Freehold vs Leasehold Property: Key Differences, Pros, Cons & Which Is Better?

The main difference between freehold and leasehold properties is the way you hold the property and the land that belongs to it.

In simple words, freehold property will basically give you ownership of both the building and the land it is built upon, subject to any existing laws and regulations. On the other hand, in the case of leasehold property, you will only be allowed to use the property for a certain period of time through the lease, but not the land itself.

Knowing the difference between the two will be crucial before you purchase any property because of its impact on how you can make use of the property, among other things. In this article, we explain what freehold vs leasehold properties are, along with their differences and pros and cons.

Freehold vs Leasehold Property: Key Differences

The key distinction between freehold and leasehold ownership lies in ownership of the land and tenure of the property.

What Is Freehold Property?

It is quite easy to get the definition of freehold property because it offers full and complete ownership. In freehold property ownership, you will have full rights to the building and the piece of land on which it stands.

There is no time limit in your ownership because you can buy, improve, rent out, or pass it on to your lawful heirs without having to seek anyone's permission.

What is Leasehold Property ?

Understanding the leasehold property definition becomes easier when you take into consideration that he is buying or renting a property for an extremely long time period. When it comes to the leasehold property, then the land is owned by others like the government, local authority, or some private developers. One will be granted the right to use the property for the specified period, which is mostly 99 years.

One can make use of the house, apartment, office or any other property according to the terms specified in the lease agreement. But after the expiry of the lease period, the ownership of the property might revert to the original landowner unless one extends his lease. In other words, leasehold property implies that the ownership of the property for a specified period of time is available to the owner, but the land will not be owned by him forever.

Freehold Property: Advantages and Disadvantages

Freehold property is an asset that includes ownership not just of the structure but also the land where the structure stands. It has no pre-established lease term, which gives the owner more flexibility.

Pros of Freehold Property

• Permanent ownership: Freehold is an asset that includes ownership not just of the structure but also the land where the structure stands. There is no pre-established lease term, which gives the owner more flexibility.

• Greater control over the property: You have complete liberty to renovate, alter, reconstruct, or redesign the premises according to city rules and requirements without the landlord’s consent.

• Easier transfer and inheritance: The transfer of property to legal successors or relatives is easy and simple.

• Potential resale advantages: Freehold property appreciation is always steady since there is no limit on who can buy it.

Cons of Freehold Property

• Higher purchase price in some markets: Freehold land often holds more value than leasehold properties do.

• Higher upfront investment: Aside from the increased buying cost, there are also expenses relating to registration and stamp duty charges.
• Buyer still needs to verify title and approvals: Buyers must conduct thorough legal checks to confirm clean title deeds and ensure there are no legal disputes or encumbrances.

Leasehold Property: Advantages and Disadvantages

Leasehold property might be a good choice for buyers who need to possess a certain piece of property for a long time but do not necessarily need to purchase the land forever. Nevertheless, it is crucial to consider both advantages and drawbacks prior to purchasing it.

Pros of Leasehold Property

• May have a lower upfront cost: Leasehold units tend to be cheaper than freehold units within comparable urban areas.

• Can provide access to properties in strategic locations: The construction of many housing schemes, business districts, and metro nodes takes place on leasehold land.

• Long-term leases can provide substantial usage rights: A common 99-year lease is more than enough for a whole lifetime to reside on.

Cons of Leasehold Property

• Ownership is for a defined lease period: After expiry of the period, the land goes back to the proprietor unless renewed.

• Restrictions may apply to transfer or alterations: Any change in structure or ownership may require permission from the lessor or local government.

• Ground rent or other charges may apply: The land owner will be expected to pay recurring ground rents.

• Remaining lease tenure can affect resale and financing: Where the lease duration left is less than 30 years, getting mortgages on one’s home or finding potential buyers becomes difficult.

Can a Leasehold Property Be Converted Into Freehold?

Yes, in some instances, it is possible to convert leasehold property into freehold property. This process depends on the place and the landowner, who may be an authority in that particular place.

What is leasehold-to-freehold conversion?

A conversion from leasehold to freehold is a process that allows a tenant to convert their leasehold to absolute freehold through payment of a conversion fee to the land department.

Who can apply for conversion?

In most cases, one who holds the registration for the lease, a power of attorney holder, or the legal heirs can request conversion when all arrears and ground rents are paid.

