Deciding between a Leasehold and Freehold Property

Buyers planning to invest in a residential property should be aware of the two parlances related to ownership of the property, namely Leasehold and Freehold property. Both these types of property ownership have wide differences between them and understanding these differences is paramount for a prospective property buyer. Inability to understand the conceptual differences between the two may lead to the buyer regretting his investment decision at a later stage.

What is a Leasehold Property?

Leasehold property entitles the owner to use the property owned by a freeholder for a fixed period of time which is called the lease period. Leases may either be long-term, extending from 99 years to 999 years, or short-term, extending upto 30-40 years based on the discretion of the freeholder. The owner of a leasehold property does not have any rights on the property which he holds and has to return it back to the freeholder when the lease period expires. In India, both private as well as government leases are in vogue even though government leases are preferred over private leases as they can be held for a longer period.

Features of Leasehold Property:

·  A leaseholder signs a contract with the freeholder that mentions the rights and responsibilities of both parties.

·  As per the contract the freeholder will be responsible to maintain all common areas of the residential property that include the entrance halls and staircase, the external walls as well as the roof.

·  The leaseholder will be entitled to pay maintenance charges of the property, service charges, annual “ground rent” as well as his share of the building insurance.

·  Leaseholders have to get the permission of the freeholder for undertaking any major works on the leased property.

·  Leaseholders may be restricted from owning pets as well as subletting the property to others.

·  If the leaseholder does not fulfill the terms of the lease, the lease agreement can become annulled.

·  To protect the rights of leaseholders against short leases, the government has brought about a provision by which the lease period can be extended or the leased property can be bought by the leaseholder, even though this procedure can be expensive.

What is a Freehold Property?

Freehold property entails the owner to hold on to the residential property eternally or have outright ownership of the property. The owner’s name is mentioned in the land registry as a “freeholder”, with absolute ownership of the property. Even though it is 20-30 per cent more expensive than a leasehold property, it is generally preferred over leasehold property due to the absolute rights it bestows on the owner.

Features of a Freehold Property:

·  The freehold owner does not have to pay annual ground rent fees.

·  The freehold owner is in charge of maintaining the entire fabric of the residential property that includes all common areas like entrance halls and stairways, compound walls and roof of the building.

·  Whole houses are generally sold as freehold property.

·  It is easier to leverage a freehold property in case of a financial need.

Deciding on one

The decision of whether to invest in a Leasehold or Freehold property should be taken based on the requirement of the owner. However, he should be aware of his rights and responsibilities before taking the plunge. This will enable him to make an appropriate decision which will benefit him financially as well as in terms of his residential requirements.