Why Leasehold Property is shackling Mumbai’s Real Estate Potential?

Property ownership in Mumbai is largely in the leasehold format. Residential, commercial and industrial land have all been leased on varying tenures. As the lease periods come up for renewal or are at the tail end of the lease, the current lessors, mostly government agencies, demand conversion charges for change to freehold status. Currently, there are about nine different kinds of lessors with different mind-sets operating in Mumbai as outlined in Annexure 1.

Today, sellers are required to either take permission from the lessor authorities for changes in individual ownership or pay conversion charges of 60-70%. Even at concessional rates of 10-25% conversion charges which the government came out with for two years between March 2019-March 2021, very few owners came forward. Now the rates are back to above 60%.

Land is such a scarce commodity in Mumbai and most of the leasehold land has been recovered from marshes and wasteland. It is surprising that the government’s focus is more on making money on this land acquired for free, rather than unlocking the true potential of Mumbai’s real estate.

THE GENESIS

There are 9 types of leases available in Mumbai today (See Annexure 1).

The present issue of study is, however, restricted to collector land given on lease between 1950s and 1980s for development of housing societies and for commercial and industrial development.

The land, housing over 3,000 units across Mumbai and about 20,000 across the rest of Maharashtra were allotted between 1950s and 1980s by the government to promote the cooperative movement in the state. These were mostly reclaimed or acquired lands, which were allotted to specific groups of people for developing housing societies. This constitutes a fifteenth of all the cooperative housing development in the city. However, these lands are spread all over the city from the premium Cuffe Parade to almost all parts of Mumbai.

In 2014, housing societies on collector land across Maharashtra drew up a petition to the state to convert Class II Collector Land (leasehold) to Class I (freehold). This would allow the owners of housing, commercial and industrial leasehold land to freely redevelop the land without seeking government permissions for every redevelopment. The land was given on occupancy basis, which meant the ownership was given to individual buyers.

The problem arose when the houses were sold by the original allottees. Since the original allotment was for specific castes, communities or categories, it was mandated that the new buyer should conform to the original lists. Since that was not adhered to over the years, the new buyers or the societies could not register the sale with the collectors. Societies allowed new buyers in, but did not necessarily register the sale with the lessor authorities. In some cases, upto 15 sales of the same unit have been made over the past 30-40 years. For redevelopment the societies have to go back to the collector for permissions as the land is still not freehold.

Several societies formed area-wise pressure groups (Chembur, Ghatkopar, Kurla etc) from about 2013 and in 2014 and petitioned the state to allow the conversion to Class 1 or freehold to facilitate redevelopment. This has been pending for over five years.

In 2016, the government issued an order allowing the conversions by paying premiums based on ready reckoner rates. The premiums were lower for residential land and higher for commercial and industrial land. In September 2018, the conversion charges were pegged to 50% of the ready reckoner rates. This drew a lukewarm response because of the extremely high premiums charged for conversion to freehold land.

The clause that only persons of the reserved category could transfer or sell the land was also revoked. The only issue that remained was the hefty premium that the sellers had to bear. Many of the original allottees were now retirees and found the premiums unaffordable. As a result, many societies that went into redevelopment chose to transfer the liability of conversion charges from the individual seller to the new developer. However, the premiums on conversion at 60-70% were so high that the projects became unviable and did not take off.

A fresh agitation to lower conversion premiums was accepted by the Devendra Fadnavis government which issued a 2019 order which allowed conversion of Nazul land to freehold at 5% of ready reckoner rates and 10% conversion premium for all other residential societies till March 2022, after which they would revert to 60% of the ready reckoner rates. For commercial and industrial land, reduced conversion charges were 25% of ready reckoner rates which reverted to 70%.

This amount has been challenged in court, citing the Supreme Court verdict that the rights of the lessor cannot be more than 25% of the market value of the land. The ready reckoner value being the listed value of that plot, the government’s intent of charging 60-75 per cent has already been challenged in court.

However, in December 2020, a circular was issued by the revenue and forest department which stayed all conversions, citing foul play. Some land allotted for commercial purposes, purportedly availed of conversion under discounted residential rates. A new policy was to be announced soon.

