What you need to know about leasehold estate

Consider a leasehold estate similar to a standard rental contract. An interest in a piece of property is given to a tenant by the owner or landlord. In essence, it grants the tenant the right to a specified type of use of the land.

What is the definition of leasehold estates?

Leasehold estates are a type of property ownership in which a person or organization enters into a long-term, fixed-term lease or rental arrangement with the property’s owner. In this arrangement, the person or entity that owns the leasehold estate is referred to as the “tenant” or “lessee,” while the person or entity that owns the real estate is referred to as the “landlord” or “lessor.”

What is an example of a leasehold property?

A condominium unit in a building where the land is owned by a different organization, such as a real estate developer or homeowners association, is an example of a leasehold property. In this case, the person or organization buying the condo unit gets a leasehold estate.

The length of the lease, which might vary but is frequently 99 or 999 years, is normally specified in the leasehold agreement. The owner of the leasehold estate is entitled to utilize the condominium unit as agreed upon during the term of the lease. The land on which the structure is located is still the landowner’s property.

What are the disadvantages of buying a leasehold property?

Purchasing a property on a leasehold basis can involve a number of drawbacks. Here are some of the most common drawbacks associated with leasehold ownership:

Lease term limitations

Leased properties have a finite lease term, meaning that once the lease expires, ownership of the property usually reverts to the landlord. This can lead to uncertainty and the potential need to negotiate lease extensions or face the possibility of losing the property.

Ground rent and maintenance costs

Leased properties often require payment of ground rent and service fees to the owner or a management company responsible for maintaining the property. These costs can increase over time and affect the affordability of the property.

Lack of control and restrictions

Leased properties are subject to the conditions set forth in the lease. This may include restrictions on making alterations or modifications to the property, subletting, and even keeping pets. The lease may also dictate the use of common areas and impose specific rules and regulations with which owners must comply.

Limited decision-making power

In leased properties, decisions regarding the management and maintenance of the building or development are usually made by the owner or a management company, rather than by individual tenants. This can result in less control over important decisions affecting the property and possible dissatisfaction with management practices.

Lease extensions and enfranchisement costs

Extending the lease of a property or purchasing the freehold (if available) may involve substantial costs, including legal fees, appraisal fees, and the possible payment of a premium to the owner. These additional expenses can significantly impact the total cost of the property.

Difficulty of sale

Leased properties with shorter remaining lease terms may be less attractive to potential buyers. The remaining lease term limitation may make it more difficult to obtain a mortgage and decrease the market value of the property.

Vulnerability to increases in ground rents

 In some cases, leases include provisions that allow for periodic increases in ground rent. These increases, especially if not limited or controlled, can increase significantly over time and create financial burdens for tenants.

Can you sell a leasehold property?

Yes, it is generally possible to sell a leased property. Leased properties can be bought and sold between parties, transferring the remaining term of the lease to the new owner. When selling a leased property, the seller usually assigns its leasehold interest to the buyer, who becomes the new tenant.

Additional things to think about

Assignment of the lease

In order to transfer the seller’s leasehold interest to the buyer, the seller, and buyer must complete all relevant legal procedures. An assignment of the lease or a deed of conveyance is typically used in this situation.

A lease information package, which includes information on the terms of the lease, service fees, ground rent, and other pertinent information, is typically sent to the buyer by the seller. The buyer can better grasp their rights and obligations by reading this material.

Read more: What does convey mean in real estate?

Landlord’s consent

Some leases may stipulate that the landlord must approve any property sales. As part of the approval procedure, the buyer could be asked to give the landlord references or financial data.

Lease valuation

A number of factors, including the remaining length of the lease, ground rent, service fees, and other lease clauses, may affect the value of the leased property. Before submitting an offer, purchasers may receive professional advice or have an assessment done to evaluate the worth of the leased property before making a proposal.

Anything that may be leased, such as a piece of land, a structure, or an apartment inside one, is considered a leasehold estate. Your objectives will determine the kind of leasehold estate you require.

Understanding leasehold agreements and how they impact the real estate you buy or sell is crucial. Real estate is typically either residential or commercial. Now that you are more familiar with the phrase, you may buy/sell real estate with more assurance.

Read more: What is a leaseback in real estate

Written by Vanessa Gallanti. July 5, 2023

Enthusiast about planning, project management, construction materials and technology, and construction. A civil engineer from Los Andes University and a content writer for Kukun.