There are primarily two types of legal ownership of a property: a leasehold and a freehold. Leasehold and freehold both come with certain rights and obligations, and each has its own benefits and drawbacks. The basic difference between the two is land ownership and control.
Freehold property
Freehold property refers to any property which is “free from hold” of any entity except the owner. Therefore, the owner of the property can enjoy free ownership of the property and can also use the property for any purpose which is in compliance with the local regulations.
The owner of a freehold property does not need to acquire consent from the state to sell the property. Hence, the sale of a freehold property requires less paperwork and is sold at a higher price than a leasehold property.
The owner of a freehold property can transfer the property to another person without any restriction. The transfer can be done by registration of sale deed. Freehold properties are inheritable and can also be inherited by a legal guardian. There is no mortgage or other claim to the absolute title of a freehold property.
Leasehold Property
Leasehold property refers to a property which is temporarily owned by a person for a fixed term. However, during the lease term, the temporary owner of the property will not have ownership of the land on which the property is constructed. The original owner of the property, that is, the freeholder will retain the rights of the land during the lease term. The ownership of the property reverts back to the freeholder when the lease expires. During the lease term, leaseholders have to get consent from freeholders if they want to make any alteration to the property.
How does it matter whether a property is leasehold or freehold?
In case of freehold property [plot or flat], the owners right is full and unconditional [within the parameters of law of the land]. In case of a standalone property, the owner owns the property and also the land on which it stands. In case of multi-level property, the land ownership is usually divided in proportion to the floor area of each owner.
However, a person or entity is legally entitled to occupy or use a leasehold property only for a specified period, on the basis of rental consideration. Once this period expires, all legal rights pertaining to occupancy and use of the property return to the owner. Also in case of any transactions on this land by the buyer an NOC is required from the owner.
If a property is built on leasehold land, selling it can become a major issue if the term on the leasehold land is due to expire. Any person seeking to purchase such a property would find it extremely challenging to obtain a home loan for this purpose. The remaining lease duration is fundamental for home loan approvals. Ordinarily lease durations of 99 years and beyond do not face many issues. Since it is not always possible to opt for a freehold property, it makes sense to understand the advantages and disadvantages of freehold versus leasehold properties.
A few examples of such lease hold properties are the collector’s land on which Nariman Point stands, Mumbai Port Trust lands in Masjid Bandar and Ballard Estate, and Navi Mumbai as well. Mumbai has 1,282 land parcels which are on long lease while suburbs have 295 plots of land which are on lease.
Developer Perspective
A developer is most concerned about costs incurred, so they may prefer to build on leasehold land as the land cost may be lower than that of freehold land, and not all of this cost benefit is passed on to the buyer. Land cost in premium locations is invariably the most significant cost, so any savings on this front are highly preferable.
Leasehold options, however, create a lot more inflexibility for the developer in terms of requiring to continuously revert to the lessor for permissions etc. and even in cases wherein they wish to utilize transfer of development rights (TDR) it is an obstacle.
In most residential developments, the developer will have completed all tasks and responsibilities associated with the plot long before renewal is due, and will have already exited the premises. Therefore, he is not concerned with whatever transpires after that. It is true that it is harder for developer to leverage the land for funds initially, but the leasehold route may still be more preferable in case substantial cost savings are envisaged.
Buyer Perspective
Given a choice in case of residential options particularly — and if the budget permits — it is definitely preferable to invest in a freehold alternative, given the better clarity on the future. It is also easier to leverage a freehold property to procure funds in case of future requirements.
A leasehold property owner can convert leasehold property to freehold property if the owner has owned leasehold property with general power of attorney (GPA), NOC or documents to convert property. In some specific areas such as Delhi NCR, Gurgaon property owners have never converted their property due to hefty conversion cost or cumbersome process of conversion. These will involve the payment of a hefty premium which would be almost equal to buying the land. The main disadvantage of non-conversion is that the property can neither be sold nor transferred without conversion. The banks and financial institutes never give loans on such properties.
Recently the government eased norms for conversion of property. Owners can convert property on payment of a conversion charge and transfer/sell it without any hassles. The condition for conversion of leasehold to freehold property is simple where the owner will need to have all documents, such as sale deed, power of attorney and receipt of premium paid for converting property, when applying for conversion. A no-objection certificate will be needed if the property is mortgaged or there are any dues on ground rent. Conversion will not be allowed if there is a legal dispute over the property title.
Benefits of converting Leasehold to Freehold property
- The property holder becomes a full-fledged owner only by getting the sale deed of the property after getting it registered.
- There is no period of years attached to the ownership.
- Ground rent does not affect freehold property.
- Property can transferred, sold or mortgaged
- Banks and Financial Institution are ready to offer loan against property.
- Ownership rights are transferred to the purchaser.
