Leasehold vs Freehold

The 'to buy or not to buy' question in my mind has been replaced with the 'to buy leasehold or not to buy?' Recently, I fell in love with a house but it is a leasehold property. I've always been adamant to only buy freehold properties. But this property made me want to throw away every advice I've heard into the wind.. I read and read online and finally decided to err on the side of caution..

Taken from The Star online here.



Tuesday April 10, 2012

Freehold dilemma

ARTICLES OF LAW
By BHAG SINGH

Once a piece of land is alienated as leasehold, it remains so. Whether it can later be changed to freehold is a matter entirely in the hands of the land authority.

THE ordinary citizen who intends to buy a house and proceeds to do so is often attracted by the picturesque display of what is advertised, usually through a newspaper or a huge billboard.

This could in some cases lead to the buyer visiting the site office where attractive miniature models and an actual model unit will further influence the prospective buyer. All may appear well and the prospective buyer may put forth the deposit required.       

However, the frustrations and regrets of a house buyer sometimes emerge many years later as illustrated by a newspaper report on the residents of a housing estate in Kuala Lumpur. According to the report: “Residents of Taman Cuepacs in Segambut, Kuala Lumpur, are frustrated that their applications for freehold status from leasehold have been rejected by the Federal Territory Land and Minerals Department.”

The house buyers who are government servants booked the houses in 1973. At that time they were informed that the land was freehold. They said that “the property developer, Syarikat Koperasi Kerjasama Cuepacs, had put up signboards and banners stating that it was a freehold property.”

The developer had applied to the Land and Minerals Department for what was then “agricultural land” to be developed. But when the house buyers signed the Sales and Purchase Agreement, they were shocked to see that the status of the land was leasehold.

This change would have come about at the stage when the application to convert the existing agricultural land to residential, and have the land sub-divided, was made.

A lease is a grant for a fixed number of years. This is in contrast to freehold which is like giving the land away permanently and is also referred to as a grant in perpetuity.

When the state alienates land, it is within its powers to decide whether to alienate it as freehold or leasehold and if so, for how many years. In the case of a lease for residential purposes, it is usually for 99 years though it could be shorter.

There are, of course, leases of 999 years which were issued prior to the present legislation. In the Peninsular, it is the National Land Code which generally governs the subjects, while in Sabah and Sarawak, it is the Land Enactment and Land Code. Other state laws also affect land dealings.

Title

It is also the case that in a particular state in the country, not everyone will have the same type of title. In some states, the title for property owned by one category of people may be freehold and for another category of people, it will be leasehold even though they are in the same locality.

In yet other instances, it may be that one category of people may have a lease for 99 years and others may have 60-year leases, again in the same locality. Land is a matter over which the state has the necessary powers. Such situations arise because of the laws applicable and the exercise of administrative powers.

Coming back to the predicament mentioned earlier, what are the options? Apart from the powers vested in the land authority, the house buyers, who relied on the billboard advertisement, went on to sign the Sale and Purchase Agreement which clearly indicated that the land was leasehold.

Though they were initially told that the land was freehold, it was a different story at the time they signed the Sale and Purchase Agreement. At this stage, it was clear and known to them that it was not freehold land but leasehold land that the houses were to be built on.

It is understandable that at that stage, the house buyers had little choice. The choice would have been between getting the leasehold property for that price or nothing at all. At that point, 99 years would have appeared to be a long time away and something to be thought about later.

However, with the remaining years of the lease getting shorter and shorter, and the owners getting older, it has now dawned upon them that what they got is not what they imagined it to be.

This is because once the lease expires, the land will, in the absence of a renewal, revert to the state. Furthermore, as the lease gets shorter, the ease with which the property can be sold also diminishes because this makes the property less marketable.

There is nothing in the law which gives the owners a right to change the status. Of course, in most cases where the land is part of a developed area, the lease will likely be extended. However, this will be subject to payment of a premium and in most cases, the new lease is likely to be for a shorter period.

What is narrated above provides an opportunity for house buyers to fully appreciate the nature of the land when buying landed property. A buyer should be very clear about what he is buying if his house is on leasehold land.

In many cases, developers display glowing pictures of the property to be sold and its surrounding environment. However, often the more important and significant details relevant to buyers may be in small print. Sometimes the print may be so small that many people cannot make out the words, unless special attention is paid to it or a magnifying glass is used.

Fine print

That is not all. Sometimes the fact that it is leasehold may be clearly displayed but the fine print may also disclose that the land was alienated in 1995, which means that what the buyer is effectively getting is 85 years and not 99 years.       

Thus where the Sale and Purchase Agreement clearly shows that it is leasehold land, this would be binding on the property owner. Asking for a change to freehold is asking for a variation of the terms on which land was alienated.

Any variation is a matter that depends on the agreement of all the parties concerned. There is no unilateral right to do so. That there are different practices in different parts of the country, or for that matter state, may make it appear unfair to some.

However, that is a different aspect of the matter.


UPDATE: My main grouse is the amount that would be due for the premium. Even after posting this post, I still kept on looking for answers, or rather a way to justify buying leasehold to myself. I came across this article! Read about it here.

Want to know what we decided on in the end? Find out here