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Freehold Property vs Leasehold Property - Differences, Benefits, Owner Rights

By aquireacres Aug 01, 2024 357 views
Freehold Property vs Leasehold Property

Property in India can be categorized into two types: freehold and leasehold. You might have heard about freehold properties and the government's decisions to convert certain leasehold lands to freehold. If you're wondering what freehold property is, this blog will help you understand its concept, differences from leasehold properties, benefits, owner rights, documentation process, and more. Whether you're a first-time homebuyer or a seasoned investor, understanding these distinctions can help you make informed decisions when buying, selling, or investing in real estate.

What is Freehold Property?

Freehold property, as the name implies, is a property that is completely free from any ownership constraints. The individual or association owning the building also owns the land it is built on. This gives the owner absolute ownership of the property. One of the significant advantages of freehold property is its ease of handling, whether you wish to sell or lease it out. With fewer complications, the owner controls every aspect of the property without needing to answer to anyone else. When you purchase a freehold property, you have the liberty to make any modifications you desire, such as adding rooms or floors, without worrying about your rights.

What is Leasehold Property?

Leasehold properties are the exact opposite of freehold properties. These are properties that you lease rather than own. Lease periods can range from as short as one year to as long as 99 years. While you can use the building during the lease period, you cannot claim ownership of the land and must contact the actual owner to make any changes to the building. The main advantage of leasehold properties is the limited responsibility. You often don't have to spend money on major repairs or damages and can avoid regular maintenance costs.

Also Read: State-wise stamp duty in India 2024

Difference Between Freehold and Leasehold Property

To help you better understand the distinctions between freehold and leasehold properties, here is a comprehensive comparison:

Ownership:
  • Freehold: Full ownership of both the building and the land.
  • Leasehold: Ownership of the building for the lease period, but not the land.
Control:
  • Freehold: Complete control over the property and its modifications.
  • Leasehold: Limited control; significant changes require the owner's consent.
Ease of Transfer:
  • Freehold: Easier to sell or lease out.
  • Leasehold: More complicated process for selling or leasing.
Responsibilities:
  • Freehold: Owner is responsible for all maintenance and repairs.
  • Leasehold: Limited responsibilities, often excluding major repairs and regular maintenance.

Understanding these differences will help you navigate the property market more effectively and make smarter decisions regarding your real estate investments.

Features

Freehold properties

Leasehold properties

Ownership

Absolute ownership. The owner has 100% rights. 

The lessee has the right to use the property for the leased period but cannot claim ownership.

Period of ownership

The person owns the property forever or until it is sold.

The lessee can use the property for the leased period.

Rights

The owner has unlimited rights to make changes, sell, rent, or lease out the property.

The lessee can make use of the house and all its features. However, they cannot sell, rent, lease out, or make structural changes without the lessor's permission.

Availability of bank finance

Banks finance people who want to buy freehold properties. 

Banks usually finance leasing only if the period is >30 years.

Maintenance and damage costs

The owner is entirely responsible for maintenance and damage charges.

The actual owner (lessor) will handle major damages and repair costs.

Restrictions to use the property

There are no restrictions on inviting guests, having pets, or renting out the property.

There may be specific restrictions put forth by the lessor that needs to be followed.
Pros and Cons of Freehold Property
Advantages
  1. Complete Ownership: You have full ownership of both the land and the building, with no time limitations on your ownership.
  2. No Ongoing Rent: Since you own the land, there are no recurring rent payments.
  3. Easier Financing: Banks are more willing to provide loans for freehold properties.
  4. Control and Flexibility: You have complete control over the property and can make any adjustments or renovations without needing authorization.
Disadvantages
  1. Higher Costs: Freehold properties typically come with a higher purchase price.
  2. Maintenance Responsibilities: You are responsible for all maintenance and repair costs.

Understanding the pros and cons of freehold property can help you make informed decisions in the real estate market.

Pros and Cons of Leasehold Property
Advantages
  1. Lower Purchase Price: Leasehold properties are generally cheaper since you're buying only the building, not the land.
  2. Cost-Effective Land Purchase Options: Some agreements allow you to buy the land at a lower annual fee compared to a mortgage.
  3. Ownership Flexibility: You own the building and can make improvements, even though you don’t own the land.
Disadvantages
  1. Increasing Ground Rent: Ground rent can increase over time, which might become expensive.
  2. Difficult Financing: It is usually more difficult to obtain financing for leasehold properties.
  3. Higher Down Payments: The initial down payment for leasehold properties is often higher.
  4. No Benefit from Land Value Increase: You won’t benefit from increases in land value; the landowner does.
Choosing Between Freehold and Leasehold for Residential or Commercial Use

For residential properties, freehold is generally preferred due to the complete control and ownership it offers. Although the initial investment is higher, freehold properties are easier to finance through banks, making them a smart choice for long-term investment and personal use.

