Here’s Why Leases Are For 99 Years
A “freehold property” and “leasehold property” are some common real estate jargons we have come across. In the former case, city development authorities sell off the land as freehold to developers through auction. Properties built on such land are "free from hold" of any other entity except the owner for an indefinite period. On the other hand, leasehold properties are those where developers acquire land development rights through lease for a period between 30 to 99 years, from the time of construction. Many buyers are curious to understand the rationale behind the unusual figure of 99 years, and who acquires the ownership after the lease ends.
Let us explain.
The 99-year lease concept
The lease starts from the date of land allotment and adheres to certain terms and conditions set by the government viz. lease period, nature of rights, duties of lessor and lessee, conditional clauses, termination clause, dispute resolution clause, etc. The developer can then proceed with construction and sale of residential or commercial projects. Buyers will own these properties only till the period of 99 years after which the landowner can claim the ownership. Also, the landowners receive a ground rent as per the 99-year lease agreement.
However, property owners can seek to the extend the tenure through lease renewal after the term ends. Furthermore, there is a provision by the government for the conversion of a leasehold property to a freehold on payment of conversion charges. Property owners also have the right to buy another lease when the original lease expires or extend the period up to 999 years.
Not only in India, the concept of this 99-year term existed in other countries as well. According to the traditional American common law, this was an arbitrary or indefinite time to cover the life expectancy of any lessee or lessor and secure the property ownership of the lessor. Moreover, 99 years was considered an approximate period encompassing three generations.
Buying a leasehold property
Leasehold properties, quite affordable than freehold, can be purchased as an investment option but not if you intend to pass it on from generation to generation. But if you are buying a property which has covered 30 years of its lease period, selling it would be difficult as financing them is tough as banks are reluctant. Besides, low rate of appreciation and dropping values are deterrents for prospective buyers, especially if the remaining period is less than 30 years. Buyers may face issues with the renewal of the occupancy contract, title transfer and registration, additional expenses like property tax. However, if a buyer intends to buy a leasehold property, he or she should confirm if the seller has obtained a transfer memorandum from the local development authority. In case of smaller leasehold periods, developers could face challenges in terms of procuring funds for construction.