Top legal experts say, “Collector lands have been given 50-999 year leases. The idea was to protect the allottees and give the benefits to more than one generation.”

The leases on places like Cuffe Parade still have validity for 30-40 years. Lease expiry being one generation away, the current owners prefer to wait rather than pay such high conversion charges. Even those who want to sell, are unable find buyers willing to pay such high conversion premiums.

There are also several implementation problems. In cooperative societies, say with 50 flats, if 10 want to buy the freehold status and 40 don’t or if 40 want to buy the freehold status and 10 don’t, the payment must be for the entire package. That unanimity is often impossible to achieve.

Many societies were also holding back from redevelopment because they wanted the developer to bear the cost of conversion. To bite the bullet, developers needed strong incentives. In Cuffe Parade, for instance, houses which had used 3 FAR did not have enough incentive left for the developer to profit after paying the conversion charges. If they had used 1.33 FAR, there would be enough incentive left to even consider the conversion.

Also the entire incentive policy was not publicised enough. No letters were issued to societies or no large public announcements were made, nor advertisements issued as for voluntary disclosures etc. The fact that the policy was announced in 2019 and the pandemic hit in 2020 was also responsible for the weak acceptance. In South Mumbai, only 19 of the over 1,250 plots given to individuals and housing societies came forward for conversion.

• To put the costs in perspective, to convert 1.4 acres with 7,634 sq m built-up area, retail chain D-Mart owner, RK Damani came forward in 2021 to pay Rs 65 crore to convert from leasehold to freehold at the rate of 25% of ready reckoner rates. The lease was originally fr 971 years and was due to finish in 2910. The application for conversion of the lease of the Malabar Hill property was made in 2019.

• In March 2022, Rustomji Developers paid conversion charges of Rs 29 crore to convert a plot at Lands End Bandra (W) to freehold.

• Prominent developer- Niranjan Hiranandani, chose to pay 25% conversion charges to convert his place of residence on Malabar Hill to freehold. He however, made a statement that sentiment for this piece of property purchased and built by his late father was the only driver to undertake such expensive conversion. 

RETHINK REQUIRED

Clearly, cost is a big hinderance when it comes to conversion to freehold.  We believe some serious rethinking is required to urgently tackle the on-ground situation.

The need for speed is because:

1. The quality of some assets of over 30-40 years, have deteriorated and are in need of redevelopment.
2. The original owners paid for these lands to get the occupancy. Charging exorbitant conversion rates at redevelopment by the government agencies shows a profiteering mind-set.
3. Owners and developers will come forward for redevelopment in these projects only if there is enough viability. Even at 25%, these rates are often way too high to justify the payments to convert the projects to freehold.
4. Longer period for concessional rates of conversion must be allowed, perhaps in continuity, as these transactions and decisions take a long time to make.
5. Many projects still have over 30 years before the lease runs out. Payment of very high rates to convert them is often deferred by the land owners to the next generation. This will stall development and actually lower state revenues. 
6. Redevelopment after conversion is only considered by projects that have used 1.33 FAR. For others the logic of conversion for redevelopment does not hold or seem viable.
7. Over the years original allottees have worked with society managements to sell to new buyers and exit without adhering to the original allotment stipulations of caste, class and religion. The social milieu that demanded such stringent stipulations may have changed and need to be revisited, if redevelopment of these structures is to be addressed.

RECCOMENDED SOLUTIONS

Speed is of the essence in finding solutions:

1. A more liberal regime of condoning past violations by paying premiums has to be soon put in place. A relook at societal needs and the requirement of reservations has to be urgently re-examined in an independent time-bound action.
2. Using incentives for conversion charges in a time-bound manner, rather than extract hefty premiums.
3. The period given to the market for conversion needs to be longer or in perpetuity, so that societies can seek individual owner consents to redevelop and then shortlist a developer who would be able to assess viability after paying the premiums. A one- or two-year period is too short for the typically long process of assent or transaction required to conclude real estate transactions.
4. More time should be provided for people to undertake the pre-processes of submitting applications and approvals.
5. The payment should be allowed in instalments as such large sums of money are difficult for pensioner allottees or even for builders.
6. A system of hefty fines and even cancellation of licences can be put in place as disincentives to a few unscrupulous developers who queer the pitch for those with serious, long-term intent to stay in the redevelopment market.
7. Better publicity of the scheme after the announcement so that everyone gets to know about it

Our submission is that the government must play the role of a facilitator of redevelopment, rather than that of a stern collector of premiums and taxes. The stamp duty and registration rebate in Maharashtra during the pandemic proved that lowering rates to reasonable levels can result in higher collections for the state.  This critical rationalisation of leasehold conversion charges could unlock tremendous value in Mumbai.

