Can I offer packages with a free domain offer for signing up, however retain sole rights to the domain unless it's purchased from me at the expiration of a certain plain?

For instance... a user signs up for a package and gets a free domain, however I retain the rights to the physical name so the user can't immediately cancel the hosting package and take the domain and run with it.

However, if the user wants to go to another hosting company, they can purchase the domain from our company for $x or after six months of service, something like that.

Is that legally possible?

Yes, it is legally possible. Just make sure your organization is listed as the registrant for that domain.

For fair business practice you should make sure the customer understands this policy since there are some organizations who offer something similar to this but doesn't release the domain over to the customer.

Excellent. From an ethics point, yes, the customer would need to understand this, so it would need to be included in any agreements that would be associated with that account (I wouldn't want it to come as a "suprise" at the end... could leave a bad taste in a customers mouth).

Thanks for your reply m2dek!

As a customer I wouldn't consider a deal like that where I don't own/control my own domain name from the start. Wouldn't recommend to anyone else either. If you do offer it, like others have said, make sure the terms are unmistakeably clear to the customer right from the start.