Freehold and Leasehold Meaning
What You Should Know:
- There are three main types of property ownership; freehold, leasehold, and co-operative housing.
- In a freehold agreement, you fully own the property and land. It is the most common form of ownership in Canada.
- In a leasehold agreement, you own the property on top of the land but not the land. As a result, you must pay ground rent and condo fees.
- Freehold properties are more expensive because you are also buying the land. However, they appreciate more than leasehold property.
There are few things more essential about your house than whether it's freehold or leasehold. Although many people find the technical legal language intimidating, it distinguishes between owning your property outright and renting the ground from a landlord. Getting this information wrong when buying a home can be an expensive mistake.
What does freehold mean?
Quite simply, owning a freehold property means you fully own the property and land. As the name suggests, it is "free from hold" of any entity besides the owner. Both the property and land are owned in perpetuity by the owner and can be used however they please (within local regulations). This is opposed to a leasehold property where you only own the property for a specified lease duration.
In Canada, freehold ownership is the most common way to own a home. Most single-family homes are freehold.
What does leasehold mean?
A leasehold means that you are leasing the land from the owner for a specified period. Although you may own the building, you rent the ground and pay additional maintenance fees and service charges. The standard lease lasts around 99 years. However, they can range from 40-999 years. At the end of the lease, the renter must renegotiate land fees with the landlord.
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Freehold Townhouse
There are two types of townhouses in Canada; freehold and condo. In a freehold, the owner wholly owns the property, so they are responsible for all maintenance and costs associated with the property. As a result, freehold owners do not have to pay condo fees. They also do not have shared communal areas as a typical condo would. However, freehold townhouses are becoming increasingly popular because people are looking to avoid condo fees.
In general, freehold townhouses are great for real estate investors and those who want the freedom of a standalone home without the cost. This is because they provide real estate investors with more appreciation and better cap rates and homeowners with the flexibility to make the changes they want.
Freehold Strata
A freehold stratum is somewhat of a combination between freehold home ownership and leasehold condo living. Although you fully own your home and land in freehold strata, communal amenities are shared between the subdivision. Owners must pay condo fees to maintain the shared spaces. However, owners are required to maintain their individual property. As a result, the condo fees will be lower than traditional leasehold strata because they don't include individual unit maintenance such as snow removal or landscaping. The downside of individual maintenance is that some residents may choose to neglect property upkeep.
Additionally, freehold strata owners must abide by additional rules established by the homeowner's association. To summarize, freehold strata owners fully own their individual property and land. However, they share communal amenities. They must pay a small fee to maintain the common area. Additionally, unlike standard freehold ownership, strata freehold owners must follow additional neighbourhood rules.
Freehold Condo
Freehold condo is just another name for freehold strata. The term strata is used in British Columbia, while the term condo is used in other provinces. In a standard condo purchase, you own the inside of your unit, but the condo corporation maintains the exterior. In exchange for maintenance, you pay condo fees. However, with a freehold condo, you do not have to pay fees to maintain your individual property because you are expected to maintain it yourself.
Freehold condo owners also typically own the land their unit is built on. As a result, they see more price appreciation but pay more for the unit upfront.
Freehold Land
With freehold ownership, the owner also owns the land under the building. In a leasehold agreement, the landlord owns the ground, but another party owns the building on top of the land. This is typical with condos, and the renters must pay land rental fees to the landlord. One benefit of owning freehold land is there are no restrictions on inheritance. This means the owner can sell the property as they please and do not need approval from the landlord.
Freehold vs Leasehold
Freehold properties are more popular among purchasers than leasehold properties. In addition, freehold property prices climb at a faster rate than leasehold ones, and so buyers like purchasing them. Furthermore, it's simpler to obtain a mortgage on a freehold property than one on a leased one.
However, those who prefer not to maintain their property should opt for a leasehold. These properties have a lower purchase price, and you should receive landscaping included in your ground rent. It is always best to double-check your lease agreement to confirm that maintenance is included with your fee.
Financial Considerations
Obtaining a Mortgage
Banks are generally more inclined to lend on a freehold property than a leasehold one. This is because it is considered a safer investment since the registration of a freehold property has been completed and is expected to rise in value. Banks are also prepared to provide larger home loan sums for freehold properties. However, they are more expensive upfront.
Receiving Insurance
Home insurance protects your property in the case of an accident. For example, a storm or a fire may damage the property. With insurance, your provider will pay for the cost to repair the property.
- Freehold: Owners of freehold property must insure both their land and house. As a result, their premiums will be higher than leasehold owners who only need to insure the home.
- Leasehold: Owners of leasehold property only own the house and not the land it was built on. As a result, they do not need to insure the ground as that is the landlord's job. Leasehold owners generally opt for building insurance. This policy will cover the cost to repair the building due to pre-specified damages. Additionally, leasehold owners may obtain content insurance to protect their belongings in the event of damage.
