Leasehold Property Meaning: Everything You Need to Know

Estimated reading time: 8 minutes

Are you considering a leasehold property in India? Understanding leasehold property meaning and how it differs from freehold is important for making smart real estate choices. Leasehold properties offer advantages but come with unique challenges, including lease terms and property value effects. 

This article covers key aspects like benefits, valuation, and lease extension processes. Get the essential insights to make informed decisions and optimise your property investment. 

Read on to be well-equipped for your leasehold property purchase!

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What is a Leasehold Property?

A leasehold property is one where the owner, called the lessor, grants the right to use the property to another party, the lessee, for a specific duration. This period can range from 25-30 years to as long as 99 years, with extensions possible up to 999 years. 

Unlike freehold properties, where the buyer owns the land and building indefinitely, leasehold properties involve a temporary ownership arrangement. The lessee pays for the right to use the property without actually owning the land, which remains under the lessor’s control. This distinction affects the lessee’s rights, as they may need permission for modifications and are subject to the terms of the lease. 

This arrangement can affect your eligibility for home loans, as banks may consider the remaining lease period and associated costs like ground rent and maintenance charges when evaluating the property’s value and your loan application.

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5 Advantages of Leasehold Property

Leasehold properties come with various advantages. Some of them are listed below: 

• Lower Purchase Cost: Leasehold properties generally come with a lower purchase price compared to freehold properties. This makes them more accessible for buyers who may have budget constraints, allowing them to invest in desirable locations at a reduced cost.

• Access to Prime Locations: Many leasehold properties are located in premium areas, often managed by government authorities or large entities. This provides buyers with the opportunity to live in high-demand areas without the higher cost typically associated with freehold properties.

• Reduced Maintenance Burden: Maintenance of common areas and the building structure is usually handled by the lessor. This arrangement can ease the financial and managerial burden on lessees, as they are often responsible only for the interior of their units.

• Customisation Opportunities: Leasehold properties often allow for interior modifications and upgrades, offering flexibility to personalise the space according to individual preferences. This can be particularly advantageous for those who want to improve their living environment without the constraints of full property ownership.

• Lease Extension Options: Many leasehold agreements include provisions for extending the lease term. This provides a degree of security and stability for buyers, as they can negotiate lease extensions to ensure long-term residency and avoid the disruption of lease expiration.

Leasehold Property vs. Freehold Property

Aspect	Leasehold Property	Freehold Property
Ownership	You own the property for a fixed term (e.g., 30-99 years), while the land remains with the lessor (often government or large entities).	Complete and indefinite ownership of both the land and the building.
Duration	Fixed lease term, with options for extension (up to 999 years). Shorter lease terms can impact value and financing options.	Permanent ownership with no time constraints on the duration of ownership.
Initial Cost	Lower purchase cost due to temporary land rights. This makes it more accessible for first-time buyers or those with budget constraints.	Higher purchase cost reflects full ownership of land and property.
Maintenance	Maintenance of common areas is often handled by the lessor. Lessees are typically responsible for interior upkeep.	Full responsibility for all aspects of property maintenance and repairs, including land.
Modifications	Modifications, especially structural changes, may require the lessor’s approval. Restrictions can limit customisation options.	Greater freedom to make structural and aesthetic changes without needing external approvals.
Financing	Financing can be more complex; banks may scrutinise lease length and terms, affecting loan approval and interest rates.	Generally easier to finance with more favourable loan terms and conditions due to permanent ownership.
Property Value	Value may decline as the lease term shortens; potential impact on resale value. Buyers may be cautious of expiring leases.	Property value tends to be more stable and potentially increases over time, benefiting from permanent ownership.
Lease Extension	A lease extension is possible but can involve additional costs and negotiations, potentially affecting future financing.	No lease extension is necessary; ownership is permanent, offering long-term security.

How to Calculate the Value of a Leasehold Property?

Several leasehold property calculators are available online. You can use them to easily determine the value of a leasehold property. 

