What exactly does ‘leasehold’ mean and what are the implications of buying a property, or building a house, on leasehold land? We explain.
Leasehold refers to a property tenure, where one party buys the right to occupy the property for a given length of time (30 to 99 years). In a leasehold land, the authority (usually, a government agency) remains the owner of the land and gives the land to builders, to develop apartment projects on a leasehold basis. Anyone who buys a residential flat will own it only for the leasehold period.
Projects built on leasehold plots
Most projects in large metro cities like Mumbai and Delhi-NCR are built on leasehold plots that are bought by the developer. This practice is followed, mainly due to the scarcity of new land in and around these cities. The primary owner of the leasehold land is usually the government or local development authorities and the period of lease is usually between 30 to 99 years. This means that if you were to buy a property in a project that was built on leasehold land, you would remain its owner only for 99 years, or for any other lease period and the authority/government will remain the primary owner.
Once the construction of a project is complete, the developer will transfer the lease in the name of the society formed. It is his duty to build the project and hand it over to the residents’ welfare association (RWA). Until the RWA is formed, the developer maintains the project.
Risks for homebuyers in leasehold properties
The main disadvantage for a home buyer, is the uncertainty that arises after the lease period on the land ends and the renewal of the occupancy contract. This scenario usually comes up when the lease on the land is for shorter tenures of 30-33 years, which is commonplace especially in Mumbai. Along with the contract renewal, buyers will also have to bear other costs, such as property tax, etc.
Another issue that projects built on plots with shorter lease periods face are not receiving funds for construction. So, a significant delay or even non-completion of projects is a possibility. Additionally, redevelopment of such projects becomes problematic, since the consent of all the involved authorities is required, to carry out any repair or construction.
While applying for a home loan for a property built on leasehold land, the home loan tenure cannot be higher than the balance period of the lease. In cases, when the lease period for the land is short or is nearing its end, lenders would be unwilling to risk the possibility of the lease not being renewed and therefore, may not grant a home loan.
The advantage for homebuyers in leasehold properties
The biggest advantage of buying a property in a project that was built on leasehold land, is that it will be significantly cheaper than buying one that was built on a freehold plot (where the developer is the sole and primary owner of the land). In metro cities, developers usually pay a far lesser price for lease a plot in a good location in the city, as opposed to paying a huge amount and buying the land from the primary owner. This financial benefit trickles down to home buyers, as well.
Such leasehold plots, for residential projects, are commonly part of a larger development. This means that the surrounding areas usually have good infrastructure and connectivity.
Disadvantages of leasehold properties
- The individuals need to pay ground rent to the freehold owner. This rent might increase over time, thereby, increasing the charges for the leaseholder.
- The liberties of the leaseholder are restricted. Thus, the leaseholder may need the permission of the freeholder, for any repairs or changes in the property.
- Most leaseholders are not allowed to keep pets in the properties.
- One cannot sub-let a leasehold property.
How can I find out how many years are left on the lease?
If you are planning to get a leasehold property, you should know the tenure of the lease. A lease document has all the necessary details of the leasehold property, like the starting date of the lease, its tenure, and other terms.\
Can I extend my lease?
Leaseholders can extend a lease if they reside in a property for more than two years and there are less than 80 years left on the lease. It is always better to extend the lease sooner, because the nearer the expiry of the lease, the costlier it is to renew.
What home buyers of leasehold properties can do
- Get the property registered in your name.
- Obtain a transfer memorandum – official permission granted by the development authority to the owner (seller) of the property, allowing him/her to transfer the rights to the home buyer.
- Always choose to buy or invest in a project built on land that has a long leasehold period.