Mumbai realty: Evaluating leasehold and freehold land

Nov 16 2013, 00:32 IST
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SummaryThe developer ordinarily pays a substantial value for the long-term lease to the lessor up front.

A leasehold property defines the status of the land on which the property is built. Leasehold land on which construction takes place is ordinarily on long-term lease, which may be between 30 to 999 years. Specific to residential property on leasehold land, one may use the example of the MMRDA’s Wadala development plan, wherein the land is given on long-term lease to developers who can sell the units constructed on an outright basis.

The developer ordinarily pays a substantial value for the long-term lease to the lessor up front. A few examples of such lease hold properties are the collector’s land on which Nariman Point stands, Mumbai Port Trust lands in Masjid Bandar and Ballard Estate, and Navi Mumbai as well.

On completion of the project, the lease is transferred in the name of the society formed. The future of such properties after the lease term is uncertain to the extent of the amount that the state demands for renewal, which will need to be paid by the society.

Clarity on this is expected after the legal authorities reach a decision on the Nariman Point buildings, wherein renewal is imminent. A concrete formula is expected with respect to calculating the incremental value required to be paid by the societies for renewal.

How does it matter whether a property is leasehold or freehold? It should be remembered that in the case of a freehold property, the owner retains complete legal rights over the property indefinitely.

However, a person or entity is legally entitled to occupy or use a leasehold property only for a specified period, on the basis of rental consideration. Once this period expires, all legal rights pertaining to occupancy and use of the property return to the owner. Also in case of any transactions on this land by the lessee an NOC is required from the lessor.

If a property is built on leasehold land, selling it can become a major issue if the term on the leasehold land is due to expire. Any person seeking to purchase such a property would find it extremely challenging to obtain a home loan for this purpose. The remaining lease duration is fundamental for home loan approvals. Ordinarily lease durations of 99 years and beyond do not face many issues. Since it is not always possible to opt for a freehold property, it makes sense to understand the advantages and disadvantages of freehold versus

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