Real estate basics: What is a freehold property?

A freehold property is one, where the owner/society/residents’ welfare association owns the building and the land that it stands on outright, in perpetuity. A freehold land is generally bought through an auction or lottery. The completed project, thus, will include the cost of the land incorporated in the final cost of the units.

A freehold property, hence, is any real estate that is legally ‘free from hold’ of any entity other than the owner. The owner of such a property has the right to use it for any purpose, in accordance with the regulations of where it is located. The sale of a freehold property requires significantly lesser paperwork, as it is not necessary to request authorisation from the state. However, this also means that a freehold property is more expensive to purchase than a leasehold property.

What is freehold land title?

Freehold land title refers to a property title by which the owner of the land owns it for perpetuity (free from hold). In other words, freehold land title ownership has no limit in time for the landowner and its beneficiaries.

Benefits of freehold property

A freehold property, as the name suggests, signifies complete freedom. Thus, the owner of the property has complete control over the property and has no further payments to make, in the form of ground rents, service charges or any other kind of charges that might be in the case of leasehold properties. Thus, the owner knows the exact amount he spends for purchasing the property. A freehold property also has no restriction regarding time, visitors and the like. Thus, the owner can do whatever he legally wishes to within his property, without being answerable to anybody else.

Disadvantages of freehold properties

The only disadvantage of freehold properties is that they are more expensive. Since an individual owns both, the land and the property, to have complete control over it, the cost incurred on it increases. Thus, such properties might be difficult to be purchased by individuals who are used to staying in flats or apartments, where they just own the property and therefore, pay a lower price.

Insurance for freehold properties

Owning a property involves several risks and responsibilities that might cause high expenditure. For example, the property may be damaged by a storm or a fire. Thus, the owner of a property requires an insurance to cover for the financial expenditure, in case of any property damage. The freeholders’ insurance policy provides adequate financial cover for both, the property and the land, in case either of it is damaged. The premium against the insurance depends on the size and net worth of the property. However, once the owner of a freehold property is eligible for such an insurance, the risks involved in owning the property can be minimised. A freeholder’s insurance policy not only protects the property from any loss but also provides adequate financial cover, in cases of loss of rent if the property is found to be uninhabitable.

Can the government take back freehold land?

Under the Land Acquisition Law, the government has the right to acquire all types of private land for the purpose of industrialisation, development of infrastructure facilities or urbanisation of the private land, after compensating the affected land owners suitably.

Comparison between leasehold and freehold property

Advantages of freehold property vs leasehold property

Rights of the owners of freehold properties

There are no restrictions on the right of an owner of a freehold property to transfer it further and it can be inherited. There is no encumbrance to the absolute title of the property and it can be transferred, by registration of a sale deed. When you purchase a freehold property, you also own the land it was built on, along with the house itself. If the property is an apartment, the home owner becomes a shareholder in the property. You have the right to live in the house as long as you wish and you can also make changes to it.

While most houses in India are sold as freehold properties, apartments are also sometimes sold on lease. However, this is gradually changing, as buyers feel more confident in purchasing a property that is freehold.

Home loan for a freehold property

Banks are generally more willing to extend a home loan for a freehold property, as compared to a leasehold property. This is because it is considered a safer investment, as the registration of a freehold property is done and it is also expected to increase in value. Banks are also willing to sanction a larger home loan amount for a freehold property with a high market value (where the loan-to-value ratio can be 80 per cent of the market value of the freehold property).

What is leasehold property?

A leasehold property is usually more affordable than a freehold property, because the ownership rights are for a limited period, after which the lease expires. Once the lease expires, the ownership of the property is given back to the original owner. Most of the time, the leases are for 99 years but can be extended up to 999 years. A buyer can also purchase the leasehold property by converting it to freehold property.

Difference between leasehold and freehold property

Advantages of leasehold property

• A leasehold property has less responsibilities.
• The owner can avoid maintenance costs and repairs, as such properties are generally looked after by the sole owner of the property.
• Provides accommodation for people who need a house for a short period of time.

Disadvantages of leasehold property

• The individual taking a leasehold property has to renew the contract when it expires. However, the owner of the property is not bound to renew the contract and might terminate it, leaving the individual without a home. Thus, there is an additional responsibility of looking for an alternative accommodation before the contract expires.
• The amount of service charges required to be paid by the individual depends on the owner and non-compliance with the same can cause the owner to terminate the contract.
• There may be restrictions on the lifestyle and the number of guests visiting the owner in the case of a leasehold property.

Insuring a leasehold property

There are two kinds of insurance policies for leaseholder property – the building’s insurance and insurance for the contents. The building’s insurance policy is generally opted for by the owner of the property while the contents’ insurance is for the leaseholder. The building’s insurance policy generally covers the financial costs incurred as a result of damage to the entire building. However, such an insurance policy does not cover repairs of individual flats and other things that might be a part of a single flat alone. These are covered by the contents insurance policy. As a result, a leaseholder can apply for a contents’ insurance policy to receive financial coverage for any damage caused to the flat but not the entire building. This is because a building’s insurance requires complete ownership of the property and thus, it is eligible only for the owner of the property.

Converting a leasehold property to freehold

A leasehold property can be converted to a freehold property through a clear sale deed, a general power of attorney and a no-objection certificate (if the land is under mortgage or rent). Additionally, you would also need to pay a conversion charge, to the relevant authorities. In Delhi, a property owner can get the status changed, using only the registered agreement to sell and the general power of attorney. In Maharashtra, the state government has set the rate for the conversion of leasehold property to freehold at 25% of the ready reckoner (RR) rate.