Let’s say you lease an asset that costs Rs 3,00,000. After the lease period, the asset’s value is expected to be Rs 70,000. The interest rate on the lease is 9%, and the lease lasts for one year (12 months).

To calculate your monthly payment:

• Subtract the residual value (Rs 70,000) from the cost of the asset (Rs 3,00,000).
• Using the interest rate (9% per year, which is 0.75% per month), the monthly payment comes out to be approximately Rs 20,554.17.

Over 12 months, your total payments will add up to Rs 2,46,650.

The total interest you pay over the year is Rs 16,650.

Simple tips to calculate the value of a leasehold property:

• Assess the Remaining Lease Term: Determine the number of years left on the lease. Shorter leases may reduce property value and complicate home loan approvals. Consider how the remaining term impacts your valuation and financing options.

• Analyse Ground Rent and Service Charges: Review the ground rent and service charges associated with the leasehold property. High or escalating charges can lower property value and affect loan eligibility. Factor these costs into your valuation.

• Evaluate Comparable Sales: Research recent sales of similar leasehold properties in the area. Make sure they have comparable lease terms and conditions. Use this data to establish a market value benchmark for your property.

• Consider Lease Terms and Conditions: Examine the lease agreement’s specific terms, including renewal and maintenance clauses. Favourable terms can enhance value, while restrictive terms may decrease it. Adjust the property value based on these factors.

• Calculate Lease Extension Costs: Estimate the potential cost of extending the lease. This can affect both property value and future financing. Obtain a professional assessment to include these costs in your valuation.

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Step-by-Step Lease Extension Process

Step-1 Review Your Lease Agreement

Examine your current lease agreement to understand the terms related to the lease extension, including any conditions and costs involved. This initial step helps you identify key aspects of the lease that may affect the extension process and financing options.

Step-2 Obtain a Professional Valuation

Hire a certified property valuer or surveyor to assess the value of your leasehold property and estimate the premium for extending the lease. This valuation is essential for negotiating a fair extension fee and for securing favourable terms with your lender.

Step-3 Contact the Freeholder

Notify the freeholder or their managing agent of your intention to extend the lease. This formal notification, often in writing, should include the valuation report and your request for lease extension terms. Initiate discussions to understand their requirements and respond to their initial offer.

Step-4 Prepare and Submit the Extension Application

Draft and submit a formal application for lease extension to the freeholder. This application should include the valuation report, your proposed terms, and any necessary legal documentation. All required information should be accurate and complete to facilitate a smooth process.

Step-5 Negotiate Terms and Finalise Agreement

Review the freeholder’s response and negotiate the terms of the lease extension, including the new lease term and any additional costs. Once both parties agree on the terms, a formal lease extension agreement will be drafted for review and approval.

Step-6 Complete Legal Documentation

Engage a property lawyer to handle the legal aspects of the lease extension. Your lawyer will ensure that the lease extension deed is properly drafted, executed, and registered with the relevant land records office. This step formalises the extension and updates the property records.

Step-7 Pay Extension Premium and Associated Fees

Make the necessary payments for the lease extension premium, legal fees, and any additional costs. These payments are crucial to finalising the extension and securing the updated lease terms. Ensure you receive confirmation of all transactions for your records.

Step-8 Update Property Records

The updated lease terms should be registered with the local land registry or municipal office. This step is vital for reflecting the new lease duration in official property records. This can further impact future financing and property transactions.

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Conclusion

The complexities of leasehold property can be challenging. You should understand the key elements, from lease terms and valuation to extension processes. It empowers you to make informed decisions. Whether you’re buying, selling, or extending a lease, being well-informed is crucial for securing the best terms and avoiding potential pitfalls.

To ensure you’re getting the best advice and support tailored to your specific needs, visit Credit Dharma. Our experts are here to guide you through every step of the home loan process and help you secure optimal terms for your property investments. 

Don’t leave your property decisions to chance! Contact us today and let us help turn your property goals into reality.

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Frequently Asked Questions