Leasehold Property vs. Freehold Property in India: Key Differences & Considerations
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Leasehold Property vs. Freehold Property in India: Meaning & Differences

In terms of Indian real estate, you will commonly come across terms like freehold and leasehold properties. The main difference between freehold and leasehold lies in issues related to land control and ownership. In a leasehold property, the lessee leases the property from the owner for a particular period with restrictions related to transfer and ownership. On the contrary, a freehold property gives complete property ownership without any restrictions on its construction, modification, and transfer. Read further for more details on the two types of properties.

What is Leasehold Property?

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 without owning the land. The leasehold premise eventually belongs to the property's original owner. Most flats and apartments you can buy in India are leasehold properties. As a tenant, you must pay the ground rent, service, and maintenance charges to the lessor and return the property at lease expiry.

The lease duration may vary from 30 to 999 years. The longer the lease tenure, the higher the property’s value. Leasehold properties with less than 30 years of lease also find difficulty qualifying for a Home Loan.

What is Freehold Property?

If you want to know the meaning of freehold, you must understand that this kind of ownership gives the buyer complete rights over the property without any restrictions. The owner can sell, transfer, or modify the property without any obligations. With a simple sale deed registration, they can transfer the property to anyone they want. That is why freehold properties are usually costlier than leasehold properties.

Advantages of Leasehold Property

Now that you understand the leasehold property meaning, consider the general advantages of buying one below.

  • Cheaper Price: Since you buy only the building without the land, purchasing a leasehold is more affordable than a freehold. Depending on the agreement's terms and length, buying a leasehold saves money, especially if you want to buy a bigger house in an affluent area.
  • Alternative Finance Option: If the agreement allows, you can purchase the entire property, including land, at a lower annual fee than a mortgage. However, you will need an expert to look for this option in the agreement.
  • Become a Home Owner: A leasehold is an excellent way to purchase a house without purchasing its land. Since you are the building owner, you can still improve its construction.

Disadvantages of Leasehold Property

Buying a leasehold has some disadvantages as well, mainly including the following:

  • Continuously Re-Assessed Rent: Land rent is affordable at the time of the agreement, but it typically needs re-assessment according to the property's market value. The ground rent may become unaffordable if the real estate market booms.
  • Higher Down Payment: If you want to buy a leasehold property with a Home Loan, the down payment requirement is usually higher than freehold.
  • Difficulty Gaining Finance: Obtaining housing finance for these properties is more challenging than for freehold.
  • No Benefit from the Increasing Land Value: Since you do not own the land, you do not benefit from the increasing land value. The rising price of land in the area is the landowner's benefit, and you only end up paying a higher rent.

Advantages of Freehold Property

The advantages of freehold are self-explanatory with the freehold property meaning. These are as follows:

  • Free from Hold: If you understand the freehold land meaning, it’s evident that such property is free from hold. That means you can use the property for any purpose according to the regulations.
  • No Time Limit: You must have heard that a buyer purchased the property with a 99-year lease. Conversely, the freehold meaning suggests that such properties have no time limit to the ownership. Once you buy a freehold property, you become its owner forever until you transfer it to someone. The lease will never run out.
  • Money-Saving on Rent: You don't need to pay any ground rent with freehold property
  • Easier Access to Housing Finance: Lending institutions like Kotak Mahindra Bank approve Home Loans easily for freehold properties.
  • Property Usage as per Discretion: Since you are the complete owner of the building and the land, you don’t need anyone's permission or inform anyone before making any structural changes. You can completely reconstruct the house at your discretion.
  • Simpler Paperwork: The paperwork will be simpler if you wish to sell your freehold house.
  • Easier Transfer: The process will be much easier if you want to transfer the property to someone. The transfer will be automatic to your progeny.

Disadvantages of Freehold Property

  • Sole Responsibility for Expenses: Since you are the complete property owner, you are solely responsible for covering all expenses related to it, including repairs, renovation, reconstruction, etc. If the property falls into a legal issue, you don't have a landowner to share the responsibility.
  • Expensive Purchase: When you enter the market to buy a freehold property, it will be costlier than a leasehold home.

How to Choose Between Leasehold and Freehold Property?

Now that you understand the freehold and leasehold difference, here are a few factors to consider when making your final decision between the two:

  • Extent of Ownership: The leasehold meaning suggests that you only own the flat, but the original owner retains the land title. Conversely, for a freehold property, you get ownership of both the land and the building constructed on it.
  • Unpredictability: The lease renewal and ownership are subject to unpredictability as per the market fluctuations. A freehold ownership has complete transparency in these aspects.
  • Rent: As a lessee, you must pay an annual land rent. No such rent is applicable on freehold properties.
  • Maintenance Charges: You must pay maintenance charges to maintain shared facilities in a leasehold ownership. With freehold home ownership, you are completely responsible for the property's maintenance and related expenses.
  • Lease Term: As the leasehold land meaning suggests, you only own a leasehold house for a specific tenure. In contrast, a freehold owner retains the ownership rights forever.
  • Right to Modification: Additional formalities are involved when modifying or reconstructing a leasehold house. No such limitation is present under freehold home ownership.
  • Access to Loans: Whether you want to borrow a Home Loans or a mortgage loan for the property, freehold ownership easily attracts lenders compared to leasehold.

When choosing between leasehold and freehold ownership, the key is to evaluate and consider your personal preferences and long-term goals.

How to Convert a Leasehold Property into a Freehold Property?

The difference between freehold and leasehold properties suggests that freehold ownership has multiple advantages over leasehold. If you own a leasehold property, you must follow these steps to convert it into a freehold property:

  • If it is a government-owned property, apply for conversion from the concerned authority that owns the property.
  • If it is a private property, prepare a sale agreement between both parties.
  • Based on the sale consideration, prepare a final conveyance deed on a non-judicial stamp paper.
  • Register the conveyance deed with the respective locality's registrar's office.
  • Mutate the buyer’s name in the local civic body books.

Legal Aspects Regulations Apply to Leasehold & Freehold Properties

Leasehold and freehold systems operate within a legal framework. Here are the legal aspects and regulations involved:

  • Agreements: The agreement defines the obligations and rights of both parties, specifying the lease length, rent payments, maintenance responsibilities, etc.
  • Rights: Leaseholders can use and occupy the property within the stipulated terms. However, they must pay rent and maintain the properties.
  • Leasehold Valuation Tribunal (LVT): In case of disputes, LTV is an essential resource that determines matters like lease extensions, service charges, etc.

Read Also: What Is Duplex Home?

Frequently Asked Questions

1. What type of properties are preferred by buyers, a freehold or leasehold?

Most home buyers prefer freehold properties for complete ownership. However, those looking for cheaper properties may opt for leasehold.

2. What are the rights and responsibilities of freehold property owners?

Freehold property owners have complete rights over the property. Consequently, they are solely responsible for the property’s maintenance, upgradation, reconstruction, etc.

3. How can I extend the lease on my leasehold property?

Lease deeds usually have an extension clause that the lessee can use to extend the lease term after its expiration.

4. What are the risks associated with investing in freehold properties?

Higher price tags, bigger loan requirements, and sole responsibility for maintenance are some risks associated with freehold properties.

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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.