Tri-party agreement – How does it work?

A tri-party agreement is a contract among three parties. In the context of home or condo construction, it’s used to secure bridge loans for the construction phase. This agreement includes the buyer, the lender, and the builder. 

For instance, in India, if someone buys a new flat in an under-construction project, a tri-party agreement is made to get a loan. The loan helps to pay for the home until it’s complete. The buyer promises to repay the loan. The lender gives the loan. 

The builder uses the loan to build the home. The agreement helps everyone know their duties.

You may also like: Stock Lending and Borrowing [Explained]

What is a tri-party agreement?

Tri-party agreements lay down the rules between three parties if something goes wrong.

These agreements are especially used when loaning money for a property that’s not yet built. They help settle any disputes over the property if the borrower, usually the future homeowner, can’t repay the loan or passes away during construction.

For instance, the borrower wouldn’t want to pay the builder until the work is done to ensure good quality and timely completion. But this puts the builder at risk of not getting paid after finishing the work, while still owing money to others like plumbers and electricians.

If this happens, the builder can claim a construction lien on the property, meaning they have a right to take over the property if they’re not paid. At the same time, the bank also has a claim on the property if the borrower can’t pay back the loan.

For Example, suppose a builder, say Tata Housing, is building a home for a borrower. The borrower doesn’t pay Tata Housing until the work is done, but after finishing the work, the borrower faces financial issues and can’t pay. Now, Tata Housing can claim a construction lien to recover their dues, but the bank that loaned money to the borrower also has a claim.

A tri-party agreement helps settle these claims, ensuring everyone’s interests are looked after.

How does a tri-party agreement work?

A tri-party agreement brings together three parties:, the borrower, the lender, and the builder. This agreement lays down the rights and actions of each party. It outlines the construction steps, the final cost, when the possession date, and the interest rate with the payment plan for the loan. It also mentions a legal term called subrogation, deciding who, how, and when the property securities are moved between the parties.

Also Read: Interest rate risk – Meaning and risk management strategies.

Useful circumstances for a tri-party agreement

A tri-party agreement becomes crucial in various scenarios.

• During the sale of a property with a registered society, a tripartite agreement is formed between the seller, buyer, and the society.
• If a property bought from a builder is being resold, and a society hasn’t been formed yet, a tri-party agreement is helpful between the builder, buyer, and seller.
• In instances of encroachment on a property, be it land, home, or farm, a tripartite agreement helps in laying down legal obligations.
• When a registered society agrees to a sale and purchase of a property, a tri-party agreement is useful, ensuring no objections to the transfer of the flat and subsequent change in ownership.
• In cases where a builder is made a third party responsible for forming a new society, finding a new buyer, or constructing a new apartment, a tri-party agreement is used for managing third-party payments.

Property Deal Requiring a tri-party Agreement

• Necessary when an owner sells a flat or apartment in a registered society.
• Parties must obtain permission before proceeding with the sale.
• Essential if the developer sold the flat without informing the society committee member.
• Involves builder, buyer, and seller during the sale of flats in a registered society.
• Bank of Baroda specifies a format including buyer, seller, and bank, especially for flats bought from a developer in a housing project without a formed registered society.
• Each bank, like the State Bank of India (SBI), has its unique tri-party agreement format available for download on its website.

Advantages of tri-party Agreement

• Ensures transparency in transactions.
• Third party can’t claim unawareness of the transaction.
• Legal heirs and successors can’t challenge the transaction.
• Banks and financial institutions are more willing for loan selection when assured of the transaction’s authenticity.
• Confirms no arrears owed by the seller to a third party.
• It is easier for banks and financial institutions to provide housing and other loans with a submitted tripartite agreement.

Infographic: Advantages of Tri-party Agreement

Also Read: Risk management in stock market

Tri-party agreement tips

Below are the steps to follow to protect yourself from tri-party agreements.

1. Know the agreement’s aim

A Tri-party agreement is a legal paper involving three parties, often used in real estate with a builder, buyer, and seller. Knowing its aim is crucial before signing.

2. Check its legality

Make sure the agreement is legal and follows Indian laws. Services like NoBroker can help in verifying its legality.

3. Review confidentiality clause

Check the tripartite agreement for a confidentiality clause to ensure all parties keep the agreement’s terms private.

4. Check terms and conditions

Go through the agreement’s terms and conditions thoroughly, ensuring all parties agree to them.

5. Look for dispute resolution

Make sure there’s a way to solve disputes in the agreement to avoid future legal issues.

Conclusion

Entering a tri-party agreement is wise if opting for a housing loan to buy an under-construction property. This agreement includes you, the lender, and the builder.

Until the property’s completion, the builder holds its ownership. This setup is vital for properties still under construction, securing loans for them. The agreement prevents future disputes arising from conflicting claims, like if the buyer defaults or dies during construction.