Investment Information
Real estate investors prefer freehold units because they provide more appreciation and cash flow. As stated previously, land appreciates more than buildings. By owning the ground, an investor can maximize their return. Additionally, freehold property owners do not need to pay land rent to a landlord, as is the case with a leasehold. Therefore, freehold investors can increase their cash flow to receive a more favourable cap rate.
However, some real estate investors prefer purchasing land and creating a leasehold agreement. The investor only owns the land in this strategy and establishes a lease agreement with a building owner. The investor then receives land rent every month and does not need to worry about maintaining the building.
The Types of Freehold Ownership
There are three main types of freehold estates, each of which might be owned for eternity. Some have specific criteria that must be satisfied before they may be inherited, while others do not.
- Fee simple absolute: This is the standard type of freehold ownership where owners have complete and unrestricted control of the land and building. Owners can use the property however they wish within local regulation. There is no set length of ownership, the property can be transferred as the owner pleases, and the owner's heirs can inherit it.
- Fee simple determinable: This is a form of ownership in land that is subject to certain restrictions. For example, a provision might be that the land may only be utilized for educational purposes and can only produce corn. If the conditions for using the property are broken, the previous owner can reclaim the property.
- Life Estate: A life tenant is an individual who may own the property for as long as they live. The life tenant is responsible for keeping the property in good condition and preventing waste generation. When they pass away, the life tenant loses all rights to the house.
The Types of Leasehold Ownership
A leasehold estate is a type of real property that allows you to rent the ground for a period without having significant possession rights. There are four distinct types of leasehold agreements.
- Estate for years: The majority of leasehold contracts are classified as an estate for years. The lease must have a set duration and an established start and end date. For the course of the lease, the tenant agrees to pay rent to the landlord and comply with the provisions of the lease agreement. When the lease ends, the landlord can renew or terminate the tenancy.
- Estate from year to year: As the name suggests, this tenancy renews every year. This type of tenancy typically happens after a fixed-term lease expires and there is no renegotiation.
- Tenancy at will: This arrangement has no formal contract or lease agreement between landlord and tenant. Because there is no fixed-term contract in place, either party has the right to terminate the tenancy at any moment. Tenants may be required to provide 30 day's notice before being compelled to leave.
- Tenancy at sufferance: This tenant had the right to reside in the property at some point but their legal right to stay has expired or been terminated. The tenant does not have permission from the landlord to remain on the premises, and they may be sued for unlawful detainer.
Converting Leasehold to Freehold
It is a possibility to purchase the ground from your landlord to transition your leasehold to freehold. You will be a freeholder of the land and no longer need to pay ground rent through this process. If you wish to do this, it is essential to have money set aside if the ground owner decides not to sell their land or wants significantly more money than what you were prepared for.
Land ownership laws vary between provinces, and it is essential to determine the legal implications before committing to this process. Always talk to a real estate lawyer before starting this process.
The Bottom Line
Freehold or leasehold is the distinction between land ownership. A freehold estate implies full ownership, while a leasehold estate involves a lessor and lessee agreement. Leasehold renters must pay ground rent to their landlord even though they own the building. However, leasehold properties are cheaper than freehold ones because they do not include the land.
Financial institutions are more likely to offer loans on freehold properties due to the lower risk. Freehold owners must insure both their land and house; money set aside is recommended if ground price negotiations do not pan out as expected. Owners wishing to convert their leasehold into freehold should consult legal counsel for what implications this process may have within their country.
Frequently Asked Questions
What are some examples of a freehold property?
The best example of a freehold property is a typical single-family home. In this situation, you own both the house and the land and have the freedom to make whatever changes you want. There is no ground rent or property maintenance fees as there would be in a leasehold condo.
What is the difference between freehold and leasehold property?
A freehold estate implies full ownership, while a leasehold estate involves a lessor and lessee agreement. Leasehold renters must pay ground rent to their landlord even though they own the building.
Can you renovate a leasehold property?
You can modify a leasehold home, although there may be certain restrictions. You can always alter the décor and layout of your rooms, for example. However, structural modifications to the property without the owner's approval are forbidden. Even minor repairs require the authorization of the owner on some properties.
Why do people buy leasehold properties over freehold?
The primary reason is due to financing. As mentioned in this article, leasehold properties are less expensive than freehold. For example, someone who makes $40,000 a year may not be able to mortgage a one-bedroom "freehold" condo for $700,000 in a desirable area; however, they might manage a leasehold in the same neighbourhood for $550,000. Financing is just one component of many when it comes to homeownership alternatives.
Is a 999-year lease as good as freehold?
It depends on what you are looking for. A leasehold will have a lower purchasing price but you will be required to pay ground rent and maintenance fees. Additionally, you will not experience the appreciation in land value.
Can I get a mortgage for a short leasehold that has less than 25 years left?
Not for a mortgage that is longer than 20 years. Banks will only lend to leaseholds that expire five years after the amortization period. This is because banks do not want to deal with the uncertainty that arises near the lease expiration.
Who pays property tax for leasehold properties?
The lessee generally pays all real property costs such as taxes, insurance, upkeep, and financing charges. These costs are frequently referred to as "pass-throughs" because they are expenses that transfer from the owner to the tenant.