Annexure 1

LACK OF UNIFORMITY

Advocate Dr HarshulSavla

1. Maharashtra Housing and Urban Development (MHADA) lease or 33(5). Unviable land now made viable because of premium payable ratios linked to ready reckoner rates. Redevelopment has been changed to a cluster format, through a notification. Instead of developing buildings one by one, two or more buildings can be redeveloped in clusters, leading to better planning and community facilities. This directive supports the original large format MHADA Layouts. In 2017, MHADA was approved as a Special Planning Authority (SPA) for its own developments. In the rest of Mumbai, the planning authority is the Brihanmumbai Municipal Corporation (BMC). The Shiv Sena head is the chairman of MHADA, which has a land bank of thousands of acres, includingReclamation, Kalanagar and Ghatkopar.
2. Bombay Port Trust (BPT): This lessor is automatically terminating leases that come up for renewal. In this process it is chunking out a lot of land in South Bombay and Eastern Water Coast where the BPT lands are predominantly located. The western coast is predominantly through private development. The government wants the Eastern coast land back. There are still a lot of dilapidated cess buildings where the BPT should be looking at redevelopment. In cess buildings, owners have paid development cess for a period of time. BPT as a  lessor neither allows transfers nor development.
3. Estate Department: Much of the land here is on a 999-year lease. Eastern parts of Mumbai from Byculla to Sion and South Central Mumbai areas of Matunga, Sion, Lal Bagh, Chinchpokli, Colaba and Mazgaon are part of this.

The Estate Department wants to reduce the 999-year lease to 30 years. The Matunga Builder Association challenged it in a writ petition in 2013. A 999-year lease effectively meant freehold status. Any building that is made on Estate land, now has to give an indemnity.

Leasehold Estate land that has to be transferred, even to a son after the father’s death, is time consuming and expensive. It takes over six months and Rs 50 lakh for a 600 sq m plot to be transferred. Red tape is rampant in this category.

The Estate Department charges upto Rs 1 lakh per sq metre (carpet) to develop, rendering locations with rates below Rs 40,000 per sq metre non-viable for redevelopment. 

• Collector Land: The government came up with a scheme to pay 10% ready reckoner rates for residential property and get the land converted. But by the time people came to realise it, the one-year time period had lapsed and the rates were back to 60% of the reckoner rates. This has become  unviable because after paying so much for conversion, developers find it impossible to pay to the residents. Currently, the Estate Department is reconsidering the policy. It is believed that Collector Nidhi Chowdhary is reconsidering making it 10% for residential and 25% for commercial and retail property. These collector lands are in Central and Western Suburbs including localities such as Bandra, Versova and Chembur.
• MMRDA is another powerful lessor
• CIDCO in Navi Mumbai too has considerable leasehold land
• Central Public Works Department (CPWD): Its leasehold lands are in South Bombay, Kala Niketan and Marine Lines. It is a reluctant lessor and does not have a development policy. Most of these houses are cess buildings. They need approval from MHADA to process 33(7). But the BMC insists on a lessor NOC before they process the Intimation of Disapproval (IOD). The CPWD comes under the Department for Urban Development. Its Delhi office has had a freehold policy in the last three years. However, in Mumbai, where it owns over 2,500 acres of land, it has no policy of conversion. The CPWD in Mumbai, lodged in Pratishtha Bhawan is actually an engineering department that has by chance received the largesse of land.
• Another lessee is the Railway Land Authority.
• Private Leases: An interesting leasehold land is private leases such as the Juhu Vile Parle Development (JVPD) Juhu scheme, or the Khar Gujarati Samaj and the Arya Samaj scheme too are community based leases.

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