[ecis2016.org] What exactly leasehold property means and what are the implications of buying a property, or building a house, on leasehold land? We explain
Leasehold refers to a property tenure, where one party buys the right to occupy the property for a given length of time (30 to 99 years). In a leasehold land, the authority (usually, a government agency) remains the owner of the land and gives the land to builders, to develop apartment projects on a leasehold basis. Anyone who buys a residential flat, will own it only for the leasehold period.
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Leasehold property: Risks for home buyers in leasehold properties
It becomes important to understand the ownership of an apartment building on the leased land. The main disadvantage for a home buyer, is the uncertainty that arises after the lease period on the land ends and the renewal of the occupancy contract. This scenario usually comes up when the lease on the land is for shorter tenures of 30-33 years, which is commonplace especially in Mumbai. Along with the contract renewal, buyers will also have to bear other costs, such as property tax, etc.
Another issue that projects built on plots with shorter lease periods face, is of not receiving funds for construction. So, a significant delay or even non-completion of projects is a possibility. Additionally, redevelopment of such projects becomes problematic, since the consent of all the involved authorities is required, to carry out any repair or construction.
[ecis2016.org] Buying in a project on a leasehold plot: What you should know
While applying for a home loan for a property built on leasehold land, the home loan tenure cannot be higher than the balance period of the lease. In cases, when the lease period for the land is short or is nearing its end, lenders would be unwilling to risk the possibility of the lease not being renewed and therefore, may not grant a home loan.
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What is a leasehold property? Difference between leasehold and freehold property
| Leasehold property | Freehold property |
| A leasehold property means the property on the land is leased to the property buyer for a certain period, but the ownership belongs to the original owner (such as the government). | Freehold property refers to a property that is free from hold (other than the owner). The buyer will own the plot of land on which it is constructed. |
| Owners will be required to pay to extend the lease at the end of the lease period | The ownership in this type of property is indefinite |
| State consent from the land office is required for transfer of ownership | State consent is not required to transfer ownership. However, it may be needed in some specific earmarked properties |
| Many banks do not finance a property where the lease period is less than 30 years | Getting finance from banks in case of freehold properties is easier |
Leasehold property: Projects built on leasehold land plots
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Most projects in large metro cities like Mumbai and Delhi-NCR are built on leasehold plots that are bought by the developer. This practice is followed, mainly due to the scarcity of new land in and around these cities. The primary owner of the leasehold land is usually the government or local development authorities and the period of lease is usually between 30 to 99 years. The owner can choose to extend the tenure to 999 years. The unusual figure of 99 years is considered an approximate time spanning three generations. The ideal time period should be more than 30 years which enables a property buyer to seek financial help from banks. Getting an extension of the lease period will be in favour of the buyer as it augments the property value over the years and makes it easier to get financing assistance.
This means that if you were to buy a property in a project that was built on leasehold land, you would remain its owner only for 99 years, or for any other lease period and the authority/government will remain the primary owner.
Once the construction of a project is complete, the developer will transfer the lease in the name of the society formed. It is his duty to build the project and hand it over to the residents’ welfare association (RWA). Until the RWA is formed, the developer maintains the project.
Leasehold property: Advantage for home buyers
The biggest advantage of buying a property in a project that was built on leasehold land, is that it will be significantly cheaper than buying one that was built on a freehold land or plot (where the developer is the sole and primary owner of the land). In metro cities, developers usually pay a far lesser price for lease a plot in a good location in the city, as opposed to paying a huge amount and buying the land from the primary owner. This financial benefit trickles down to home buyers, as well.
Such leasehold plots, for residential projects, are commonly part of a larger development. This means that the surrounding areas usually have good infrastructure and connectivity.
Leasehold property disadvantages
- The individuals need to pay ground rent to the freehold owner. This rent might increase over time, thereby, increasing the charges for the leaseholder.
- The liberties of the leaseholder are restricted. Thus, the leaseholder may need the permission of the freeholder, for any repairs or changes in the property.
- Most leasehold properties are used both for commercial and residential purposes. So, before investing in a leasehold land, it is essential to understand who will bear the maintenance cost. In case of major changes to the property, the cost is borne by the leaseholder (owner) whereas the costs of smaller changes to the property are usually borne by the existing buyer, if valid permission from the landowner has been obtained.
- Most leaseholders are not allowed to keep pets in the properties.
- One cannot sub-let a leasehold property.
Leasehold property: How can I find out how many years are left on the lease?
If you are planning to get a leasehold property, you should know the tenure of the lease. A lease document has all the necessary details of the leasehold property, like the starting date of the lease, its tenure and other terms.
Leasehold property: Can I extend my lease?
Leaseholders can extend a lease if they reside in a property for more than two years and there are less than 80 years left on the lease. It is always better to extend the lease sooner, because the nearer the expiry of the lease, the costlier it is to renew.
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Leasehold property: What are leasehold restrictions?
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Most leaseholders need to abide by rules and regulations imposed by the owner of the property. Such rules require the leaseholder to take permission of the freeholder for any new development or activity in the property. These rules and regulations are called ‘leasehold restrictions’.
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What home buyers of leasehold properties can do
- Get the property registered in your name.
- Obtain a transfer memorandum – an official permission granted by the development authority to the owner (seller) of the property, allowing him/her to transfer the rights to the home buyer.
- Always choose to buy or invest in a project built on land that has a long leasehold period.
Is leasehold property safe to buy?
One can go a leasehold property that allows the individual to own the property for a specified time. Ownership of a building or property on leased land is legal in India and investing in such a property is completely safe.
Conversion of leasehold into a freehold property
In India, there is provision to convert a leasehold property to a freehold property. For converting a leasehold property into a freehold property, the lessee must acquire the ownership title of the property.
The process of conversion can be done if one has the relevant documents and proofs that includes GPA (General Power of Attorney), a clear sale deed, and a no objection certificate if the land is on mortgage or rented out. Further, one is required to pay conversion charge to the department of land records in the state.
A registered agreement to sell and GPA can be used for conversion of a leasehold property to a freehold property in Delhi. In some cases other document proofs that may be required to complete the procedure are house tax assessment and proof of permanent electricity connection if it is a non-sanctioned building plan.
Can I insure a leasehold property?
Insuring a leasehold property is not mandatory by law. However, it is always better for the tenant to insure his room or flat so that their personal belongings are kept safe. It should be noted that though the freeholder is responsible and accountable for the entire property, it does not include your personal items and belongings. You can protect these only through an appropriate insurance policy.
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FAQs
Are leasehold properties good to buy?
There are no issues with getting a leasehold property. However, the leaseholder may face difficulties if it is a bad lease. Thus, it is better to go through the terms and conditions of the lease before making a choice.
Can the freeholder evict you from a leasehold property?
If the leaseholder breaks the terms and conditions of the lease, the freeholder can move to a court and evict the leaseholder.
Is it difficult to sell a leasehold property?
Selling a leasehold property is similar to selling any other property. However, some complex paperwork might be involved in selling such properties. It is easier to sell your property if the lease is for a longer period. It might be difficult to get a buyer if the tenure of a leasehold property is short.
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