents involved in the home buying process. A plethora of questions may arise as to ‘What is a tripartite agreement?’, ‘Who are the parties to such an agreement?’, ‘What does the tripartite agreement include?’, ‘What are its advantages?’, and so on and so forth. This article will focus on answering all these questions, among others.

What is a Tripartite Agreement

A tripartite agreement becomes necessary when a buyer opts for a loan to buy a house in an under-construction project. For example, if you have planned to purchase a property that is still under construction and for that purpose, you avail a home loan from a bank, then you(i.e. the buyer), the seller, and the bank shall enter into an agreement specifying the various terms and conditions of the transaction including the course to be taken in case of any contingency or default. Since there are three parties involved, the agreement is called a tripartite agreement.

A tripartite agreement sets out the terms and conditions of a property deal when a third party, namely a lender/financial institution is also involved.

Parties to a Tripartite Agreement

A tripartite agreement is a legal document involving three parties:

1. The person willing to buy the property i.e. the buyer;
2. The person willing to sell the property i.e. the seller, builder or developer; and
3. The institution granting the loan i.e. the bank/financial institution.

Objective behind a Tripartite Agreement

• Tripartite agreements assist the buyers with obtaining loans for properties against a planned purchase of a property.
• As the house is not in the name of the buyer until the possession, the developer is also made a party to the agreement. This protects the interests of the home buyers.
• The tripartite agreement clarifies the status of all the parties involved in the real estate transaction.
• The tripartite agreement also includes the legal process which defines how, when and to whom various agreements in the property are transferred between the parties. This is called subordination. For example, in case of death of buyer/borrower, the builder may have the first right to lien for what is rightfully owed to him, and then the bank would retain a lien on remaining assets.
• The agreement affirms that in case the borrower fails to pay back the loan, then the property will be transferred to the lender and the builder must accept the lender as the new owner.
• The tripartite agreement seeks to avoid any future conflicts.

Details to be included in a Tripartite Agreement

Cases/transactions where a Tripartite Agreement may be required

In case of the following circumstances or transactions, it will be useful for the parties to enter into a tripartite agreement:

• At the time of selling the flat, that is a part of a registered society: In such a case, it becomes necessary for the buyer, seller, and society to enter into a tripartite agreement. It shows that society has no objection to the transfer of that flat.
• When there is any charge or encumbrance on any property, such as a mortgage, in that case also a tripartite agreement may become necessary.

Tripartite Agreement in case of leased property

In the context of leased property, the tripartite agreement involves the following parties:

1. The owner of the property,
2. The lender, who has lent the property, and
3. The tenant, who occupies the property.

The agreement says that in case the owner fails to pay the loan, then the lender shall become the new owner of the property and the tenant has no choice but to accept the lender as the new owner. However, it is pertinent to note that the new owner cannot change the terms of the lease.

What are the benefits of including a third party in the agreement

The inclusion of a third party who is indirectly related to the transaction in the tripartite agreement is beneficial in the following ways:

• The third party cannot, later on, say that he was unaware of the transaction.
• The legal heirs of the third party cannot challenge the transaction.
• It convinces the bank about the genuineness of the transaction and therefore assists the buyer in securing a home loan for a planned purchase of the property.
• It is likely that the borrower/buyer would not be willing to pay the builder/developer/seller unless the whole construction work is completed in accordance with agreed quality standards. However, the builder has to pay the subcontractors, the architects, the electricians, etc. There is thus, a risk that the buyer might not pay or refuse to pay due to any reason. In such circumstances, the builder must have a safety net in order to claim the costs and money that he owes to subcontractors, electricians. This safety net is provided by the tripartite agreement. In the event of non-payment, the builder can claim a construction lien on the property.

Other uses of a Tripartite Agreement

A tripartite agreement may also include the architect, contractor, and designer within its scope. This is called a ‘no-fault arrangement’ wherein all the parties undertake to remedy their mistakes or omissions and agree not to hold any other party liable for any omissions or errors made in good faith.

Advantages of a Tripartite Agreement

• A tripartite agreement helps in applying for home loans.
• It facilitates the lender/bank in doing the legal checks before investing in a property.
• The agreement includes all the details of the transaction (mentioned above) and restricts the developer from entering into a purchase deal of the same property with another buyer.

Word of caution

A tripartite agreement involves three parties and focusses on protecting and balancing the interests of the buyer, builder and the lender. Since a lending institution is also involved in the agreement, the terms and conditions mentioned therein might be too complex for a buyer. Hence, it is recommended that you take help from a legal expert in this regard. This will ensure the protection of your interest as a buyer in case of any future disputes etc.

