Who owns your building land?

A ready possession 2BHK flat was available at a 10% low price at Andheri. The deal was fixed and the money was due the next day. The night before, it was suddenly realized that it was not checked whether the builder owns the building land. Opened the RERA site on the laptop, entered the registration number of the project and started checking. In this regard, it is mainly to be checked whether the land is not a lease hold. Legal title report is not useful because mostly it mentions whether the land is dispute free, marketable & free of encumbrances. After checking for a long time, paragraph number 30 and 31 in the contract letter with the builder were noticed. Both the land and the building were leasehold and being leased for mere 30 years. Next day morning while informing the mediator that the deal has to be cancelled due to this reason, it was realized that he really did not know anything about it. He had bought a flat and a shop in same building. He did not believe anything and strongly insisted on contacting Builder’s Chief Sales Executive in this regard. Finally, the Builder’s Chief Sales Executive, after taking a very tentative approach, accepted that both the land and building were on 30 years lease. Except for one or two flats, all the flats in the building were sold and these flat buyers had formed a whatsapp group. When mediator disclosed this news on whatsapp group, it was very shocking for all these flat owners. None of the flat owners knew anything about it and none of them ever took the efforts to read agreement clause Nos.30 & 31. Some flat owners asked on phone, what is the harm to us due to this issue?
 
When considering what & how the harm is, several points should be kept in the mind :-
 
1. When we buy a flat worth 1 crore, at least 45 to 50 lakh rupees we pay for our share of the land. It means, taking the money worth the freehold land (land with ownership rights) builder is actually providing us leasehold land (rental land). Even if he offers us at 10% less price, but in the end he extracts at least 30 lakh rupees extra. As per wealth tax rules, when the lease period of the building is less than 50 years, it’s value goes down by at least 36%. Andheri land is expensive compared to Borivali land and compared to Andheri land, south Mumbai land is expensive. The main difference in the price of flats is determined by the price of freehold land in that locality. The cost of construction does not vary much and is marginal compared to other costs. That means let the flat in south Mumbai be at Rs.50,000/sqft or in Andheri be at Rs.25,000/sqft, in both the cases, the cost of construction shall be around Rs.3,500 per sqft. The higher the price of the flat on the leasehold land, the bigger the fraud.

2. For leasehold land one has to pay annual rent as per lease agreement. Since 2017, there has been a huge increase in annual ground rent on state government land (MHADA, Cidco, MIDC etc). Now, it has also been arranged that it will be increased every year by linking it to the ASR (Ready Reckoner rates). For private leased land, annual ground rent is payable as mentioned in lease agreement.

3. Terms & conditions mentioned in lease agreement have to be followed. This mainly leads to the many limitations in the redevelopment of the building. If any work is to be done on the building and premises, the permission of the land owner is required.
4. General understanding is that the lease is just a formality & lease period is always extended without much efforts. But actually as per lease agreement we agree to the term that we can be asked to vacate after the completion of lease period. Do you remember the old age home scene in the movie `Munnabhai MBBS’? In that scene, the corrupt official does not extend the old age home lease period at the behest of the builder. In the future, when your lease period ends, it will be in the hands of, then political leaders and government officials, to extend it. In the case of private land, it will depend on the land owner.

5. Even if lease period got extended, the terms & conditions, lease period and annual rent are subject to change. Formerly government lands in Mumbai were offered on 99 years lease tenure and annual rent was only Re.1. But since 2012, The lease term has been limited to 30 years and annual rent has been increased hugely. This will definitely happen in case of private land.

6. In fact, property tax should not be made applicable to the flat owner, at least for land component, since it is not owned by the flat owner. But both, property tax & annual rent, are collected from flat owner.

7. Terms and conditions are subject to change at will & at any time. MHADA has changed the conditions, particularly regarding permission for redevelopment, several times. This has made redevelopments of MHADA lands very difficult.

8. The valuation of such flats also works out to be very low. So, when you need valuation of your flat for Visa formalities to send your son/ daughter abroad and expect to get valuation of flat to be Rs.1 Crore, at your dismay, valuation may turn out to be only Rs.60 lakh if it is a leasehold land with balance lease period of 40 years.
 
This may happen in case of the private land also. Even after many years, the residents of many societies do not know that they are living on the land which is leasehold. In such a case, even getting renewal of lease shall be very difficult task for a private land.
 
Basically, why does this situation occur? Common man has a misunderstanding that whenever a flat is purchased from builder, it is on fully ownership basis, that is, we own the land also. All the clarifications regarding the land are usually mentioned in the first (builder's) agreement. But generally no one seriously reads it. As reflected in the scenario described at the beginning of this article, the tendency of the builder, while selling, is to hide such things. It is also very difficult to check by opening the RERA site, because there is no direct question on RERA web site whether the land is leasehold or freehold. Hence, one needs to peruse proforma of agreement of sale or Form B declarations to get the information on RERA web site, which is very difficult for common man.

Considering all above aspects, while purchasing a flat, check whether the land is leasehold. If it is leasehold, work out whether price of the flat is reduced in terms of balance lease period. Don’t trust builder or estate agent, insist on actual perusal of lease agreement, from it confirm the tenure of lease & work out the balance lease period. When lease period is more than 50 years, the value of such property should be reduced by at least 20% as compared to any adjoining property on freehold land and when lease period is less than 50 years the value of such property should be reduced by at least 36% as compared to any adjoining property on freehold land.

Beware of the fact that builder has not invested in purchasing the land for the project, but is trying to extract that non-invested amount from your pocket and that amount is very huge. Most of the time it is your life time saving.