Documents generally required

• Original lease deed
• Possession letter & Allotment letter
• Building plan approvals copy
• Proof of identity and proof of address
• Up-to-date property tax payment receipts
• No Objection Certificate (NOC) if applicable

Conversion charges and other costs

Conversion fees differ greatly depending on the location of the land, its area, government rates, and whether the lease is current. Other expenses include stamp duty, registration fees, and legal fees.

Important Note: The process of leasehold to freehold conversion and the fee structure differs from state to state in India. For example, the DDA follows its own set of rules regarding the conversion policy and its land rate, while West Bengal, Maharashtra, and others follow their own set of rules.

Freehold vs Leasehold: Which Is Better for Buyers?

In determining the suitability of freehold vs leasehold Property, one size cannot fit all purchasers. There is no perfect alternative; the best will depend on your financial capacity, future intentions, location, and intended use of the property.

Here are some important factors to consider:

• Long-term ownership: If you plan to keep the property for an extended period of time and leave it to your family in the future, a freehold property would be more ideal, since you own the land and the building.

• Budget: If a low upfront cost is your aim, you might want to think about purchasing leasehold property, subject to the location and terms of the lease.

• Location: For instance, some residential or commercial properties in big cities are constructed on land leased from the government or authority. Under such circumstances, a leasehold property gives people access to a place that might be difficult for freehold owners.

• Remaining lease period: Consider the number of years left to run before purchasing. A property that has a long lease period, say 70 to 99 years, can offer long-term usage, although it is important to review the terms of the lease.

• Resale plans: In case you want to sell the property at a later date, consider the terms of transfer and the remaining lease term. In most cases, freehold properties do not have an expiry of the lease, while the remaining tenure is crucial for leasehold properties.

• Financing requirements: The banking sector or financial institutions could require various criteria for loans on freehold or leasehold property. The remaining term on the lease and the terms of the lease could determine eligibility for a loan.

• Intended use: If what you really care about is the use of that specific property for some residential or commercial purpose, you may want to consider leasehold property as a possibility.

• Conversion possibility: Should the relevant authorities allow for the possibility of leasehold conversion to freehold, one should verify eligibility, costs involved, and all other requirements before purchasing the property, as it will enable the possibility of future conversion to freehold.

What Should You Check Before Buying a Leasehold Property?

In case you purchase a leasehold property, it is necessary to put in more effort because you will not be buying the land but only the right to use the property for a certain period of time. The following should be taken into consideration:

• Original lease deed: Go through the original lease deed. You need to check the tenure, terms and conditions, name of the landowner or lessor, and the restrictions on the property.

• Remaining lease period: Determine the exact number of years left on the lease contract. The longer remaining term of the lease contract will definitely give more security and increase the chances of financing and resale.

• Ownership and title documents: Ensure that the seller is the legal owner of the leasehold and is authorised to dispose of the property.

• Ground rent and pending dues: Confirm that all dues related to ground rent, property tax, maintenance charges, electricity, and others are settled.

• Transfer or sale restrictions: Some leaseholds may not allow the sale or transfer of the property. Find out whether the lessor or development authority needs to give consent.

• NOC requirements: Check whether the issuance of a No Objection Certificate (NOC) or written permission from the concerned authority is necessary before the transfer of the property.

• Freehold conversion eligibility: Ascertain if the property qualifies for conversion to freehold and familiarise yourself with the terms and fees.

• Mortgage or legal issues: Make sure that there is no mortgage or other outstanding claims on the land you wish to purchase.

• Property tax and local dues: Ensure that all municipal taxes and any local charges are up to date till the day of the transaction.

Conclusion: Freehold vs Leasehold Property — Which One Should You Choose?

The decision to go for freehold vs leasehold property depends on various aspects such as budget, preference for property ownership, investment needs, and future considerations. The freehold is usually one that entails owning not only the building but the land as well. Leasehold, on the other hand, refers to owning a property that can be used and occupied for a specific period of time as per the terms of the agreement. Various factors need to be considered when making such decisions.

Before the purchase, analyse the following aspects: title documents, lease deed, lease tenure left, fees involved, approvals, etc. Analysis of these aspects may assist you in selecting the property which is in line with your financial goals.

When you need help navigating real estate markets, finding good investment prospects, or assisting with real estate paperwork, Moneytree Realty, India's most trusted real estate advisor, is the one to approach for your real estate needs. Call us now at +91-9732300007.

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