Many people are in the business of buying properties. Some buy it for personal use. However, there can be chances that their desired property is already being owned by another person or that the cost of the property is too high. In such cases, renting is an option whereby they can use the property against payment of consideration in the form of rent. In India, rent agreements are usually made for 11 months after which they need to renew the same. What if someone wants to rent the property for a longer tenure?
They can go for leasehold on houses. Let us see how!
What is Leasehold Property?
A leasehold property is a type of real estate where the owner, known as the lessor, grants the right to use the property to another person, known as the lessee, for a specified period, typically decades. Unlike freehold properties, where the buyer owns the land and the property indefinitely, leasehold properties involve a temporary ownership arrangement.
Leasehold Property Features & Overview
While we discussed the leasehold property meaning, let’s discuss some of its prominent features. Leasehold land is usually taken for a longer duration that may range between 25-30 years to as long as 99 years. It can be extended to as long as 999 years. This is akin to selling the land but not in the legal sense. This is because the upfront payment is not done to the holder of the property in the form of sale consideration. Further, the ownership of the property remains with the lessor.
There is a difference between freehold property and leasehold property. In the case of freehold property, the buyers are the complete owner of the property and they can exercise all the rights associated with the property. Further, the owner of the freehold property does not require any permission for alteration or changes in the property. Whereas, in the case of leasehold property, the buyer does not completely hold the property and the actual ownership rests with the freehold owner.
The following are the features of the leasehold property:
- The lease is usually for a period of 25-30 years
- It is usually the buyer that bears the ancillary costs such as property tax, renewal of contract, etc.
- For the redevelopment of projects that are constructed on the leasehold land, the approval of all the parties is required. There should be a consensus among the freehold owner, lessor, and the buyer of the home.
- The consent of the state departments is necessary for executing the lease deed and construction of the leasehold property.
- Some states offer an option for conversion of the leasehold property to the freehold property. If there is an option available, one should exercise the same.
Leasehold Property Advantages
Purchasing a leasehold property is a common practice in India. Following are some of the advantages of leasehold property that make it a preferred option in real estate:
- Purchasing a property on a project built on leasehold land costs less as compared to that built on freehold land.
- When it comes to metro cities, the cost of land is significantly high. Buying the land and then building a project significantly raises the cost of the project which makes it less affordable for buyers. Therefore, developers resort to leasehold properties in metro cities.
Leasehold Property Disadvantages
Leasehold property does confer certain disadvantages that a buyer should be aware of:
- One cannot sublet the leasehold property.
- The lease rent must be paid to the owner of the property which can increase the leaseholder’s charges.
- Buyers of leasehold properties often face restrictions with respect to the rules and regulations.
- Buyers of a real estate property built on a leasehold property can hold their property only for the lease period.
- The leaseholder may need the permission of the freeholder for any changes to the leasehold property.
- Leaseholders are usually not allowed to keep pets in the leasehold property.
What Home Buyers of Leasehold Properties Can Do?
If there is a leasehold on houses, the buyers of the same should check the period of the lease before investing in the property. As the homeowners of the leasehold properties can only hold the property till the lease period, they need to determine when can they hold the property. Further, what are the plans after the lease expires? Will the lease be extended? Or the homebuyers will have to vacate the property? Homebuyers of leasehold properties should ensure the following:
- Get the property registered in their name.
- Obtain the transfer memorandum. It is official permission that is granted by the development authority to the owner or seller of the property which allows them to transfer their property rights to the homebuyer.
- Buy or invest in a project built on land with a long leasehold period.
- The buyer should ensure that the home loan tenure is not longer than the lease tenure. This is primarily because in case the tenure of the lease is shorter than the home loan tenure, then the risk of the lease not being renewed falls upon the lender. In such a case, they may refuse to sanction the loan.
Is Leasehold Property Safe to Buy?
It is safe and legally valid to own a property built on leasehold land in India. It is safe and secure to invest in the same and the buyer of the leasehold property gets to hold the property till the lease expires.
In a Nutshell
The land is limited. This is the primary reason why the price of land and plots is skyrocketing. Therefore, to make real estate projects more affordable for homebuyers, developers go with leasing the land for developing their projects. This primarily benefits the people in the metro cities where the population and demand are high and the land is limited leading to high prices.
However, whether the project is built on leasehold or freehold land, homebuyers always go for affordable home loans. Home loans are some of the most affordable loans in India. It not only facilitates the purchase of a house but also provides tax benefits. Home loan principal repayment can be claimed as a deduction under Section 80C of the Income Tax Act whereas the interest payment is deductible under Section 24(b).
If potential buyers are looking to purchase a leasehold property, then it's time they move ahead with their decision with the TATA Capital home loan facility.
17 November 2022
6 mins read
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