Definition of Leasehold
Leasehold is a terminology that is used in the field of property related to land or real estate where it means temporary ownership of land or property where the lessee or the tenant has the rights to the physical possession of the property with the help of some title granted by the lessor or landlord and in the case of such the property is considered to be the personal property of the lessee during the leasehold period.
Leasehold hold, as mentioned above, is a common term used when a lessee is granted temporary ownership of a property or land by the owner or lessor. Here the lessee buys the right to occupy the land or property from the lessor for a specific period of time. A lease is considered a legal estate that can be bought or sold in the open market. Here the asset is typically property such as a building or some allotted space in the building or else a piece of land. The lessee comes forward and discusses with the lessor. A contract between them is signed for the right to use the building, space, or land in return for a fixed set of scheduled payments that will be payable to the lessor over a period of time which is generally coined as the lease period. One very common example of Leasehold is that owners of big retail stores will often go for leasehold agreements in big shopping malls rather than purchasing the space there or constructing their own building. The leasehold contracts for commercial spaces can be a bit complicated, which include many things to consider, such as payment structure, conditions for breach of contract, and improvement to the agreement clauses.
Example of Leasehold
One very common example of Leasehold is big retail or departmental stores like Walmart. Walmart has operations at many sites with big buildings used in operations. Such stores will never purchase or construct the buildings but, instead, go for leasehold agreements where Walmart enters into a lease agreement with such building owners or the lessors and takes possession of the property for a stipulated period of time. This agreement entered is generally renewed when the lease gets over and henceforth continued.
Declining Value of Leasehold
With the passage of time, as the Leasehold nears the expiry date of the contract, the leasehold property tends to lose its value or worth, which is at times even close to 80% of its value, and the premium starts rising drastically once when the unexpired terms of the Leasehold are below 80 years. This is generally known as the concept of “marriage value,” which is further defined as the estimation of the potentiality that the house or land bears to increase its value once the lease extension has been approved. By legal means, tenants with less than 80 years left of their lease must pay upfront half of the marriage value discussed above as a token to compensate the owner of the property or the lessor. The value of the property under leasehold declines parallelly in line with the length of the unexpired term as it will become more difficult to sell or give for a further mortgage. Leasehold properties with more than 80 years pending on their contract should be extending it as early as possible.
Buying the Freehold on Leasehold Property
The leasehold reform Act has given a provision to the lessee or the tenant of the property a right to buy the freehold on the same property or the piece of land. The right to buy freehold without the agreement of the lessor is called enfranchisement. Sometimes, some lessors or landlords will sell the freehold even when the lessee has not made any formal claim. On the grounds where a lessee has to or doesn’t have to make a formal claim, one should take professional advice to seek the overall cost of the entire process. The right to enfranchisement or freehold of the property depends on a few factors, like the house/property, the lease agreement, and the tenant or the lessee meeting certain stipulated conditions to fulfill the freehold agreement. Freehold is generally defined as the right to buy the house and the premises surrounding the same from the lessor. A few conditions which are set for freehold are as follows:
- House: The house must be typically considered a property that defines all the criteria of being a house and has got a visible demarcation from any adjoining house or property.
- Lease: The lease must be for a long term of more than 21 years, or it must have a right to renew the same.
- Leaseholder: One must be the leaseholder of the house or property before one applies for freehold or enfranchisement.
Leasehold improvements can be explained as the charges for enhancements that are paid to the lessor by the lessee for the leased property. A few examples to explain the same can be building interiors and false ceilings, electrical and plumbing works, carpeting the interiors, and building in-house cabinets. These improvements will typically revert to the lessor’s ownership when the lease expires unless and until the lessee can remove the structures or the additional objects built without causing any damage to the property.
Leasehold vs Freehold
Freehold property means the tenant or lessee becomes the owner and has complete rights over the property. In contrast, Leasehold means the lessee buys the property but has no ownership rights as it belongs to the owner or lessor. In cases of freehold, the lessee/owner has full rights over the property, and he/she can make changes, whereas, in freehold, the lessee/owner cannot make any kind of changes to the property. The cost to acquire a freehold property is very high, whereas the cost to acquire a leasehold property is really low compared to a freehold. There is no tenure attached to freehold as the property now belongs to the owner, whereas in cases of Leasehold, there is a pre-defined tenure involved. In freehold properties, duties or responsibilities are not compulsory, whereas, in a leasehold property, the lessee has to follow specific duties and responsibilities.
As discussed above, we could see how leasehold property is defined and how it is different from freehold properties too. We could also understand the pros and cons of having a leasehold property, and the same was drawn for freehold too. It depends on the lessor-lessee on the agreement they want to enter based on their choice and criteria.
This is a guide to Leasehold. Here we also discuss the definition and explanation along with an example and the declining value of Leasehold. You may also have a look at the following articles to learn more –
- Long-Term Liabilities Example
- Liabilities in Accounting
- Current Liabilities Formula
- Assets vs Liabilities