Sample Tripartite Agreement (important clauses)

TRIPARTITE AGREEMENT

This Tripartite Agreement (“Agreement”) is made and executed at the (Place) and on (Date),

(1) The buyer, whose name, address and other details are mentioned in Schedule I hereunder (hereinafter referred to as the “Buyer”, which term shall, unless repugnant to the subject, context or meaning thereof, include its/his/her/their successor(s), heir(s) and permitted assign(s)) of the First Part;

(2) The builder, whose name, address and other details are mentioned in Schedule I hereunder (hereinafter referred to as the “Builder”, which term shall, unless repugnant to the subject, context or meaning thereof, include its successor(s), heir(s) and permitted assigns) of the Second Part;

(3) M/s. A & B Finance Limited, a company under the Companies Act, 2013, having its registered office at XYZ and having Corporate Identity Number: ……….. (hereinafter referred to as the “Lender”, which term shall, unless repugnant to the subject, context or meaning thereof, include its successors and assigns) of the Third Part.

Each party shall hereinafter be individually referred to as the “Party” and collectively as the “Parties‟.

1. The Builder is engaged in the business of developing real estate projects and is developing the project on the said land more particularly mentioned in Schedule II hereunder.
2. On being satisfied with regard to the integrity and capability of the Builder for the timely completion of the Project, the buyer has entered into an agreement with the Builder (Builder-Buyer Agreement) for sale of the unit/flat as described in Schedule II hereunder in favour of the Buyer at a total sale consideration mentioned in the Schedule I hereunder (“Sale Consideration”).
3. The Buyer has approached the Lender for a loan up to the amount mentioned in Schedule I hereunder for the purpose of purchasing the flat. The lender has agreed to sanction the same subject to, inter alia, creation of first-ranking charge(s)/lien(s)/mortgage(s)/encumbrance(s) over the unit/flat (including all receivables therefrom/relating thereto) by the Buyer exclusively in favour of the Lender and on the terms and conditions mentioned in loan documents.

The parties agree as follows:

DISBURSEMENT OF LOAN

Subject to the provisions of this Agreement and the Loan Documents, the Parties agree that the Loan (subject to deductions, if any) may be disbursed in full or in such tranches as deemed fit by the Lender upon, inter alia, receipt of any intimation from the Builder to whom the Loan(or any part thereof) is to be disbursed on behalf of the Buyer towards the Sale Consideration of the unit/flat.

OBLIGATIONS OF THE PARTIES

1. The Buyer(s) undertake(s) to make payment of the buyer’s contribution (as specified in Schedule I hereunder) (which forms part of the Sale Consideration) directly to the Builder from the buyer’s own funds prior to disbursement of Loan or any part thereof by the Lender and shall provide satisfactory documentary evidence to the Lender in this regard.
2. The buyer undertakes sole liability to pay the sale consideration and any other amounts that may be there as per the provisions of the Builder-Buyer Agreement. The same shall not be the liability of the lender.
3. The buyer shall not take possession of the flat without the written permission of the lender and the builder shall not offer possession of the flat to the buyer or his agents before the execution and registration of the sale deed in favour of the buyer.
4. The buyer has created/shall create mortgage/charge/encumbrance/lien over the unit/flat (including all receivables therefrom/relating thereto) exclusively in favour of the Lender.
5. The Builder has granted its consent for, and hereby acknowledge, such mortgage/charge/encumbrance/lien by the Buyer exclusively in favour of the Lender.
6. The Builder hereby undertakes or confirms :

1. All approvals, permissions and clearances pertaining to the Project and the land have been taken as per the law from the concerned authorities.
2. The builder shall construct the property in accordance with the plan approved by the authorities.
3. To complete the construction of the Project and deliver the possession of the flat as per the agreed timeline.
4. The builder shall from time to time provide the information relating to the progress of construction to the Lender.
5. That there is no litigation pending with regard to the flat or land.
6. That there is no lien/encumbrance/negative lien/charge/mortgage over the flat (except in favour of the Lender) and all approvals/no-objection certificates have been obtained by the Builder for sale of the flat and for creation of encumbrance/mortgage/charge/lien over the flat (including all receivables therefrom/relating thereto) by the Buyer in favour of the Lender.
7. All original documents relating to the flat (including allotment letter), the Builder-Buyer Agreement, sale deed or another similar/relevant deed, as the case may be, in favour of the Buyer shall forthwith be handed over to the Lender only. The buyer also irrevocably authorises and agrees to such handing over.
8. The Builder shall inform the Lender in writing at least a week in advance regarding the time, date and venue of registration of the sale deed in favour of the buyer. The Buyer shall ensure that applicable stamp duty and registration/statutory charges are paid on all such documents and the Buyer.
9. The Buyer(s) and/or the Builder(s) undertake to the Lender that it/he/she/they shall promptly execute such additional documents as may be required by the Lender relating to the matters of this Agreement.

