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4 Categories Of Leasehold Estates
There are 2 critical factors that differentiate leasehold from freehold estates:
- Although there is legitimate possession and use of the land, ownership does not exist
- There is a finite duration tied to the land
In layman’s terms, anything that is not freehold is… as good as a rental. However, as most homeowners and investors will not outlive the lease on their property, a leasehold does not make much of a material difference when put in this context.
Under a leasehold agreement, the user of the house or land is the lessee or can also be called the tenant. While the party doing the leasing is the lessor or often the landlord.
Please note that in this context, tenants refer to property buyers and investors. Even though they have acquired (bought) leasehold property and become owners, technically they are just leasing the property or land, usually from the government.
In real estate agreements like this, the tenant even though is not the ultimate owner, cannot be coerced in giving up the property as long as he abides by the terms surrounding rules of ownership. This is with the exception of extraordinary circumstances.
During the lease, the ultimate owner is said to hold a reversion on the property. This refers to his right to recover or repossess the property when the lease period expires.
Also, it is not uncommon for parties who own freehold land to sell plots and parcels on a leasehold basis.
Here are 4 types of leasehold estates
1) Estate for years
Most new real estate investors don’t realize the full picture of how this works. And the confusion can cause a lot of unhappy owners and stressed-out developers.
For example, they might buy a 99-year leasehold apartment thinking that they get a home with 99 years to run. However the 99 years do not start from the date of purchase… even if it’s a new condominium.
Because the land might have been acquired years before sales started. And that will eat into the number of years left to run. So if selling activities only started 5 years after a developer acquired a piece of land, buyers will essentially be left with 95 years on the leasehold property.
This category of leasehold estates have a specific start date and end date. The time period does not start dynamically with the date of purchase.
2) Periodic estate
This is structured as a periodic tenancy from year-to-year. It has a fixed length based on the original lease.
And upon expiry, renews automatically unless explicit instructions have been communicated by landlord or tenant to terminate.
3) Estate at will
This is a typical lessor-lessee relationship with all the rights you expect from such a relationship… with one key difference.
The catch is that either parties may terminate the agreement at any time.
Because how broad a term this can encompass, state laws usually require such estates to specifically spell out a notice period when termination clauses are enforced.
4) Tenancy at sufferance
When a tenant continues to stay on the property after the expiry of the lease without agreement from the landlord, it is said that a tenancy at sufferance has occurred. This makes the wrongdoer a holdover tenant.
In these circumstances, the landlord has the right to start the eviction process and recover the property. The process has to follow the requirements of the state regarding eviction laws.
During this time, should the landlord accept rent paid by the tenant, it becomes a periodic estate.