In India, there are considered to be two different kinds of properties, i.e., leasehold and freehold. When it comes to both of them, there are various differences with regard to their sale, ownership and purchase. It is important to know the variations between leasehold and freehold property because they play an important part in ownership. Hence, in this blog, we have researched extensively and have penned down the important nitty-gritty of the same.

What Does Freehold Property Entail?

When it comes to freehold property, this is where the buyer a total ownership of the land or property, where there is no extra ground rent. When you buy a freehold property, you have total ownership rights and also total control. When there is total ownership, you can make any type of changes in the property where there are zero restrictions. In addition to this, you can also transfer or sell the property, as per your convenience. The ownership depends upon your decision and will remain the same until you want to modify it.

Apart from this, there is an absence of ground rent; therefore, you will only have to pay additional expenses, costs, or charges like maintenance costs, renovation, and repair expenses. When you have total control over the property, you can do any kind of improvements and alterations where there are no documents or permission are needed. As mentioned in the name, the freehold property is said to be free from all types of holdings. There are no restrictions when you own the property. There are a lot of benefits when it comes to this type of property, such as long-term investment, where the value of the real estate increases over time, and there are no costs concerning the lease.

What Does Leasehold Property Include?

With regards to the leasehold property, you only own the building for a limited period of time. The land and the property are owned by the landlord, who is a freeholder. There is an agreement called the lease agreement, which includes the period of ownership, which can be for a very long period of time. After the lease period has expired, the ownership of the property is given back to the landlord, where you will not have any ownership towards the real estate. But, if you want, you can also extend the period of the lease with the landlord, who is the freeholder, if needed.

This is a type of property ownership where you can only use the property for a limited period of time and according to the lease agreement. In this agreement, you will get to know about your rights and also about your responsibilities, which is inclusive of rules and regulations on how to take care of the property. You will need to pay ground rent on a regular basis, and there might also be additional charges for the maintenance, which are according to the terms and conditions. With regards to purchasing a leasehold property, there are particular documents which are needed to make sure there is seamless transfer of ownership.

How to Convert a Leasehold Property Into a Freehold Property?

Changing your leasehold property into a freehold property has a lot of benefits, but in order to make the transition, you need to submit an application to the government agency that has been overseeing the real estate. You should also prepare a sale agreement which mentions the terms between the property owner and the leaseholder. After this, you should draft a final conveyance deed, which is on the non-judicial stamp paper, where it mentions the sale considerations that have been agreed upon. The conveyance deed should be registered at the registrar’s office that is local. The final step is to make sure that the property has been transferred officially in your name, and it should be mentioned in the records of the local civic body.

The Application of Legal Aspects to Freehold and Leasehold Properties

When it comes to the freehold and leasehold properties, they are completely governed by the legal structures that are distinct in nature. Each of them has its own type of rules and regulations. Being central to freehold and leasehold arrangements are the contracts which tell about the rights and responsibilities of all people involved. For the leasehold real estate, this is inclusive of rent specifics, lease duration, and obligations regarding maintenance. With regards to the freehold agreements, although it is minimally restrictive, there are usage rights and property boundaries to it.

Leaseholders can occupy and use the property within the terms of the lease, and it is inclusive of maintaining the property and paying rent. Although freeholders have extensive ownership rights, they should abide by the rules and regulations and laws with regards to the property use. In addition to this, the tribunal can provide a lot of decisions on various issues like fair service charges, lease extensions, and other leaseholder rights. This ensures that there is an equal approach towards ownership and leasehold management.

Documents Required for Converting Leasehold Property to Freehold

If you want to convert the property from leasehold to freehold, there are some particular documents needed so that the process is seamless and within the legal terms. The first one is the original lease agreement, which is important because it contains the present lease terms. A No Objection Certificate is also needed from the property’s developer or lessor, which implies consent for conversion. The property title deed is also important so that you can prove your present ownership of the property. A sale agreement should also be created for the transfer, which includes the terms and conditions between you as well as the freeholder. Next is the conveyance deed where this is a legal document that has been prepared on a stamp-paper, which is non-judicial, and it is important for the property transfer. A local authority approval is also needed, where the documents should be from the local civic bodies that are relevant and are endorsing the conversion. Last but not least, there should be proof of tax payment through current property tax receipts.

How to Select Between a Leasehold Property and a Freehold Property

If you are confused about choosing between the two types of properties, then there are a lot of factors which you can consider before selecting the appropriate one. The first factor is the extent of ownership, where leasehold implies that you only own the flat, but the original ownership is with the land title. But when it comes to the freehold property, there is ownership not only land but also of the building which is constructed on it.

When it comes to the rent, the lessee should pay land rent on a yearly basis. But for freehold properties, no rent needs to be paid. In a leasehold, the maintenance charges should be paid so that the shared facilities can be maintained, but with freehold, the owner is totally responsible for the property expenses and maintenance. Another factor to consider is the unpredictability.

Differences Between a Freehold and Leasehold Property

When you are making a decision regarding real estate, it is important to understand the differences between the two. With regards to the duration of the ownership, for freehold property, there is total ownership with no limit in time and with leasehold property, the ownership is for a fixed period of time and can last for many years. When it comes to the control over property, there is total autonomy in modifications and management for freehold property, and in leasehold property, for any major changes, the landlord’s approval is needed. The financial obligations for the former have no rent, where the owner is responsible for all the maintenance expenses, and for the latter, there is ground rent, and there is also an application of service charge.

