Real estate basics: What is a freehold property?


What exactly does ‘freehold’ mean and what are the implications of buying a freehold property? We explain

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

NatureLeaseholdFreehold
Tenure of ownershipLeases are for usually 99 years or more.There is no such fixed duration, unless limited by the town planning department.
Approvals required for ownership transferTransfer of leases require permission from the state or the governing authority.Owner can transfer the property without any limitation.
Rights of ownerLease is to be acquired from the landlord who has the freehold right on the property.Owner has the complete right over the land and the building that stands on it.

 

Advantages of freehold property vs leasehold property

LeaseholdFreehold
Relatively cheaper than freehold properties.Property owners do not have to pay annual ground rent.
Leasehold properties are a safer bet, since the land titles are clear and verified.Complete ownership rights of the property, with no restrictions to transfer it further.
The responsibility to maintain the building lies upon the developer, state or the responsible authority.You are in charge of maintaining the freehold property and do not have to depend on anyone else.
All apartments and flats are leasehold, because the land is owned by the builder. The lease is extendable if both parties agree.More stable, as compared to a leasehold property and more likely to increase in value in the long run.

 

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.

 

freehold property

 

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

LeaseholdFreehold
Property belongs to the original owner and the ownership is transferred to the investor for a certain period of time.Property belongs to the owner.
The investor has to pay to extend the lease period.There is no such limit with respect to the ownership.
Property can be leased only when the state gives consent.Does not require any legal consent to transfer ownership.
Bank finance may not be possible, if the lease period is less than 30 years.Banks finance freehold properties.

 

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

ProsCons
Easy to sell, as the ownership lies with the actual owner.Freehold land is costlier than leasehold land.
Bank loan and refinancing is easier for freehold land.You may need to pay more down payment for blocking the unit.
Capital appreciation is more, as compared to leasehold property.

 

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.

 

FAQs

What is a freehold property?

Freehold property is any real estate that is legally 'free from hold' of any entity other than the owner.

How to convert leasehold property to freehold?

A leasehold property can be converted to a freehold property through a proper documentation process, as mentioned in this article.

What is the difference between freehold and leasehold property?

The major difference between freehold and leasehold properties lies in the ownership status and control rules.

What are the advantages of freehold property?

You don’t have to pay rent on a freehold property, unlike a leasehold property.

What are the advantages of leasehold property?

It is much more affordable than a freehold property.

Can you renovate a leasehold property?

You can renovate a leasehold property, although there might be several restrictions. For example, you are generally allowed to change the décor of your rooms and even the plan. However, one cannot bring about structural changes in the property without the permission of the owner. Some properties also require the permission of the owner even for minor repairs.

(With inputs from Surbhi Gupta and Anuradha Ramamirtham)

 

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