From Leasehold to Freehold: Should Cooperative Housing Societies Opt for Land Conversion During Redevelopment?

Introduction: –

In urban areas like Mumbai, where land is a scarce and valuable commodity, the question of land tenure becomes increasingly significant for cooperative housing societies considering redevelopment. Many of these societies operate on leasehold lands, which have specific rights and obligations tied to them. However, as land values continue to rise, the potential benefits of converting leasehold lands to freehold lands deserve careful consideration. The government struggled to uphold the lease rents set in outdated agreements. In response, it issued several circulars stating that lease rents would now be determined based on the current ready reckoner rates at the time of renewal. This shift has drastically affected numerous housing societies and individuals with rights to leasehold lands, resulting in some facing rent increases in their previous amounts.

As a result, various cooperative housing societies and individuals challenged the Maharashtra government’s resolutions from May 29, 2006 (“2006 GR”), December 12, 2012 (“2012 GR”), and May 5, 2018 (“2018 GR”). These resolutions outlined the new calculation method for lease rents and included provisions for converting leasehold plots to freehold.

Understanding Leasehold vs. Freehold

Leasehold land refers to property that is leased from the government or a private entity for a specified period, often with conditions regarding rent and usage. In contrast, freehold land grants complete ownership rights, providing greater flexibility for development and financial investment. This distinction can impact not only property value but also the rights and responsibilities of landholders.[1]

Case:-

The Hon’ble Bombay High Court addressed the challenge to the aforementioned Resolutions in Writ Petition No. 939 of 2014, filed by Anil Kapoor and others[2] against the State of Maharashtra (referred to as the “said Writ Petition”), alongside several similar petitions. The court identified three key issues regarding the Resolutions:

1. Can the government determine the lease rent for lands leased to the Petitioners based on the value of the land according to the Ready Reckoner?
2. If the answer to the first question is yes, is the increase in lease rent as outlined in the 2006, 2012, and 2018 GRs extortionate, exorbitant, or manifestly arbitrary?
3. Lastly, even if the previous questions are answered in favor of the government, can the government adjust the lease rent every five years based on the land’s value at the time of such revision?

Facts of the case:-

The predecessors of the Petitioners were granted 50-year leases by the Secretary of State for India in Council (British Crown), with many taking possession of their plots in 1901. As most leases expired in 1950 and 1957, the government issued a resolution directing the Collector to renew these leases for an additional 30 years. Consequently, the leases were extended from January 31, 1951, to January 1, 1981, under the terms specified in that resolution. Many lessees developed their lands and sold flats to third parties.[3]

In 1986, the Government of Maharashtra issued a resolution dated March 14, 1986 (“1986 GR”), which raised the residential lease rent by approximately 25 times the rate in effect before January 1, 1981. However, this increase was challenged and subsequently annulled by the Hon’ble Bombay High Court on April 23, 1992. Following this, the government introduced another resolution on October 5, 1999 (“1999 GR”), which recalculated lease rents based on the land’s value at the lease’s expiration. This 1999 GR was withdrawn in 2004, and the government then enacted the 2006 GR, which used the “Annual Statement of Rates” (i.e., the ready reckoner rate) as the basis for valuing government lands.[4]

Subsequently, the 2012 GR was passed, renewing the Petitioners’ leases for another 30 years at revised rates based on the ready reckoner values, with adjustments scheduled every five years. Additionally, this resolution allowed lessees the option to convert their leasehold lands into Occupancy Class-II land upon payment of a specified premium. Finally, the 2018 GR was introduced, updating the rates established in the 2012 GR.

Order:-

After hearing both parties, the Hon’ble Bombay High Court issued an order on July 10, 2024 (“the said BHC Order”), which included the following key points:

1. The government did not consider the full market value of the land, recognizing that there are existing lessees. Therefore, it determined that the lease rent would be calculated based on only 25% of the land’s value according to the Ready Reckoner, affirming the government’s right to revise the lease rent.
2. The rates specified in the resolutions are not deemed exorbitant, extortionate, or manifestly arbitrary.
3. Lastly, the government is not permitted to revise or reset the rates on a five-year basis.