Documents needed for converting leasehold property to freehold

For converting an immovable leasehold property into a freehold property in Delhi, there are certain documents that need to be submitted by the applicant to the Delhi Development Authority (DDA):

• GPA (general power of attorney).
• A clear sale deed.
• No-objection certificate (NOC) if the land is on rent or mortgaged.

The applicant must also pay the conversion charges to the Authority.

What is better, leasehold or freehold?

Usually, buyers prefer buying a freehold property as its prices increase more gradually as compared to leasehold properties. Moreover, it is easier to get a mortgage against a freehold property as compared to leased ones. If you invest in a leasehold property, the ownership will remain with the developer who bought the land to construct the project or the state authority who constructed the flats on its land.

Pros and cons of freehold land

Why is freehold land not depreciated?

Freehold land is not depreciated, because such land is assumed to have an unlimited useful life. Other long-life assets, such as land improvements, buildings, furnishings, equipment, etc., have limited useful lives. Since the owners of leasehold assets cannot sell the property, the depreciation is not factored in leasehold property.

Is it hard to sell leasehold land?

Selling or transferring a leasehold property or land is not difficult. However, for the transfer of the lease, you would need to acquire permission from the concerned authority. Moreover, as a mortgage or loan may not be easily available, buyers who do not have financial assistance may avoid such properties altogether. Also, the land where leases are short, are harder to transfer/sell.

Freehold conversion charges are tax-deductible: ITAT

In a recent judgement, the Income Tax Appellate Tribunal (ITAT), Allahabad Bench, allowed the tax deduction on the share of freehold conversion charges, stamp duty, etc., for converting a property into freehold. The assessee had contended that the freehold conversion charges constituted improvement of the property for better title of the property and claimed the same as deductions towards the cost of improvement of the property while computing long term capital gains tax. To this, the court ruled that that the assessee had rightly claimed the deduction on account of improvement in the property being an improvement in the title of the property on being converted from leasehold Nazul land to freehold property. Also, the court agreed that making the property freehold, would grant perfect ownership rights/title in favour of the existing lessees, who would then be in a position to transfer/sell the property.

Is freehold land an asset?

For income tax filing for businesses, it is imperative to show certain fixed assets which need to be installed like furniture, office building and plant & machinery, etc. While stocks, cash on hand and debtors are considered as current assets, freehold land and building is considered as fixed assets.

Freehold property: Latest news

The Delhi State Industrial and Infrastructure Development Corporation (DSIIDC) has decided to grant freehold ownership of factories and plots allotted under the relocation scheme at Bawana Industrial Area. The allottees who have completed five years from the date of allotment and have completed the construction and started their factory, are eligible for this scheme. The freehold rights would allow the owners to take loans directly from banks. Until now, they were forced to go to money lenders.

E-auction of freehold residential properties by Chandigarh Housing Board (CHB)

Recently, the Chandigarh Housing Board (CHB) had conducted e-auctions for 109 freehold residential properties. As many as 76 properties were sold and the remaining will be a part of the next e-auction. The board is planning to invite e-tender for the sale of 151 leasehold commercial properties and 38 leasehold residential properties.

Several vacant properties have been identified and will be included for the first time in e-tenders.

PIL in Allahabad High Court over freehold land in Noida

A public interest litigation (PIL) has been filed by the Confederation of NCR Residents Welfare association (CONRWA) with the Allahabad High Court contesting the 99-year leasehold system that is followed by Greater Noida Industrial Development Authority, Noida Authority and Yamuna Expressway Industrial Development Authority.

The PIL seeks to make the leasehold properties in Noida and Greater Noida freehold. The Noida Authority had even given its go ahead on the subject but the matter is now with the government to give it a green signal.

The subject was first raised by the Federation of Noida Residents Welfare Association (FONRWA) in 2018.

Maharashtra invokes order staying conversion of leasehold land to freehold land

The Maharashtra State Revenue Department has now cancelled its orders staying the conversion of collector’s land (Occupancy Class II lands) to freehold. The collector’s land requires prior approval from the collector for the transfer of the land to the occupants of the land. The stay orders were issued towards the end of 2020 as there were allegations that the conversion was being misused. The move will benefit about 3,000 Mumbai societies that are living on collectors land. These 30,000 housing societies are as old as 50 years.

However, the housing societies say that the conversion charges are unaffordable and the scheme for conversion will remain on paper.

D-Mart’s R K Damani pays Rs 65 cr for conversion of mansion land to freehold land 

D-mart mall owner R K Damani has paid an amount of Rs 65 crore for the conversion of 1.4 acres or about 7,634 sq m of leasehold land to freehold land for a property he bought at Malabar Hill in Mumbai. The Maharashtra State Revenue Department has charged him the existing 25 per cent ready-reckoner rate for conversion.

R K Damani and his brother had paid Rs 1,001 crore for a mansion at Malabar Hill in March 2021. The mansion was constructed on land leased to one Govindlal Bansilal in 1939. It was later passed on to Premchand Roychand & Sons LLP. It was originally leased for 971 years and the lease was to expire in 2910.

FAQs

(With inputs from Surbhi Gupta and Anuradha Ramamirtham)

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