Leasehold Property Insights: Know Your Rights and Renewal Procedure

When making a real estate purchase, you must understand the type of ownership involved as part of properly informing your investment decision. In short, ownership of property can generally be defined as either freehold or leasehold, where freehold ownership means you own the property for an unknown or indefinite period and leasehold means you must abide by a predetermined leasehold tenure, whereby the lessee is assigned specific rights and obligations for that period. 

In addition, leasehold properties are becoming increasingly popular now that they are typically cheaper and located in a favourable location, often in an urban or metropolitan area context. Despite these advantages, leasehold properties have complexities such as finite ownership, decline into decreasing property value over time, and lease renewal. In this article, we consider the fundamentals of leasehold property, detail the rights of leaseholders, and discuss lease renewal, so that buyers will be comfortable with this investment option.

What is a Leasehold Property?

A leasehold property is a type of real estate that gives an individual or entity, called a lessee, the right to occupy and use the property for a set period (as specified in the lease) from the person who owns it (the lessor, or freeholder). Typically, the lease document specifies the tenure, obligations, and rights of the lessee.

While a freehold property lasts indefinitely, a leasehold does not. After the lease period expires, the lessor takes back possession of the property, unless the lease has been renewed. While leasehold properties are still included in definition of real estate and property, their time-limited ownership structure creates uniqueness, and it most often requires lessees to take some action to renew the lease to keep the degree of ownership provided by the lease.

In India, it is common for many properties, particularly in urban areas, to be allotted as a leasehold property, especially from the government, such as the Delhi Development Authority (DDA) or the Maharashtra Housing and Development Authority (MHADA). Not only is this property less expensive than a freehold property, but it is typically much less expensive than freehold properties at the same or similar land locations, if you are a buyer searching for an affordable place to buy.

Also Read: Understanding Jamabandi: Meaning, Importance, and Its Role in Property Transactions

Key Features of Leasehold Property

Leasehold properties have unique characteristics that set them apart from freehold properties. These include:

1. Fixed Tenure: Lease terms typically range from 30 to 99 years, with some extending to 125 years.
2. Limited Ownership: While lessees can use the property, ownership rights remain with the lessor.
3. Lower Upfront Cost: Leasehold properties are generally priced lower than freehold properties, making them appealing to first-time buyers and investors.
4. Usage Rights: Lessees can live in, rent out, or transfer the property, subject to the terms outlined in the lease agreement.
5. Depreciating Value: The market value of a leasehold property decreases as the lease period diminishes, making timely renewal essential.
6. Maintenance Responsibility: Internal upkeep is typically the lessee's responsibility, while external and common areas are often maintained by the lessor.
7. Government Allotments: In India, leasehold properties are often provided by government agencies, ensuring planned infrastructure and well-connected locations.

Legal Rights of Leaseholders

Despite their limited ownership, leaseholders enjoy several rights protected by statutory laws and lease agreements. These rights include:

1. Right to Peaceful Enjoyment: Leaseholders have the right to use the property without interference from the lessor, provided they adhere to the lease terms.

2. Right to Information: Leaseholders are entitled to information about service charges, property insurance, and other expenses.

3. Right to Challenge Charges: Leaseholders can dispute unreasonable service charges and major repair costs imposed by the lessor.

4. Right to Access Common Areas: Lessees can access communal facilities and shared spaces as specified in the lease agreement.

5. Right to Transfer Lease: Leaseholders can transfer their leasehold interest to another party, subject to the agreement's conditions.

6. Right to Lease Extension: In many cases, leaseholders have a statutory right to extend the lease, ensuring continued use of the property.

7. Right to Enfranchisement: Lessees in certain jurisdictions may collectively purchase the freehold, converting the property into a freehold estate.

8. Protection from Forfeiture: Lessors cannot repossess the property without following legal procedures, even in cases of lease breaches.

9. Right to Well-Maintained Property: Leaseholders are entitled to well-maintained common areas and services as agreed.

10. Statutory Rights Upon Expiry: Long-term leaseholders may have the right to continue occupying the property or negotiate an extension when the lease term ends.

How to Renew a Lease Agreement?

Renewing a lease is a crucial step to maintain rights over a leasehold property. Here is a step-by-step guide to the renewal process:

1. Start Early: Begin the renewal process at least 6–12 months before the lease expires. This allows ample time for negotiations, documentation, and formalities.

2. Review Lease Agreement: Check the lease deed for renewal clauses. Some agreements provide automatic renewal if conditions are met, while others require formal negotiation.

3. Submit a Renewal Request: Write a formal application to the lessor, expressing your intent to renew the lease. This should be submitted at least 60 days before expiration.

4. Provide Necessary Documents: Gather and submit documents such as the original lease deed, identity proof, property tax receipts, and any other required paperwork.

5. Pay Renewal Fees: Pay the renewal charges or ground rent, as determined by the lessor or relevant authorities. These charges may vary based on property value and prevailing regulations.

6. Negotiate Terms: If the lease is privately held, negotiate terms such as revised rent or updated conditions. Government leases typically follow standard renewal policies.

7. Sign and Register the Lease: Once approved, sign the renewed lease agreement and register it with the local sub-registrar if the lease exceeds 11 months.

8. Update Property Records: Ensure that the renewed lease is reflected in official land and municipal records to avoid disputes.

Benefits and Challenges of Leasehold Property

Benefits:

• Affordable entry into desirable locations.
• Often located in well-planned areas with excellent infrastructure.
• Potential for steady rental income and resale value.

Challenges:

• Time-bound ownership requiring periodic renewal.
• Potentially high renewal fees based on property appreciation.
• Limited flexibility compared to freehold ownership.

Also Read: Notarized vs. Registered Rent Agreement: What’s Best for Your Rental Needs?

Is Leasehold Property a Good Investment?

Leasehold properties can be an excellent investment, particularly in urban areas where freehold options are scarce or unaffordable. The affordability of leasehold properties, combined with their strategic locations, makes them attractive for both end-users and investors.

However, prospective buyers should evaluate:

• The remaining lease tenure and renewal feasibility.
  
• Terms outlined in the lease agreement.
  
• The lessor's reputation and track record.
  

Seeking legal advice and conducting thorough due diligence can help mitigate risks, ensuring the investment aligns with long-term goals.

Conclusion

It is important to appreciate leasehold property to understand its complexities and make reasoned investment decisions. With an adequate understanding of their legal rights and the renewal method, leaseholders can protect their interests and maintain maximum investment value. 

Leasehold properties are fraught with complexities; however, their relatively low cost, location benefits, and common maintenance contracts make them a viable option for many buyers. By preparing for lease renewal and adjusting for potential problem areas, leaseholders can benefit from this unique form of property and secure a safer financial future.

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