When it comes to property value, the freehold property appreciates over a long period of time, but for leasehold property, it can depreciate when the lease term ends. The maintenance responsibility for the freehold property stands with the owner, but for the leasehold property, it is shared or further handled by the freeholder themselves. With regards to the inheritance, the freehold property can be given down to further generations, but with leasehold property, the rights are said to be given but are limited down towards the lease duration. The freehold property is suitable for investors who engage in long-term investment and want full ownership, but leasehold property is for those who aim for short-term investment and are seeking a lesser maintenance responsibility. When it comes to documentation, for a freehold property, there is a need for a sale deed, title deed, and also various other payment receipts. But for leasehold property, a sale deed or lease agreement and service payment receipt are needed.

Real Life Scenarios in the Indian Real Estate Market

In order to understand how freehold and leasehold are done in real life, let’s take the instance of a residential apartment which has been allotted by the DDA, and this is usually under a leasehold. The land will be with the authority, but the owner of the apartment can not only occupy it but also sell it. When it comes to a villa which is in a gated community and which has been constructed by a private builder, when it is registered under your name and is in the municipal records, this type of property is considered to be a freehold. Also, if there are any older properties in metropolitan cities like Kolkata or Mumbai, they are on leasehold, and this is because of the land lease agreement during the colonial era.

Impact on Investment and Resale

The type of ownership for the property can have a heavy impact on the investment potential and also on the resale value. When it comes to freehold property, it is easier to sell, there are no government decisions or dependency needed for the lease renewals, it is desired by end-users and investors, and there is top-notch price appreciation. When it comes to leasehold, there is slower appreciation and that is because of uncertainty, when the lease is about to expire, there is difficulty in selling it, and the investors do not preffer it because of the legal hurdles.

Financing and Bank Loans

With regards to a home loan, the Indian banks prefer freehold properties. When it comes to leasehold properties, if the lease period is more than 30 years, it might be possible to opt for a loan, but the terms from the banks are stringent. There are a lot of factors considered by the banks like the authority granting the lease, the remaining time for the lease tenure, possibilities of conversion and property usage and condition rights. If the leasehold tenure is shorter, which is less than 20 years, the banks will provide a loan where the interest rate is higher and the conditions are stricter, or they will reject the financing.

Registration and Stamp Duty Charges

The stamp duty, which is paid during the property registration, differs based on the ownership region and type. When it comes to freehold, the stamp duty depends on the consideration amount or market value, whichever is considered higher. When it comes to leasehold, it is determined by the lease period. If there are longer leases, i.e., more than 30 years, there will be higher duties, and it will be closer to the freehold expenses. It is for this reason that it is best to take guidance from a registrar's office or a local property lawyer, in order to get to know about the expenses that will be applicable in the city or state.

What Happens when the Lease is Expired?

If the lease has come to an end, the structure and the land will be reverted towards the lessor until it has been renewed or extended. This can be a very difficult situation for those who own and have not converted or renewed their lease. Some of the potential outcomes for this include renewing it by payment of a premium, which is subject to approval, the lease term is extended and last but not least, there might be eviction or legal action taken in very extreme cases. This is regarded as one of the most major risks when it comes to leasehold property, where the buyers should ensure verification of the leftover lease term before it is being bought.

The Perspective of the Builder-Buyer

When it comes to major cities, the apartments in different high-rise buildings are usually built on land that is a leasehold property. A lease agreement is done by the developers and it is with the land authorities, and it is only then that they are able to build residential complexes. The buyers should conduct a thorough inquiry about the project, whether it is in freehold or leasehold. Also, the buyers should get to know if the builder has made a payment of the lease rent towards the authority. In addition to this, they should also get to know about the restrictions on transfer or resale. All of this information is mentioned in the agreement of builder-buyer, where it should be extensively reviewed before the final signature is made.

Buyer Protection and Legal Recourse

When it comes to leasehold ownership, it comes with various limitations, but there are Indian laws that provide some type of protection, like the Real Estate Regulatory Authority (RERA), where, according to them, there is an obligatory transparency in the builder dealings, which is inclusive of land ownership status. Legal petitions can also be filed by the owners in order to compel the authorities to convert or renew the leasehold titles. The civil courts and consumer forums handle various disputes which are related to the conversion fees, lease rights and unfair lease terms. Hence, it is mainly recommended to opt for legal advice before purchasing a leasehold property, and this is particularly for large-scale investments.

Government Policy and Present Trends

There is a lot of pressure from various lawmakers and consumer bodies to stop leasehold systems or help them become favourable for buyers. Some of their proposals include giving automatic conversion towards the freehold and it is after 30 years. In addition to this, there should also be a minimisation of the conversion fees, and last but not least, the lease terms should be standardised, and there should be fewer hurdles in bureaucracy. Some of the cities like Ahmedabad and Hyderabad are already providing plots which are government-allocated, and it is on a freehold basis so that the business can be conducted seamlessly and also so that there is transparency.

Thus, if you are purchasing a home for investment or personal reasons, you should know the difference between a leasehold and freehold property. You should choose the former when you need long-term residence, higher bankability, and better resale prospects. You should consider leasehold when there is a strategic location, budget constraints and also government allotments where there is easy conversion.