What is the reason for 99 years LeaseSamar Javed09 January 2020
99 year lease clause is read and heard a million times but the crux still sounds confusing and misleading owing to the confusing jargon which is used at times. To understand what is a 99 year lease agreement it is important to understand what a lease means!
What is a Lease Agreement?
A lease is a legal contract between the lessor and the lessee in which the lessee agrees to pay the lessor the amount due towards him for the use of the asset. The lessor gets the ground rent for the land use by the lessee. Generally, real estate property is leased for the tenure of 99 years and post that depending on the circumstances either the contract gets renewed or it becomes freehold.
In a lease agreement, the roles and responsibilities of the lessor and lessee are spelt out and deviation of either of the parties calls upon for legal action.
99 year Ease Concept
99 year lease was an arbitrary time-span which was spelt out under the traditional American common law. This time period however, has varied lately but still, the phrase 99 years lease happens to be used in common parlance when it comes to real estate deals.
Property can either be freehold or leased depending on the rights of the owner:
- Freehold Property means that it is the owner who has all the rights on the property and it is free from the hold of any other party.
- Leased Property means that the property is in the name of one entity and it has been given to the other for use to the other party for a period which generally happens to be 99 years. This period starts from the time of construction of the property in question. In the case of leased properties, land developers seek land development rights for a period which can vary from 30-99 years and post that decide what has to be the future course of action.
How does 99 year Lease work?
The 99 year lease is used as the time span which can go up to three generations and thus has been used since time immemorial in conjunction with the concept of the lease. This time frame was set to 99 years because it would cover the lives of the lessor and the lessee and thus the rights of both the parties would stand safe during the period of the contract.
The lease agreement becomes functional from the day the land is allotted to the developers and thus come binding the duties of the lessor and lessee, lease period, termination and dispute clause etc. It depends on the developer whether he wants to use it for commercial or residential purpose for the stated period of 99 years.
What happens when a Land Lease Expires?
Once the land lease expires:
- the landowner takes the property and then decides whether the lease has to be continued or
- the leased property has to converted into freehold property after paying the conversion charges or
- the lease has to be extended for a period up to 999 years
Buying a leasehold property
Buying leased properties is affordable in comparison to freehold properties but come with inherent challenges which are:
- It is not something you can pass on from one generation to the other because of the specific time frame.
- Buying a leased property which has already covered 30 years of lease is not a viable option because you will face difficulty at the time of selling the same.
- Additional charges like title transfer and registration, property tax and renewal of occupancy contract can increase the budget allocated for the property.
- In case the period of expiry of the lease is less than 30 years, the rate of appreciation will be comparatively low and this can be a big deterrent for the prospective buyers to invest in such a property.
While buying a leasehold property, the buyer must confirm that the seller has a transfer memorandum from the local development authority.
Rent Vs Lease in India
There are instances where rent and lease tend to be used interchangeably but both the terms are different in terms of the rights and obligations of the tenant-owner and lessee-lessor respectively.
- Maintenance: In case of lease, maintenance has to be done by the lessee while in case of rented asset; the owner is responsible for maintenance.
- Period of contract: Lease is signed for a longer period in comparison to the rental agreement.
- Considerations: Monthly installment is paid in case of lease while rent can be paid monthly/quarterly or bi-annually.
- Flexibility: Once the lease agreement is signed, there are no changes to the terms whatsoever, while the landlord has the flexibility to alter the terms of rent agreement as per his/her convenience.
- Expiry: Once the lease gets expired, the lease contract can be renewed or the lessee can purchase the property as well. This option is not available in the rent agreement.
Some facts about leasehold property
- In most of the case, apartments, townhouses, condominiums are sold on lease.
- When you buy a Leasehold Property you must be clear that :
- You have the right to stay on it for a specified period of time.
- You will not be the legal owner of the property in the eyes of the law.
- Understanding what happens at the end of leasehold is important because in case of lease extension the role of the seller is very important and there are costs such as ground rent, property value etc which have to be taken into consideration.
- Be informed of the terms and conditions of the lease and what all you are entitled to.
- Make sure that the conditions relating to the increment of ground rent are mentioned explicitly otherwise it can dig a hole in your pocket.
- Expenses related to maintenance, service charges and insurance shouldn’t be hidden at any cost.
A leasehold property can be a good and a secure investment option provided you are cautious with the terms and conditions.