FAQs about converting leasehold property to freehold property

The owner of leasehold property in India can enjoy the right to use the property up to a certain period of time but cannot enjoy undisputed, unrestricted and absolute right of the property. Following are some of the important factors or questions you should ask before opting between a leasehold property and a freehold property.

Difference between a Freehold property and a Lease hold property.

Any property is neither a freehold nor leasehold, it is the nature of the rights and authorities enjoyed by a person over a property which makes it freehold or leasehold.

When a person enjoys undisputed, unrestricted and absolute right, title and interest in a property and such right, title and interest in the said property is not time bound then the said property is classified as freehold property. The owner of such property can transfer, sell, gift, convey the same right, title and interest to anybody as and when he / she desires to do so. Not only the land but any construction / structure over the land or anything attached thereto is also the sole property of the owner of a freehold property. Such ownership rights over a freehold property can be enjoyed by the owner forever or till he / she willingly relinquishes his / her rights in favor of any other person. Such relinquishment of ownership rights, title and interest may be either against a valid consideration (Sale) or without any consideration (Gift).

When a person enjoying absolute ownership rights, title and interest over a property authorizes some other person to use and utilize the said property for a predetermined period and purpose against a valid consideration then the person to whom such right and authority is conferred is called “Lessee” and for him the said property is a “Leasehold” property. In this case the ownership rights remain with the original owner who is also called “Lessor”. The lessee acquires only the right to use and utilize the property for the term of the lease and for specified purpose only. So in leasehold property the ownership rights are with the “Lessor” not the “Lessee” and right to use the property is restricted up to a certain period of time (the lease term) and for specified purpose(s) only.

Leasehold vs Freehold property-What ownership one should go for?

Ownership can be of freehold property only. The leasehold is not at all ownership, it is only the right and authority to use and utilize the property for a certain predetermined period and purpose which expires with the expiry of the term of lease. So obviously, if one has the option to choose between two, then he/she should go for freehold property.

For a buyer of immovable property nothing can be better than buying a freehold property. Other types of properties such as Leasehold, mortgaged, under acquisition and / or requisition, charged, under litigation etc. require a lot of attention and formalities and are riddled with apprehensions and uncertainties. Whereas buying of freehold property is absolutely and literally free of all these hassles and the buyer is in a better position to realize his dream, purpose and goal of such investment. This is the reason why a freehold property commands a higher price than all other categories of property.

In case of a leasehold property the ownership is out of the question. It’s a temporary arrangement (unless it’s a Govt. property on long term lease such as 99 years lease) by which the lessee acquires right and authority to use the property for a predetermined and specified period and purpose against a valid and agreed consideration. The ownership remains with the original owner the “Lessor.”

Should you convert the leasehold property to freehold property?

If there is an opportunity certainly yes. Such conversion is possible by outright purchase of the leasehold property from the owner of the same, if he is willing to do so. The option to choose for conversion of a leasehold property to freehold property is with the lessee only because it is he / she for whom the property is leasehold property. For the owner (lessor) the same property is a freehold property which is leased out for a certain period of time and after expiry of the lease term the lessee vacates the same and the owner repossesses it. There is no change in ownership status for the “Lessor.”

From the foregoing, it is quite clear that the need and / or option for conversion are for the lessee only. In a leasehold property, there is a lot of restrictions applicable to the lessee regarding mode of use, period up to which it can be used, maintenance, timely payment of consideration etc. If the lessee can acquire ownership of that property then he / she breaks free of all these restrictions and can utilize the property in his / her own way and will. Therefore, it is always ideal to get the leasehold property converted into freehold at the possible earliest if circumstances permit to do so. However, the willingness of the owner (Lessor) is of paramount importance because until the owner is willing to sell the property the lessee cannot buy that, hence the conversion of a leasehold property to freehold property is the priority of the “Lessee” but dependent upon the “Lessor”.

When is the best time for the conversion?

It depends upon the need and financial capacity to purchase the leasehold property. It also depends upon the willingness of the owner to sell the said property. The need for conversion of a leasehold property to freehold property, which can be done by purchase only, is that of the lessee but the lessor must be willing to part with the said property in favor of the lessee against a valid and agreed consideration. Hence, when the lessee is prepared to purchase the leased property he should immediately approach the owner with offer to buy the property.

If the owner readily agrees it’s fine but if he is unwilling to sell the property or wants improvement in consideration or terms then the matter needs to be dealt with accordingly. In any case, persuasion will have to be continued till the owner is ready to sell. The earlier the better, to avoid any glitch in the materialization of the deal.

This article is contributed by IndianPropertyLawyers, simplifying property legal services.