In line with the 2012 GR that allowed for the conversion of leasehold lands to freehold, the Government of Maharashtra issued a notification on March 8, 2019, establishing the Maharashtra Land Revenue (Conversion of Occupancy Class-II and Leasehold Lands into Occupancy Class-I) Rules, 2019 (“said Rules”), which facilitated the conversion of leasehold lands and lands held under Occupancy Class II tenure into freehold lands. These rules were later amended by the Maharashtra Land Revenue (Conversion of Occupancy Class-II and Leasehold Lands into Occupancy Class-I Lands Self-Redevelopment Amnesty Scheme) (Second Amendment) Rules, 2024, dated March 16, 2024, along with a notification on June 28, 2024 (“said Amended Rules”). The Amended Rules outline specific rates for cooperative housing societies planning redevelopment on leasehold lands, with applications due by September 30, 2024.

Considerations for Cooperative Housing Societies

Before making a decision on conversion, cooperative housing societies should consider several factors:

1. Cost of Conversion: The process of converting leasehold land to freehold may involve significant costs, including premiums and legal fees. Societies must assess their financial readiness for this investment.
2. Member Consensus: Engaging with all members to gauge interest and obtain a consensus is crucial, as the decision will affect the entire community.
3. Legal Implications: It’s important to consult legal experts to understand the implications of conversion, including any changes in rights or responsibilities.
4. Long-Term Planning: Societies should consider their long-term development plans. If redevelopment is imminent, freehold status may provide the flexibility needed to maximize value.

Benefits of Converting to Freehold

Converting leasehold land to freehold can provide several advantages:

1. Enhanced Property Value: Freehold properties generally have higher market values, which can benefit current owners when selling or renting out their units.
2. Greater Autonomy: Freehold ownership allows cooperative societies to make independent decisions regarding property management, redevelopment, and modifications without needing governmental consent.
3. Stability and Security: Freehold ownership provides long-term security, reducing the anxiety associated with lease renewals and the possibility of steep rent increases.
4. Investment Potential: Owners of freehold land can leverage their properties for financing or investment, enhancing their financial stability and growth potential.

Conclusion

As Mumbai continues to grow and evolve, cooperative housing societies must navigate the complexities of land tenure. Converting leasehold lands to freehold presents both opportunities and challenges that merit careful consideration. By weighing the financial implications, legal aspects, and member interests, societies can make informed decisions that enhance their value and security in the long run. Ultimately, the choice between leasehold and freehold can significantly influence the future trajectory of these societies, making it a crucial topic for discussion among stakeholders. Co-operative housing societies situated on leasehold lands planning to undergo redevelopment should consider applying for the conversion of their lands to freehold by September 30, 2024.

[1]Nisha Nambiar, Housing Societies want free to convert leasehold land to freehold cut <https://timesofindia.indiatimes.com/city/pune/housing-societies-want-fee-to-convert-leasehold-land-to-freehold-cut/articleshow/100262586.cms> 20.09.2024

[2] Anil Kapoor and 11 Ors vs The State Of Maharashtra And Anr on 10 July, 2024, writ petition no. 939 of 2014

[3] Indian Kanoon, Anil Kapoor and 11 Ors vs The State Of Maharashtra And Anr on 10 July, 2024, https://indiankanoon.org/doc/69758811/,

[4] Bhoumick Vaidya, Urjita Chitnis, Dev Vazirani, Leasehold Lands To Freehold Lands: Whether Cooperative Housing Societies Up For Re-Development Should Consider Converting Their Underlying Lands To Freehold? < https://www.mondaq.com/india/real-estate-and-construction/1512680/leasehold-lands-to-freehold-lands-whether-cooperative-housing-societies-up-for-re-development-should-consider-converting-their-underlying-lands-to-freehold> 22.09.2024