Buying Leasehold Property in India? Know the Risks & Court Rulings
In India, property ownership is classified into two parts: leasehold and freehold. Both the property types have their own pros and cons, but leasehold property often gets into dispute due to its complex and temporary nature.
Today, in this blog, we will try to understand the major disputes with leasehold properties by taking references of Supreme Court verdicts and answering three major questions that arise when we consider entering a leasehold contract for a property.
Understanding Leasehold Property
When you choose to lease a property, it is a temporary agreement where the lessor (property owner) grants permission to the lessee (the buyer) to use the property for a specific period without controlling the land.
The lessee can be the government, an authority, or any individual. After the end of this temporary period, the property possession goes back to the lessor. It is advisable to lease the property for longer periods — usually 25 to 99 years.
But, when you buy a freehold property, you are the owner of the structure, building, or land in perpetuity. If you can afford to buy under freehold, it is the more secure choice for most.
Read more: Leasehold Property Vs Freehold Property
Risks of a Leasehold Property in India
Although flexibility and affordability can be attractive, many disputes arise due to its complicated nature. The Supreme Court had to get involved a number of times. Here are three such cases that resolve the common problems you have when you leasehold a property.
Possession dispute
Firstly, you have to remember that you are a temporary occupant, and therefore, you have limited rights. Even if the construction was paid for by you, as the lessee, you could lose the right to these buildings or constructions.
Such a case arose in the Supreme Court – Dr. K.A. Dhairyawan and Others versus J.R. Thakur and Others – where the land was leased for 21 years. The lessee paid for the construction and obtained permission from the owner before doing so.
At the end of the lease, the lessee wanted possession of the building. But the Supreme Court ruled in favor of the owner under the Bombay Rents, Hotel and Lodging House Rates Control Act, 1947.
So, after the lease expires, the lessee would lose possession of such constructions, no matter who paid for them. This is why you should be careful and check the remaining term of your lease. If you want to construct on leasehold land, try to choose a property that is available for more than 80 years. This will ensure that your investment is safe from future property disputes.
Compensation dispute
The state or the centre could occupy your land, which is currently under leasehold, and provide you with compensation. The loophole is that it involves two owners – the lessor and the lessee. Although the lessee is just the temporary owner, they are also entitled to a share in the property value.
In such a case in the Supreme Court – Ajit Singh versus the State of Punjab – a dispute arose over who would receive the compensation: the lessor or the lessee. The court ruled that the compensation would be divided between the two owners. The lessor (owner) would receive 40% of the compensation, whereas the lessee (buyer) would receive 60% of the compensation.
This ruling highlights the problems that can arise if you lease your property and the government occupies it. You would end up losing more than half of the property value, and it proves to be a risk for your investment. If your property was under freehold ownership, you would have received the entire compensation. This means that the owner, in this case, would be vastly underpaid.
Who will be the arbitrator?
When you make late lease payments or damage the property, you violate the terms and conditions in your lease contract. Similarly, if your landowner is unable to deliver on the promises in the agreement, conflicts can arise.
In such a case, you would want an arbiter to step in to keep the process simple. But actually the civil court is responsible to resolve this dispute. Arbitration is a situation where a third party is appointed to resolve conflicts in cases where other laws are not involved. But when it comes to property disputes, arbitration is not the solution.
In the case of Himangni Enterprises versus Kamaljeet Singh Ahluwalia, the Supreme Court ruled that the jurisdiction of property disputes falls under the civil court. The ruling was made under the Transfer of Property Act, 1882.
Therefore, in the case of any disputes in a leasehold property, you should approach the civil court. This process is lengthy and can prove to be expensive as well.
Tips for Buyers
So, if you think that owning a leasehold property is the right decision for you, follow these tips for a smooth possession process:
1. Work with a realtor who is experienced with leaseholds. Consult experts and do your research before you dive in!
2. Check how long the lease is valid, especially if it is being transferred between two lessees. Look for long leases like 99 years; it is ideal, but you should aim for at least 25 years.
3. Verify if the lease is prepaid. In case it's not, the lease payments could increase substantially, adding to your future burden and costs.
4. Check with your bank or mortgage broker before making an offer.
5. Budget for unforeseen costs.
Conclusion
While leasehold properties can be valuable in the right circumstances, your research today will protect your investment tomorrow. These properties offer genuine advantages for specific situations, particularly for those seeking affordability, flexibility, or prime locations with lower upfront costs.
However, as Supreme Court verdicts demonstrate, a better insight into the world of leasehold property is necessary. Before investing, carefully assess the lease duration, payment terms, and legal problems to ensure your investment aligns with your long-term goal.
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