Tripartite Agreement

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Tripartite Agreement

A tripartite agreement is a legal contract between a property buyer, bank, and seller. These agreements are used when a buyer applies for a home loan for an under-construction project. The buyer in such cases has already decided on the property to be purchased and requires a loan for it. As the buyer does not have possession of the property, the builder becomes a party to the agreement. In the leasing industry, such agreements are made between the lender, borrower and tenant. If the borrower defaults in payment of the loan, the ownership transfers to the lender. The new owner, however, cannot change any of the existing clauses in the agreement and the builder has to accept the new owner. As three parties are involved in this agreement it is known as a tripartite agreement. It is important for the developer in such agreements to have a clear title to the property.

Who Takes the Tripartite Agreement – People Involved

A tripartite agreement is usually entered into between a buyer, seller and a bank when the buyer intends to take a loan for an under-construction property. As the buyer does not have possession of the property, hence the builder’s name has to be part of the agreement. In the event of default by the buyer, the title of the property transfer to the bank.

Purpose of the Tripartite Agreement – Why Do You Need It

A tripartite agreement is required when a property buyer wants to buy an under-construction property. If the property were complete, then it would be a bipartite agreement between the borrower and the lender. As the borrower does not have possession of the property, hence the builder’s name has to be incorporated in the agreement making it a tripartite agreement.

A tripartite agreement is important from the point of view of the developer or seller as in the event the buyer or borrower defaults in payment of the loan to the lender, then the lender becomes the owner of the bank. The interest of the seller or developer is protected through this agreement.

The rights, duties, and liabilities of all three parties to the agreement are clearly stated. This agreement helps the bank keep a detailed record of all the transactions between the buyer and the seller.

The agreement should be made according to the laws of the state in which the property is located so that in the event of a breach of contract appropriate action can be taken. The agreement, therefore, should bear the registration stamp of the concerned state along with details of the property and original title deed.

Contents of the Tripartite Agreement – Inclusions

Being a tripartite agreement, the agreement should include the names of the three parties to the agreement.

It should also include:

  • Effective date of the agreement: The date on which the agreement is being entered
  • Location of the property: The exact address of the property under construction should also form part of the agreement
  • Title Deeds: The details relating to the original title deeds of the property under construction should be mentioned in the agreement
  • Loan Amount: The amount of loan being sanctioned to the borrower should be mentioned
  • Interest Amount: The percentage of interest being levied on the loan and the total interest charged to the borrower should be mentioned along with the equated monthly installments
  • Rights, duties, responsibilities: The rights, duties and responsibilities of the three parties to the agreement namely the buyer, seller, and bank should be mentioned in the agreement
  • Due date of repayment: The due dates of repayment of the loan with a detailed loan payment schedule should be part of the agreement
  • Agreed selling price: The price at which the developer has agreed to sell the property should be mentioned in the agreement
  • Purpose of the agreement: It should be clearly stated that the agreement is to facilitate the purchase of an under-construction property by the borrower
  • Date of possession: The date on which the developer will hand over the possession of the property to the buyer should be mentioned
  • Stages of construction: The deadline for the various stages of construction should be stated

How to Draft the Tripartite Agreement  Points to Consider While Preparing the Tripartite Agreement

While drafting the tripartite agreement, the following points should be kept in mind:

  • Parties to the agreement: The names of the parties to the agreement and the relationship between them
  • Objective: The objective of the agreement which would be a loan for purchase of an under-construction property
  • The title deeds to the property: The property in concern should have a clear title without any pending litigation
  • Address of the property: The exact location of the property needs to be stated
  • Property price: The price of the property as stated by the developer should be mentioned
  • Rights and remedies: The rights and remedies of the three parties to the agreement should be clearly stated
  • Borrower’s perspective: The borrower is entering into this agreement to get a loan for an under-construction property
  • Developer’s perspective: The developer is part of the agreement as this is an under construction property and the borrower does not have possession yet
  • Bank or lender’s perspective: The bank keeps an eye on the transactions taking place between the developer and borrower.
  • Penalties: If the booking is cancelled, the penalty to be imposed on the borrower
  • Agreed amenities: The amenities to be provided by the developer when the construction is complete

Negotiation Strategy

When entering into a tripartite agreement, the buyer should negotiate the price of the under-construction plot with the developer. The buyer should also try to get the best terms, the maximum limit and competitive interest rate from the bank for the loan. The duration of the loan should also be negotiated.

[Also Read: Loan Agreement]

Benefits & Drawbacks of the Tripartite Agreement

The benefits of a tripartite agreement are as follows:

  • Buyer/Borrower: The borrower cannot take a loan for an under-construction property unless they go for this agreement with the developer as a party to the agreement.
  • Favorable loan terms: The borrower can negotiate favorable terms for the loan from the lender for purchasing the property in terms of term of the loan, the interest rate as well as the upper limit of the loan.
  • Security: The lender or bank is the security for the developer as in the event of default by the borrower, the bank becomes the owner of the property and the developer is assured of getting full payment for the property
  • Lender: The lender can keep a tab on the transactions between the borrower and developer. If there is any delay from the borrower, they can serve a warning to the borrower.

The drawbacks of a tripartite agreement are given below:

  • Transfer of ownership: The buyer has to be very careful with regard to the payment schedule, which is monitored by the bank. If there is any deviation from the schedule like delay in payment or default, the ownership of the property transfers from the borrower to the bank
  • New owner: The developer has no choice but accept the bank as the new owner

What Happens in Case of Violation of the Tripartite Agreement

A tripartite agreement is a legal contract between three parties, the buyer, the lender, and the developer. The agreement defines the rights and responsibilities of all three parties.

It is the duty of the borrower to ensure that the loan along with principal and interest is repaid according to the payment schedule. The agreement clearly states that in the event of default in repayment of the loan by the borrower, the ownership will transfer to the bank. So, for the borrower, violation of his or her rights and responsibilities will result in loss of ownership of the property.

In the case of the developer, it is the duty of the developer to ensure that the title to the property being sold to the buyer is free of any encumbrances. If there is a misrepresentation of facts by the developer, then the developer will be reported to the regulatory body and will be penalized according to the particular laws of the state. The developer might have to pay a hefty fine or in extreme case lose the license to develop the property.

If any clause of the agreement which is prepared in accordance with the applicable laws of the state, then the agreement itself will be null and void

A tripartite agreement is important when you want to buy an under-construction property. As the property is under construction and you don’t have possession of it, the developer has to be incorporated into the agreement. The other party to the agreement is the bank.

You will have to ensure that the title to the property being sold by the developer is clear. The original papers relating to the property need to be provided when you apply for a loan from the bank.

You need to interact with the bank to negotiate the best rate of interest, tenure of the loan as well as the maximum limit of the loan.

The agreement has to be prepared in accordance with the applicable laws of the state in which the property is located.

If the property in question has a clear title and the price offered by the developer for the under-construction property is according to market rate, then it makes sense to enter into this agreement.