Leasehold properties represent a type of property tenure in which one party purchases the right to occupy a property for a specific period, generally ranging from 30 to 99 years. In a leasehold setup, the ownership of the land remains with an authority, typically a government agency, which grants the land to developers to create apartment projects on a leasehold basis. As a result, individuals who purchase a property in such a project only have ownership rights for the lease duration.
Leasehold Properties: Risks for Home Buyers
Understanding the ownership structure of apartments built on leasehold land is crucial for potential homebuyers. One of the main drawbacks for buyers is the uncertainty surrounding the property once the lease period concludes, as this can impact the renewal terms of the occupancy contract. This issue is particularly prevalent when leases are for shorter durations, such as 30-33 years, a common practice in cities like Mumbai. Upon renewal, buyers may also face added expenses, such as property taxes.
Projects on shorter leases may encounter difficulties securing construction funding, potentially causing project delays or even incomplete builds. Redevelopment of leasehold properties can be complicated as well, as it requires approval from all involved authorities for any repair or rebuilding work.
When applying for a home loan on a leasehold property, the loan tenure typically cannot exceed the remaining period of the lease. Consequently, if the lease term is short or nearing expiration, lenders might hesitate to offer financing due to the risk of non-renewal.
Leasehold Properties: Projects Built on Leasehold Land
In major metro areas like Mumbai and Delhi-NCR, most residential projects are constructed on leasehold plots purchased by developers, largely due to the limited availability of new land. The primary owner of these leasehold lands is often a government or local development authority, with lease terms generally spanning between 30 to 99 years. In some cases, the lease can be extended to as long as 999 years, roughly equivalent to three generations.
For buyers, an ideal lease period is more than 30 years, as it enables them to obtain financing more readily. Extending the lease can also enhance the property’s value over time, making it easier to secure financial assistance from banks and other institutions. When buying a property on leasehold land, it is essential to understand that ownership typically remains with the government or authority for the lease duration.
Upon project completion, the developer usually transfers the lease to a homeowners’ society, which is responsible for managing the property. Until this handover, the developer is responsible for the project’s maintenance.
Leasehold Properties: Advantages for Home Buyers
One of the biggest advantages of purchasing a leasehold property is its affordability. Leasehold properties are often priced lower than freehold properties (where the developer holds full ownership of the land). Developers usually incur a lower cost for leasing land in prime locations within metro cities compared to outright purchasing, allowing this financial benefit to pass down to buyers.
Moreover, leasehold properties are often part of larger developments, which means they are located in areas with well-established infrastructure and connectivity. This can provide added convenience and accessibility for residents.
Leasehold Property Disadvantages
Despite the benefits, leasehold properties come with certain drawbacks:
- Ground Rent: Leaseholders are required to pay ground rent to the freehold owner, which may increase over time.
- Restricted Liberties: Leaseholders have limited freedom in modifying the property and must seek permission from the freeholder for significant changes.
- Usage for Mixed Purposes: Many leasehold properties are used for both residential and commercial purposes, so buyers should clarify who is responsible for maintenance costs. Major modifications typically require approval from the landowner and are often at the leaseholder’s expense.
- Restrictions on Pets and Subletting: Lease agreements may prohibit keeping pets or subletting the property.
Leasehold Property: Checking Lease Term Remaining
If you’re considering a leasehold property, it is essential to understand the remaining lease term. The lease document will contain critical details, such as the lease start date, duration, and specific terms.
Leasehold Property: Extending Your Lease
Leaseholders who have lived in a property for over two years and have less than 80 years remaining on the lease can apply for an extension. It is recommended to extend a lease sooner rather than later, as the cost of renewal generally increases as the expiration date approaches.
Leasehold Property Restrictions
Leaseholders are generally required to adhere to the rules and regulations set forth by the property owner. These rules, referred to as “leasehold restrictions,” typically require the leaseholder to obtain the freeholder’s approval for any new developments or activities on the property.
Steps for Home Buyers of Leasehold Properties –
To secure your investment in a leasehold property, consider taking the following steps:
- Register the Property in Your Name: Ensure the property is legally registered in your name.
- Obtain a Transfer Memorandum: This official document permits the previous owner to transfer property rights to the buyer, with authorization from the development authority.
- Opt for Projects with Long Leasehold Periods: Choosing a property with a longer lease period can offer more security and potentially higher resale value.
Is Leasehold Property Safe to Buy?
Yes, owning a leasehold property is entirely legal in India, and buying such property is safe. Ownership for the lease period provides legitimate rights, and such investments are protected under Indian property law.
Conversion of Leasehold Property to Freehold
In India, there is a provision to convert leasehold properties into freehold properties, allowing the lessee to acquire complete ownership of the property. To initiate this conversion, the lessee must present the required documents, including a General Power of Attorney (GPA), a clear sale deed, and a no-objection certificate if the land is mortgaged or rented. A conversion fee must also be paid to the relevant state department.
In cities like Delhi, a registered sale agreement and GPA can facilitate the conversion process. Additional documentation, such as a house tax assessment or proof of a permanent electricity connection, may be needed if the building plan is unsanctioned.
Insuring a Leasehold Property
While insuring a leasehold property isn’t legally required, it’s advisable to protect your personal belongings. Although the freeholder is responsible for the overall property structure, they do not cover tenants’ personal items. An appropriate insurance policy can safeguard personal possessions within the property.
Conclusion
Leasehold properties offer an affordable option for homebuyers, especially in metro areas where freehold land can be prohibitively expensive. While leasehold properties present certain risks, such as limited ownership duration and potential renewal issues, they also provide advantages, including lower prices and access to well-developed infrastructure.
Understanding the lease period, terms of extension, and any restrictions is vital before making a purchase. For buyers, exploring long-term lease options, staying informed on renewal processes, and considering potential conversion to freehold can enhance the property’s value and security. With careful consideration, leasehold properties can be a worthwhile investment in India’s competitive real estate market.
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