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

As its name suggests, freehold property refers to the type of property that has nothing to hold. In other words, the owner of the building is also the owner of the land on which the building is constructed. This means the property owner has complete control over it.

The major advantage of freehold property is that it is much easier to manage when you want to sell or rent it out. There are no complications involved in the process, and the owner manages everything himself/herself without being accountable to anyone else.

This is one of the main reasons why people prefer purchasing freehold property due to the following reasons:

• Ownership rights are clear
• Easier resale
• Simple inheritance
• Easy loan approval

In many cases, they also get control over:

• Renovation
• Transfers
• Leasing
• Resale
• Long-term use

Although not all freehold property investments will result in making money, most Indians feel more secure in investing in a freehold property.

Leasehold estates are the direct opposites of freehold estates. Leasehold properties are those that you do not own; rather, you lease. The lease tenure could range from one year to 99 years.

With leasehold property, you can use the building during the time of the lease, but you cannot exercise any claims to the land. You will have to communicate with the owner of the property when you want to make any changes to the building.

The greatest benefit of leasehold estates is that you will only have limited obligations. You will never have to incur expenses on major repair works or damages.

This is the area where first-time homebuyers usually tend to get confused, even though the buyer becomes the owner of the property. It is legally permitted to make use of it, sell it, mortgage it, or transfer it in accordance with the terms of the lease agreement.

But technically, it is not full ownership like the freehold, because the ownership of the land does not lie with the buyer but rather remains with the other party.

The system of property ownership is common in areas that have been developed by government or private entities, with land ownership being difficult in these areas.

If you wish to know the distinction between freehold and leasehold ownership, below is a complete list that you can consider.

Advantages:

• Ownership of the land and the house will be yours in full, without any time limits regarding ownership.
• You have ownership of the land, and thus, you do not need to pay any further rent.
• Banks are willing to offer loans more easily for freehold properties.
• You have control of the property, and hence, you can carry out any modifications that you want without seeking permission

Disadvantages:

• Freehold properties generally cost more than leasehold properties.
• You bear the cost of maintenance and repairs.
• It is becoming very difficult to find freehold properties, especially in metropolitan cities where there is high population density.

Advantages and Disadvantages of Leasehold Property

Advantages:

• The prices of leaseholds are usually relatively lower, as you purchase the building alone and not the land.
• Some contracts will enable you to purchase the land at a lower annual rate.
• charges that are more than what you would be required to pay through mortgages.
• You own the building and can make renovations, although you do not own the land.

Disadvantages:

• The ground rent may escalate over time and could be quite expensive.
• Financing the leasehold property is usually challenging.
• The down payment on leasehold properties is relatively higher.
• There will be no gain from any increments in the land’s value.

This is due to mortgage loans, which enable one to differentiate the difference between the property ownership schemes at once.

Most of the banks prefer offering loan facilities on freehold property, as it is easy to own and sell the property since there is no problem.

Loans can also be offered for leasehold property with some conditions related to the tenure of the lease and the time remaining up to the end of the lease period.

The following are the documents required in case you want to apply for a loan for a freehold property.

• Loan application form duly filled
• Proof of identity
• Proof of address
• Proof of income (last three years’ IT returns, form 16, or past few salary slips)
• Property documents such as the sale deed, NOC letters, building plans, occupancy certificates, proof of property tax payment, and sale agreement

As mentioned above, freedom is one of the most important benefits of freehold property. Below is a list of the rights enjoyed by owners of freehold properties.

• In the case of an independent house, the owner gets full ownership of both the building and the land.
• In case of an apartment or a joint property, then the owner owns his/her own house as well as a part of the land (shared with other owners).
• The owner is free to make alterations or constructions on the building whenever he/she wants.
• The owner can put the building to whatever use he/she wishes to.
• The owner can sell or lease out the property according to his/her will.
• The owner can keep pets, tenants, or visitors in the building.

Having analysed the difference between freehold and leasehold properties, one can easily deduce that leasehold property is better, considering its lower risk factor. But the risk factor is not totally removed here.

The property might be owned by the lessor. But the contents in the property belong to you.

That means that you have to arrange your contents insurance for whatever you have. The insurance for the property will be arranged by either the lessor or the actual owner of the property.

Also Read: What is RERA?

The conversion of leasehold to freehold can be provided by some authorities and development organisations after the payment of the conversion fee and other legal requirements.

The procedure varies from one state to another, depending on the policy of the state and the land authority in terms of approval of land conversion, among others. Not all leasehold properties are eligible for land conversion.

One should never presume that the conversion of land will happen since it is not feasible all the time unless there is a specific provision for that.

Documents Needed for Converting Leasehold to Freehold Property

Below are the documents that should be submitted when applying for the conversion from leasehold to freehold property.

• Copy of the lease deed/sub-lease deed
• Copy of the sale agreement
• Copy of power of attorney
• Possession documents, like a property tax receipt
• Demand/allotment letter from the government
• No objection certificate (if required)
• General Power of Attorney (GPA)

It is not easy to distinguish which form of ownership is superior because both come with their strengths and weaknesses.

But the following are situations where you may prefer buying freehold property.

• When you intend to purchase property for investment purposes.
• When you intend to purchase property for your family's residence.
• When you require a loan from the bank to acquire the property.
• When you intend to rent out the property in the future.
• When you intend to construct extra floors in the future.

The following are some situations where purchasing a leasehold property would be preferred over others.

• Where you are concerned about the legal complications of the property.
• Where you desire to purchase a piece of land together with the building to conduct your business activities.
• Where you desire to stay in the city centre but lack the money to own the land and the buildings.
• Where you are not interested in paying overheads.
• Where you are interested in shifting from one place to another freely.

Also Read: Top 10 Real Estate Investments in Gurgaon

The difference between the two types of properties will enable one to make good choices about their investments in real estate. It can be observed that the freehold type of property is more suitable for long-term investment purposes because it offers more rights with fewer restrictions.

This kind of property gives the owner more power and a sense of peace of mind, and that is why buyers usually opt for this type of property.

It is more affordable in comparison with the other type of property, but there are some additional restrictions imposed on the lessee in this case. The knowledge about these different types of property will enable one to make informed decisions so that their investment will give more profit in both residential and commercial properties.

In the end, it is not the type of ownership that matters, but the legal rights associated with the type of ownership that matter. The buyers should be aware of all the conditions before buying and should not think about the long-term investment until a proper strategy is planned for the same.