Fractional ownership in real estate: How it works and its benefits

When purchasing a property, it's crucial to understand the type of ownership you're acquiring, which is mostly either freehold or leasehold. While freehold ownership is more common and straightforward, leasehold properties come with specific rights and limitations. In this article, discusses the meaning of leasehold property, your rights as a lessee, and the lease renewal process.

Many budget-conscious buyers and investors are drawn to competitively priced homes but worry about long-term ownership risks. That’s where leasehold properties come in—they offer affordability, but come with limited tenure.  

This raises a key concern: is leasehold property really a good investment in the long run? Let’s evaluate its true investment potential by understanding some key concepts around leasehold properties. 

What is a leasehold property? 

Leasehold property refers to real estate where an individual or entity (the lessee) acquires the right to use and occupy land or a building for a specified period, typically through a lease agreement with the actual owner (the lessor or freeholder).  

Unlike freehold property, where ownership is perpetual (for an indefinite period), leasehold property rights are time-bound and goes back to the lessor once the lease expires, unless renewed.  

In India, State-specific development authorities like Delhi Development Authority (DDA) and Maharashtra Housing and Development Authority (MHADA) commonly allot properties on a leasehold basis.  

Key features of leasehold property 

Here are some defining features of a leasehold property: 

• The lessee has the right to occupy and use the property for a fixed term, which is often 30, 60, or 99 years. 

• Ownership of the land remains with the lessor; only the right to use the property is transferred to the lessee. In a ground lease, the lessee can build structures, farm or conduct business on the land that is leased. 

• Leasehold properties usually have lesser upfront costs than freehold properties, and they attract buyers on a budget. 

• The lessee can rent out, sub-lease or transfer the property, subject to certain restrictions as specified in the lease deed or otherwise. 

• Leasehold properties are common in both residential and commercial real estate, especially in urban areas and government-owned lands. 

• The value of a leasehold property decreases as the lease term shortens, making timely renewal critical for maintaining property value. 

• The lessee is usually the one responsible for the internal maintenance the property. 

10 Important legal rights of a leaseholder 

While a leasehold property comes with certain regulations, here are some fundamental rights offered to a leaseholder not just by contract, but also through the statutory law: 

• Right to peaceful enjoyment: Leaseholders have the right to occupy and use the property for the duration of lease without undue interference from the landlord. 

• Right to information: Leaseholders are entitled to know the name and address of the landlord (freeholder) and to receive information about service charges, insurance, and other costs related to the property. 

• Right to challenge charges: Leaseholders can challenge certain service charges and other costs if they believe these are unreasonable. They also have the right to be consulted about major works like substantial repairs or improvements and maintenance costs. 

• Right to access common areas: Leaseholders have reasonable access (within the restrictions set by the freeholder) to communal parts or shared areas of the building and grounds, as well as utilities and services specified in the lease. 

• Right to sell/transfer the lease: Leaseholders can transfer their leasehold interest to another party in some cases, subject to the terms of lease. The new owner acquires the remaining lease term. 

• Right to extend lease and enfranchisement: In many jurisdictions, leaseholders have a statutory right to extend the lease. They can also collectively purchase the freehold (enfranchisement), especially of a shared building or housing complex, provided they meet certain criteria. 

• Right to form a tenant’s association: Leaseholders can come together and create a tenants’ association, which can collectively represent their interests to the landlord. 

• Right to maintenance and services: Leaseholders are entitled to well-maintained common parts and amenities as specified in the lease. The landlord is responsible for keeping the property and communal areas in good repair. 

• Protection from forfeiture: If a leaseholder breaches the lease, the landlord cannot immediately repossess the property. Legal procedures must be followed,

  
  

  including serving the notice and obtaining a court order. 

• Statutory right at lease expiry: In some cases, long-term leaseholders may have statutory rights to remain as tenants or to extend their lease at the end of the term.