Commercial entities often opt for leasehold properties because they can be more affordable. Leasehold properties offer flexibility for businesses to relocate as needed, which is advantageous if the business scales up or relocates.

Also Read: What is part performance in property law?

Converting Leasehold Property to Freehold

To convert a leasehold property to a freehold property, start by discussing the purchase with the lessor. If they agree, you’ll need to draft a clear sale deed, obtain a no-objection certificate if the land is mortgaged, and pay a fixed conversion charge to the government to change the property's status.

Insurance for Freehold Properties

Freehold properties carry more risks, but you can mitigate these by getting property insurance. This covers potential damages from natural or man-made calamities, providing financial security.

Government Reclaiming Freehold Land

The government can reclaim freehold land for developmental activities like industrialization or urbanization. In such cases, you will be compensated based on a fixed per square foot price.

Rights of Freehold Property Owners

Owners of freehold properties enjoy extensive rights, including:

  • Complete ownership of the building and land.
  • Freedom to renovate or add structures.
  • Flexibility to use the property for any purpose.
  • Ability to sell, rent, or lease the property.
  • No restrictions on having pets or guests.
Selling Freehold vs. Leasehold Properties

Selling a freehold property is straightforward and follows the usual procedure of entering a sale agreement and registering the sale deed. Selling a leasehold property requires additional documentation, such as a Memorandum of Transfer, which must be issued by the government.

Also Read: What is a Conveyance Deed & Why Is It Important?

Home Loans for Freehold Properties

Banks are more willing to offer home loans for freehold properties. Required documents include proof of identification, residence, income, and property documents like the sale deed and NOC certificates.

Insurance for Leasehold Properties

For leasehold properties, the lessor typically insures the building, while the lessee should get contents insurance to protect their belongings.

Documents for Converting Leasehold to Freehold

To convert a leasehold property to freehold, you need:

  • Copy of the lease or sub-lease deed.
  • Sale agreement copy.
  • Power of attorney.
  • Property tax receipts.
  • Government demand/allotment letter.
  • No objection certificate (if needed).
  • General Power of Attorney (GPA).
Leasehold vs. Freehold: Which is Better?

Each type of ownership has its advantages and disadvantages. Freehold properties are ideal for long-term investment and personal use, offering full ownership and control. Leasehold properties are better for those looking for lower initial costs, flexibility to relocate, and fewer maintenance responsibilities.

Latest News on Leasehold to Freehold Conversion Costs

Recent rulings have relaxed the rules on converting leasehold to freehold properties. Conversion charges are now included in the sale consideration, reducing additional costs for buyers.

Conclusion

Understanding the differences between freehold and leasehold properties helps in making informed decisions. Freehold properties offer full ownership with fewer restrictions, making them ideal for long-term investments. Leasehold properties are more affordable and offer flexibility but come with shared responsibilities and potential restrictions. Having this knowledge ensures better decision-making when buying, selling, or investing in real estate.

Also Read: GST on Construction 2024: All You Need to Know

Frequently Asked Questions

Ans 1. Advantages: Complete control: As a freeholder, you have total autonomy over your property, a key aspect in the freehold vs leasehold debate. No extra charges: Unlike leasehold land, owning freehold property means no ground rent or service fees.

Ans 2. the legal right to live in or use a building or piece of land for an agreed period of time: His family held the leasehold/had the property on leasehold. Compare. freehold. Renting property.

Ans 3. What is Freehold Property. Definition: Freehold property can be defined as any estate which is "free from hold" of any entity besides the owner. Hence, the owner of such an estate enjoys free ownership for perpetuity and can use the land for any purposes however in accordance with the local regulations.

Ans 4. 1. What type of properties are preferred by buyers, a freehold or leasehold? Most home buyers prefer freehold properties for complete ownership. However, those looking for cheaper properties may opt for leasehold.

Ans 5. Disadvantages of Leasehold PropertyThe value of the property can decrease as the lease shortens, and renewing the lease can be costly. Leaseholders also often face annual ground rent and service charges, which can increase over time.

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