Difference Between Leasehold and Freehold Property

In Indian real estate, words like freehold and leasehold properties are often used. The main distinction between freehold and leasehold is related to land control and ownership. A leasehold property is one in which the lessee leases the property from the owner for a certain length of time, with transfer and ownership limitations.

In contrast, a freehold property provides complete property ownership with no limits on construction, modification, or transfer.

Leasehold Property

A leasehold Property is the possession of a transitory right to keep land or property in which a lessee or tenant obtains real property rights through some form of title from a lessor or landlord. Although a tenant has rights to real property, a leasehold estate is usually considered personal property. Leasehold is a type of land tenure or property tenure in which one party buys the right to occupy land or a building for a set period. Leasehold estate is a legal estate that can be bought and sold on the open market.

A leasehold differentiates from a freehold, in which ownership of a property is purchased outright and then kept for an unlimited period, as well as from a tenancy, in which a property is let (rented) on a regular basis, such as weekly or monthly. The terminology and types of leaseholds differ per country. A residential tenancy under a lease agreement is commonly referred to as renting, albeit this is only sometimes the case. The leaseholder may continue in occupation for a set number of months or years. The terms of the agreement are outlined in a lease, which combines elements of contract and property law. It is critical to understand the ownership of an apartment block on leased land. The biggest disadvantage for a home buyer is the uncertainty that occurs between the end of the land lease period and the renewal of the occupancy contract. This circumstance typically arises when the lease on the land is for a shorter term of 30-33 years, which is common, particularly in Mumbai.

Along with the contract renewal, buyers will be responsible for other expenditures like property taxes, etc. Another challenge that projects developed on plots with shorter lease durations confront is that they need to receive construction funds. Projects may be significantly delayed or may not be completed at all. Furthermore, rehabilitation of such projects becomes difficult because any repair or building requires the approval of all relevant agencies. The major advantage of purchasing a property in a project developed on leasehold land is that it will be substantially less expensive than purchasing one built on freehold land or plot (where the developer is the sole and principal owner). In metropolitan areas, developers typically pay a far lower price to lease a plot in a desirable location than to spend a large sum and purchase the land from the primary owner. This financial benefit extends to home buyers as well. These leasehold plots for residential constructions are typically part of a bigger development. This means that the neighboring areas often have adequate infrastructure and connectivity. The individuals need to pay ground rent to the freehold owner. This rent may rise with time, increasing the charges for the leaseholder. The leaseholder's liberties are circumscribed. Thus, the leaseholder may require the freeholder's permission for any repairs or alterations to the property.

History

Laws governing landlord-tenant relationships can be traced back to the Code of Hammurabi. However, during the Middle Ages, the landlord-tenant relationship developed into common law in England. That law still uses many antiquated phrases and notions from a feudal social order and an agricultural economy, in which land was the key economic asset and ownership of land was the primary source of rank and prestige. The tenancy was critical to the feudal system because English law outlawed subinfeudation (the formation of new feudal estates by existing feudal landholders) in the late 13th century; a lord owned land and the tenants became vassals. Leasehold estates can still be considered Crown land today. For example, in the Australian Capital Territory, all private land "ownerships" are leaseholds on Crown land.

Advantages of Leasehold Property

Because you only get the building and not the land with a leasehold, it is less expensive than buying a freehold. Buying a leasehold may result in cost savings, particularly if you want to purchase a larger home in a posh community. This depends on the specifics of the lease, including its length and terms.
An alternative financing option is to purchase the entire property, including the land, for a lower annual cost than a mortgage, provided that the agreement permits it. Nevertheless, you will need to consult an expert to look for this option in the contract.
A leasehold is a fantastic way to purchase a home without having to purchase the land. You can still make building modifications to the structure because you own it.

The Drawbacks of Leasing Property

There are drawbacks to purchasing a leasehold, chief among them being the following:

Although land rent is low at the time of the contract, it is often reviewed every few years in accordance with the property's current market value. The ground rent can become costly if the real estate market expands quickly.
The down payment required for a leasehold property purchased with a home loan is typically more than that of a freehold property.
Compared to freehold properties, these properties are harder to get financing for.

Terminology

residential tenancy provides a place to live, whereas a business tenancy occupies buildings for business purposes. Residential and commercial tenancies may have different statutory provisions. For example, in the UK's Landlord and Tenant Act 1954, Part I (since completely superseded) dealt with residential leases, while Part II dealt with business tenancies. A "fixed-term tenancy" or "tenancy for years" lasts for a set amount of time. Despite the terminology, such a tenancy might extend for any length of time; even a one-week tenancy is referred to as a tenancy for years. At common law, the duration did not have to be fixed but could be contingent on the occurrence of some event (for example, "until the crops are ready for harvest," "until the war is over"). In many jurisdictions, this option has been partially or eliminated.

Freehold Property

In common law jurisdictions such as England and Wales, Australia, Canada, Ireland, and twenty states in the United States, a freehold is the most frequent form of ownership of real property, or land, and all immovable constructions linked to such land. In contrast to a leasehold, the property reverts to the landowner whenever the lease time expires or is otherwise legitimately terminated. For an estate to be freehold, it must have two characteristics: immobility (property must be land or an interest issuing from or annexed to land) and perpetual ownership ("of indeterminate duration"). If the period of ownership can be set and determined, it cannot be freehold. The definition of this word is "An estate in land held in fee simple, fee tail or for term of life."

The perpetual freehold is the default position subset, defined as "an estate given to a grantee for life, and then successively to the grantee's heirs for life." Freehold property is inheritable, and there are no constraints on the property owner's ability to transfer the property further. A freehold property has no encumbrances on its absolute title. A freehold is not the same as a condominium, where the owner of each unit pays a maintenance charge. Legal guardians can inherit freehold property. A freehold property can be transferred by registering the sale deed.

Advantages of Freehold Property

The benefits of freehold are self-explanatory, as is the definition of freehold property. They are as follows:
If you understand what freehold land means, you will see that such property is free from hold. That means you can use the property for any purpose permitted by the regulations.
You've probably heard that a buyer purchased the property with a 99-year lease. In contrast, the term "freehold" implies that such properties have no time restriction for possession. When you buy a freehold property, you become the owner indefinitely until you transfer it to someone else. The lease will never run out.
With freehold property, there is no need to pay any ground rent.
Lending institutions such as Kotak Mahindra Bank can readily grant Home Loans for freehold homes.
you own the entire structure and property, you are not required to obtain permission or notify anyone before making any structural alterations. You can entirely rebuild the house at your leisure.
The paperwork will be simpler if you intend to sell your freehold house.
Transferring the property to someone will be much easier. Your progeny will get the transfer automatically.

Legal and Financial Considerations of Leasehold vs. Freehold Property

Leasehold Property

Thoroughly review the lease agreement by paying close attention.
Understand the process and expenses of lease extensions.
Be aware of any restrictions on improving the property or renting it to others.
Understand the lease's annual costs and prospective increases.
Clarify the freeholder's responsibility for maintenance and repairs in the lease agreement.
Financial advantages include lower upfront costs compared to freehold properties.
Consider the annual ground rent paid to the freeholder as an ongoing expense.
Be prepared to pay additional fees to maintain communal areas and facilities.
Obtaining a mortgage for a leasehold property can be more complicated and result in higher interest rates than freehold mortgages.

Freehold Property

Freehold property can be easily transferred to heirs via a will or inheritance laws.
Always follow local construction codes while making improvements to ensure legal compliance.
Consult a lawyer for any potential problems with neighbors or property borders.
Be prepared to face continuous property tax bills.
You are responsible for all property and land maintenance and repairs.