1. The Lender is entitled to instruct the Builder to cancel the allotment/sale in favour of the Buyer for any reason whatsoever including due to breach/default by the Buyer under this Agreement and/or the Loan Documents.
2. The Buyer is entitled to cancel the allotment/sale of the flat/unit only with the prior written approval of the Lender.
3. In case of cancellation of the allotment/sale in favour of the Buyer for any reason whatsoever, the Lender shall be entitled to, inter alia, instruct the Builder to allot/sell the flat/Unit in favour of any other person(s) of the Lender’s choice(“New Buyer”) and the Sale Consideration will remain the same (which shall be payable by the New Buyer to the Builder.
4. The Buyer undertakes to pay back the loan and all amounts payable to the Lender as per the provisions of the Loan Documents irrespective of, the stage of construction of the Project; any delay in handing over the possession; cancellation of allotment/sale in favour of the Buyer for any reason whatsoever and any dispute/ difference between any of the Parties.
5. The Lender is not and shall not be construed as a promoter or co-developer of the Project and/ or is not guaranteeing the construction or development of the Project/Unit or completion thereof in any manner.
6. The Builder shall solely be liable and responsible for the completion of construction and/or development of the Project/Unit.
7. All the parties undertake to comply with all applicable laws with respect to the subject matter of this Agreement.
8. In case of any default or breach by the builder under this agreement, the Builder shall forthwith indemnify the Lender.
9. In case of any default or breach by the buyer under this agreement, the Buyer shall forthwith indemnify the Lender.

REPRESENTATIONS AND WARRANTIES

The Builder and the Buyer hereby make the following representations and warranties to the Lender:

1. that they have the power and authority to enter into this Agreement and the performance of the respective obligations mentioned in this Agreement do not and will not conflict with any applicable laws, rules or regulations.

NOTICE

Any communication and/or document(s) to be made or delivered under or in connection with or pursuant to the Agreement and/or applicable laws shall be made or delivered, unless otherwise stated, by fax, email, and physical letter/document or in any other electronic/digital form.

GOVERNING LAW AND DISPUTE RESOLUTION

This Agreement shall be governed by laws of India and the courts at (Place) shall have exclusive jurisdiction relating to any matter/issue under or pursuant to the Agreement.

MISCELLANEOUS

1. The Lender’s decision shall be final and binding with regard to any matter or thing not specifically covered under this Agreement.
2. Nothing in this Agreement shall adversely affect the provisions of the Loan Documents including the rights, claims, remedies and/or interests of the Lender.
3. If, at any time, any provision of the Agreement is or becomes illegal, invalid or unenforceable in any respect under any law of any jurisdiction, neither the legality, validity or enforceability of the remaining provisions nor the legality, validity or enforceability of such provision under the law of any other jurisdiction will in any way be affected or impaired.

1. Date and Place of agreement
2. Details of buyer
3. Details of builder
4. Builder-Buyer Agreement
5. Sale Consideration
6. Buyer’s Contribution
7. Loan

(Give a detailed description of the property/unit/flat)

WITNESS WHEREOF the Parties have signed this Agreement on the date mentioned hereinabove.

Note: The sample agreement provided above only covers the most important clauses and is not a detailed version of the tripartite agreement.

Conclusion

If you are planning to take a housing loan for purchasing any under-development property, it will be beneficial for you to enter into a tripartite agreement. While the property is in the development phase, you will not acquire its ownership and for that reason, the builder/developer is made a party to the agreement. These agreements become particularly useful when funds are loaned for a property that has not yet been built and helps in avoiding any future conflicts that may arise out of conflicting claims, say, in the event of default of the buyer or in case of his death during construction.

References

• https://www.nobroker.in/blog/tripartite-agreement/
• https://www.homeonline.com/home-buying-guide/articles/all-you-need-to-know-about-tripartite-agreement/
• https://www.remi.edu.in/blog/what-is-a-tripartite-agreement/
• https://www.investopedia.com/terms/t/tri-party-agreement.asp
• https://www.commonfloor.com/guide/everything-you-need-to-know-about-tripartite-agreement-57297
• https://housing.com/news/how-do-tripartite-agreements-work/
• https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.indiabullshomeloans.com/uploads/downloads/model-tripartite-agreement-non-subvention-with-builder-society-0012418001580303269.pdf&ved=2ahUKEwi6sLTU0fr1AhUbS2wGHdTGD-8QFnoECAUQAQ&usg=AOvVaw0rlNgNsh-t8PN9dqqJ5p_T

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.