Definition of Leasehold
Leasehold is a terminology which is used in the field of property related to land or real estate where it means temporary ownership of a land or property where the lessee or the tenant has the rights to the physical possession of the property with the help of some kind of title granted by the lessor or landlord and in the case of such the property is considered to be personal property of the lessee during the leasehold period.
Leasehold hold as mentioned above is a common term which is used when a lessee is granted temporary ownership to a property or land by the actual owner or lessor. Here the lessee buys the right to occupy the land or property from the lessor for a specific period of time. Lease is considered to be a legal estate and it can be bought or sold in open market. Here the asset is typically property such as building or some allotted space in the building or else a piece of a land. The lessee comes forward and discusses with the lessor and a contract between them is signed for the right to use the building, space or the land in return for a fixed set of scheduled payments which will be payable to 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 bit complicated which includes lot of things to consider such as payment structure, conditions for breach of contract and improvement to the agreement clauses too.
Example of Leasehold
One very common example of leasehold is big retail or departmental stores like Walmart. Walmart has got operations at a lot 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 the 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 tend to lose its value or worth , which is at times even close to 80% of its value and the premium start rising drastically once when the unexpired terms of the leasehold is below 80 years. This is generally known as the concept of “marriage value” which is further defined as the estimation of the potentiality which the house or land bears to have an increase in its value once the extension of the lease 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 property which is under leasehold declines parallelly in line with the length of the unexpired term as they will tend to become more difficult to sell or given for 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 freehold on the same property or the piece of land. The right to buy freehold without the agreement of the lessor is called enfranchisement. At times some lessors or landlords will sell the freehold even when the lessee has not made any formal claim but 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 few factors like the house/property, the lease agreement and the tenant or the lessee meeting certain stipulated condition to fulfill freehold agreement. Freehold is generally defined as the right to buy the house and the premises surrounding the same from the lessor. Few conditions which are set for freehold are as follows:
- House: The house must be typically considered a property which 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 which are paid to the lessor by the lessee for the leased property. 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 ownership of the lessor when the lease gets expired 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 full rights over the property whereas 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. Cost to acquire a freehold property is very high whereas cost to acquire a leasehold property is really low when compared to 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 leasehold property the lessee has to follow certain 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 same was drawn for freehold too. It totally depends on the lessor-lessee on what sort of agreement they want to enter into 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 declining value of leasehold. You may also have a look at the following articles to learn more –
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- Current Liabilities Formula
- Assets vs Liabilities