For many, buying a property is like a dream come true. Although property prices have softened a bit in many metro cities, prices still remain far too high. With high prices and affordability continuing to be a stumbling block, there is still one way that could make your hunt for a sweet home a reality — going for a leasehold property. But don’t just scramble on to the property ladder and seal the deal unless you understand the difference between a freehold and a leasehold property.
What is exactly meant by leasehold and how it is different from a freehold property?
Leasehold or freehold properties are types of property ownership rights. In a leasehold property (whether it is a plot or built-up) leasehold rights are granted by the lessor (the person or body enjoying ownership rights) in favour of the lessee (the person or body getting the right to use the property).
“A lease is a temporary transfer of ownership of property under the provisions of the Transfer of Property Act. The original owner of the property is the lessor while the person taking the property on lease is called the lessee. The consideration in the transaction is called the lease amount. An owner of a property can lease out his property to another person for a certain number of years for a monthly lease amount,” says Dr PSN Rao, Chairman, National Association of Realtors India (NAR-India).
In the Indian realty market, leasehold properties are most prevalent in Mumbai. However, they are also present in other cities. Any two persons/entities/body corporate can enter into a 'lease agreement' for leasing out a property under the provisions of the Transfer of Property Act which extends to the entire Union of India. Further, some governments, state housing boards, development authorities, etc. give properties only on lease and this happens in various parts of the country.
However, one of the key downsides of leasehold property is that it is not freely transferable. Secondly, unlike freehold property that gives the absolute ownership right of the property to the buyer, in a leasehold property the buyer does not have a freehold title and is therefore not an owner but only a lessee.
Black & White
A leasehold property is in essence ‘leased’ to a lessee for a definite period, ranging from 30, 60, 99 years or more by government authorities such as a Development Authority or a Housing Board. As per the agreement between the lessor and the lessee, the latter agrees to pay the yearly lease amount to the former as agreed upon by the two parties. The lessor retains land or property ownership rights and if the lessee intends to transfer the property by way of sale, gift or will to another person, he has to get a prior permission from the lessor.
In majority of cases, residential property in India is sold mostly as a freehold wherein its ownership rights are transferred by the owner to the buyer through registration of the sale deed.
Leasehold Or Freehold?
So should you buy a freehold or a leasehold property, if given a choice? If you’re delaying your decision to buy a property just because the price is too high, but are ready to sacrifice your absolute ownership, leasehold property could be an option. Otherwise, as experts believe, given a choice a buyer should prefer freehold property as the tile is absolute and clear.
“If there is a choice, it is always better to purchase a freehold property since there is an absolute, complete and full transfer of property,” advises Rao of NAR-India. He says purchase of property is ideal since there is absolute and complete transfer of ownership of property, but most people cannot afford it.
Further, the owner may not be willing to sell the property in the first place. Therefore, the lease system has come to be in vogue. Most people, he adds, who cannot afford to buy property or if properties are not available for purchase or if their requirement is only for a few years, can easily get access to a property by way of negotiating a lease.
Realty experts also add that freehold properties are more stable and the chances of appreciation in their prices are greater than that of leasehold property.