04 JANUARY, 2023

In India, there are two types of property: leasehold and freehold. The term leasehold property refers to a type of ownership in which the property owner is issued a fixed-term lease on the house or apartment situated on the land. On the contrary, freehold denotes ownership of the building and the surrounding land.

The original owner/freeholder is still the rightful owner of the house/apartment on the land. As a result, the owner of the house or apartment only has a leasehold interest in the property for the duration of the lease and has no actual ownership of the land.

Many buyers are still unclear about these real-estate types, and this article will cover relevant information about freehold and leasehold property that can help them with this.

What Does Leasehold Property Refer To?

A leasehold property is a property that a lessee or tenant agrees to rent from a lessor for a predetermined period. It's like having a house for a set amount of time but never owning the land it's constructed on—the leasehold premises will eventually revert to the property's original owner. A large proportion of apartments and flats are leasehold holdings.

The written contract between the lessee and lessor specifies the period the lessee may occupy the property and the kind of payments that will be made. Several fees, such as ground rent, maintenance costs, and service charges, are typically borne by tenants of leasehold properties.

The landlord receives the property back when the lease expires. The length of the lease might range from 30 to 999 years. Any lease having a term of less than 90 years may be problematic since it reduces the property's value. Furthermore, it will be difficult for a lessee with a term less than 30 years to qualify for a Home Loan. So they must find a lessor with a longer lease period to ensure financial assistance for the house purchase.

Read Also: How To Calculate The Valuation Of House?

What Does Freehold Property Refer To?

The owner of a freehold property enjoys unfettered, uncontested, and total rights over that property. The land's ownership and obligation may be bequeathed, sold, or otherwise transferred at the owner's discretion.

Besides, the owner of the property is not subject to any restrictions. The owner has all the right to construct anything of their choice on the freehold land.

There may only be maintenance fees that the owner of the freehold property needs to pay. Also, using a sale deed registration, the owner can transfer the property rights to anyone they like. When a person possesses a freehold property, they can make changes or renovations to it without asking anyone's permission. As a result, purchasing a freehold property requires more capital than leasing a house.

Differences Between Leasehold and Freehold Properties

Discussed below are the key differences between freehold and leasehold properties:

  1. The leasehold land means the original owner/freeholder retains title of the land but leases the flat or home on the land to the flat-owner for a predetermined period (the "lease period") instead. However, in the case of freehold property, both the land and the construction on it are owned by the same person.
  2. The unpredictability of ownership and lease renewal for a property is the primary drawback of leasehold ownership. Freehold ownership is devoid of such doubt and clarifies that the owner still retains ownership of the entire property.
  3. The lessee must pay yearly land rent if the property is leased rather than freehold.
  4. To maintain the society's shared facilities, leasehold ownership could involve paying maintenance fees. But with freehold ownership, the owner is in charge of all expenses and maintenance.
  5. A specific tenure for lease-holding rights exists in leasehold ownership. In contrast, the owner of a freehold property keeps ownership rights indefinitely.
  6. The owner may need help to perform significant property improvements under a leasehold. And such limitation is not present under freehold ownership.
  7. Compared to leased properties, freehold properties have easier access to mortgage loans.
  8. Unlike leasehold owners, freehold property holders have far more latitude concerning property sale or transfer.
  9. Leasehold properties generally have lower ownership costs than freehold properties. Due to the increased expense of land acquisition, freehold properties are more expensive.




Ownership Rights

For a specific time, the owner gives the lessee permission to possess the property.

The property belongs exclusively to the owner.

Term of Ownership

The typical lease length is 30-99 years.

Once purchased, the buyer has permanent ownership of the land and building.

Property Rights

If the lessee wants to make changes or build something on the leasehold property, they must fulfill the regulations specified by the lessor.

The owner has the right to make any changes or additions without getting permission.

Transfer Rights

The approval of the government or any other authorities is necessary for the transfer of leasehold assets.

Transferring the freehold property is not subject to governmental or other authorities' approval.

Costs of Investment

Given the circumstances and holding period for the property, the investment cost is typically low.

The cost of buying a freehold property is higher than the cost of leasing one.

Availability of Bank Finance

Most banks will refrain from financing a leasehold property (tenure < 30 years).

For freehold properties, it is simpler to obtain bank financing.

Wrapping Up

Freehold properties are preferable since they grant exclusive rights to the purchased land and property. However, they are costlier than leasehold properties. Therefore, the selection between leasehold and freehold property depends on the buyer's intentions and available finance. Also, please note that when it comes to leasehold properties, the owner has to pay an amount to increase the lease period at the end. And for freehold properties, the land belongs to the owner, which is why the lease period remains indefinite.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.