Assessing the Risks of Purchasing Leasehold Property in India

Introduction

In India, the dream of owning a property often comes with the big question—should you opt for a freehold or leasehold property? Leasehold properties have long attracted homebuyers and investors due to their affordability and locations in prime government-allocated areas. However, they also come with a unique set of legal, financial, and practical risks that must be understood clearly before committing.

What is a Leasehold Property?

A leasehold property means the right to occupy and use a property for a specific period, typically between 30 to 99 years, without owning the land itself. The original landowner (often the government or a development authority) leases the property to the buyer (lessee), who then holds rights only for the lease term.

In contrast, a freehold property gives full ownership rights to the buyer over both the land and the building for an indefinite period.

Key Characteristics of Leasehold Property:

1. Temporary ownership for a fixed period

2. Land remains under the control of the lessor

3. At the end of lease term, the rights revert to the lessor

4. Renewal of lease may involve additional costs and legal complexities

Advantages of Buying Leasehold Property

Before we dive into the risks, let’s briefly look at why people are drawn to leasehold properties:

1. More Affordable

Leasehold properties are generally priced lower than freehold properties of similar size and location, making them appealing to budget-conscious buyers.

2. Located in Prime Areas

Many leasehold plots are in strategically located zones, especially in cities like Delhi, Mumbai, and Hyderabad, developed by government agencies like DDA, MHADA, etc.

3. Low Maintenance Burden

In many cases, major maintenance responsibilities lie with the lessor or development authority.

4. Attractive for Short-Term Living

If you're planning to live in a city temporarily (say, for work or studies), leasehold could be a cost-effective and convenient option.

Legal Framework Governing Leasehold Properties

Leasehold agreements in India are governed by the:

• Transfer of Property Act, 1882

• Contract Act, 1872

• Rent Control Acts

• State-specific land laws

• Local development authority rules

The lease deed is the most crucial document, outlining:

• Lease duration

• Renewal terms

• Rent/charges

• Rights of lessor and lessee

• Use restrictions

• Transfer conditions

Major Risks of Purchasing Leasehold Property

Despite the apparent benefits, leasehold properties carry several risks—some of which can have long-term legal and financial consequences. Let's explore them one by one.

1. Limited Ownership Duration

You don’t own the property forever. Once the lease term ends, ownership reverts to the original landowner unless explicitly renewed.

Case Insight:

Dr. KA Dhairyawan & Ors. vs. JR Thakur & Ors.
In this case, lessees constructed a building on leased land. After the lease term ended, the lessors demanded possession. Despite the lessees funding the construction, the Supreme Court ruled in favor of the lessors, stating the lessees had no right over the building once the lease expired.

Lesson: Even if you’ve built on leasehold land, your investment may revert to the landowner without compensation if the lease is not renewed.

2. Complex Lease Renewal Process

Renewing a lease—especially for old properties—can be legally and bureaucratically challenging. You may face hurdles like:

1. Delay in approvals

2. Hiked renewal fees

3. Changed land-use policies

4. Demands for conversion to freehold at premium rates

3. Restrictions on Transfer or Sale

Selling or transferring a leasehold property often requires:

1. Prior permission from the lessor

2. Payment of transfer charges

3. Adherence to strict conditions outlined in the lease deed

4. Failure to comply can result in legal complications or cancellation of the lease.

4. Low Resale Value and Financing Hurdles

Banks are often reluctant to offer home loans for leasehold properties, especially if the remaining lease term is less than 30 years. This:

1. Reduces the pool of potential buyers

2. Results in lower resale value

3. Affects liquidity during emergencies

5. Vulnerability During Government Acquisition

If the government acquires leasehold property, the compensation distribution between the lessor and lessee can be tricky.

Case Insight:

Ajit Singh vs. State of Punjab
The dispute was over how compensation should be divided between the landowner and leaseholder during acquisition. The court ruled that the lessee gets only 60% of the compensation, while the lessor retains 40%.

Lesson: Leasehold property compensation can be significantly less than freehold, affecting financial planning.

6. No Arbitration in Disputes

Leasehold disputes must be handled by civil courts and not arbitration panels.

Case Insight:

Himangni Enterprises vs. Kamaljeet Singh Ahluwalia
The court clarified that arbitration does not apply to landlord-tenant/leaseholder disputes under the Transfer of Property Act. This means disputes can lead to lengthy and costly court battles.

7. Difficulty in Getting Building Permissions

Lessee may face issues in:

1. Getting building plans approved

2. Undertaking renovations or structural changes

3. Acquiring completion or occupancy certificates

This is because many lease deeds prohibit major construction without lessor's consent.

8. Lack of Transparency in Lease Terms

Often, lease agreements are vague or not easily accessible to buyers. Ambiguity in:

• Lease period

• Use rights

• Renewal process can create confusion and disputes.

How to Mitigate These Risks

Despite the risks, leasehold property can still be a good option if due diligence is done properly. Here’s how:

1. Check Lease Duration

Ensure that the remaining lease term is at least 30 years or more. This is important for home loans and long-term security.

2. Read the Lease Agreement Carefully

Check for:

1. Renewal clauses

2. Transfer restrictions

3. Usage limits

4. Maintenance responsibilities

5. Penalties

Get it vetted by a property lawyer.

3. Prefer Converted Freehold Property

In many cases, you can convert leasehold to freehold by paying a one-time fee. This gives you full ownership rights. Check with the local development authority if this is possible.

4. Obtain Necessary Approvals Before Buying

Make sure:

• No dues are pending

• Lease rent is up to date

• Transfer permission is obtained from lessor

• Encumbrance certificate is clean

5. Consult Legal and Financial Advisors

Always consult a legal expert and a real estate advisor before purchasing leasehold property. It's a small investment that saves big headaches later.

Comparing Leasehold vs. Freehold Property

Government’s Role and Policies

Authorities like:

• Delhi Development Authority (DDA)

• Haryana Urban Development Authority (HUDA)

• MHADA (Maharashtra Housing Board)

often allot leasehold properties to individuals and housing societies. Some even offer conversion schemes, like DDA's online freehold conversion portal. Check with local authorities for eligibility and process.

Conclusion

Leasehold properties in India can offer a smart, affordable option for homebuyers and investors, especially in prime locations. However, they come with critical risks such as limited tenure, resale challenges, legal hurdles, and reduced compensation in case of acquisition.

To make a safe and informed decision, it is essential to:

• Conduct thorough legal due diligence

• Understand the lease terms

• Prefer properties with long lease periods or those eligible for conversion

In short, buying leasehold property is not bad—it just requires extra caution.

If you’re ever in doubt, always consult a legal property expert to guide you through the process.