Properties are of two kinds — leasehold property and freehold property. Freehold property refers to property that is “free from hold” of any other person except the property owner for an indefinite period, while the leasehold properties usually leased for a period, generally for 99 years which starts from the time of construction.
The development authority of a particular area gives land development rights to real estate developers and sells properties for a lease period of 99 years. It means that anyone who buys a residential or commercial property will own it just for a period of 99 years, after that which the property ownership right is given back to the landowner. Customers of leasehold properties are required to pay basic rent to the landowner for this. Lease period of such properties can be renewed after the end of the term.
What happens upon expiry of a said lease?
Normally, the government allows conversion of a leasehold property to freehold upon the payment of conversion charges or guarantees the right to purchase another lease upon expiry of the original contract.
Buying an older house
A real estate investor eyeing an old property, say a 30-year old leasehold property, may find it tough to sell the property further as it would not be easy for the proposed buyers to finance it. Such properties might not see notable appreciation as well. The main challenge faced by the buyer is the renewal of the occupancy agreement once the lease is over. Apart from the renewal, older properties also need additional costs such as property tax. Moreover, a buyer could face challenges in transferring the title of the property and registration papers, too. However, if the descendants of a leasehold property possess the property for 99 years, they will just need to pay for lease renewal.
As per the developer’s point of view, projects that are planned on a smaller leasehold period may not get funds for construction, which could lead to delay and non-completion of projects.
Why 99 years?
The 99-year lease agreement covers rights and obligations for both the lessor as well as the lessee concerning the occupation of a property in exchange for a fixed amount as a rental. The terms and conditions individually specified in the agreement like a type of rights, lease period, duties of lessor and lessee, termination clause, conditional clauses, dispute resolution clause, etc. are essential factors for the continuance of any lease and any dispute regarding the lease.
The purpose of having timespan is to control the use and the transfer of land. This timespan was regarded as a safe interval choice in earlier days, given that it will include the lifespan of the lessee. It was also considered as a period enough to safeguard the ownership of the lessor.
Some facts regarding leasehold property
- NOIDA stands for New Okhla Industrial Development Authority offers land to develop apartment projects solely on leasehold.
- It is possible to increase the lease period to 999 years by paying the amount.
- On buying a property on leasehold, a buyer must confirm whether the seller has received a transfer memorandum from the local development authority.
- Real Estate developers prefer to build flats/apartments on leasehold lands since the expense of such parcels is lower as compared to freehold lands.
- Banks do not prefer funding on the purchase of a leasehold property, particularly when the remaining lease period is less than 30 years. The amount or value of such properties also falls at the end of the lease period approaches.
- The key benefit of investing in leasehold property is the price, which is usually lesser than properties constructed on freehold land.