Fee Simple vs. Leasehold
Most people are only familiar with one type of real estate ownership; fee simple, also known as freehold. It is important to know the difference between fee simple and leasehold, especially if you’re buying real estate in a leasehold state such as Hawaii along with a few other states in the US.The difference in these two types of land tenure is very different and affects the value of the real estate.
FEE SIMPLE: Fee simple is sometimes called fee simple absolute because it is the most complete form of ownership. A fee simple buyer is given title (ownership) of the property, which includes the land and any improvements to the land in perpetuity. Aside from a few exceptions, no one can legally take that real estate from an owner with fee simple title. The fee simple owner has the right to possess, use the land and dispose of the land as he wishes: sell it, give it away, trade it for other things, lease it to others, or pass it to others upon death.
LEASEHOLD: A leasehold interest is created when a fee simple land-owner (Lessor) enters into an agreement or contract called a ground lease with a person or entity (Lessee). A Lessee gives compensation to the Lessor for the rights of use and enjoyment of the land much as one buys fee simple rights; however, the leasehold interest differs from the fee simple interest in several important aspects. First, the buyer of leasehold real estate does not own the land; they only have a right to use the land for a pre-determined amount of time. Second, if leasehold real estate is transferred to a new owner, use of the land is limited to the remaining years covered by the original lease. At the end of the pre-determined period, the land reverts back to the Lessor, and is called reversion. Depending on the provisions of any surrender clause in the lease, the buildings and other improvements on the land may also revert to the lessor. Finally, the use, maintenance, and alteration of the leased premises are subject to any restrictions contained in the lease. During the lease term, typically there is a lease rent to be paidand there may be periodical increases throughout the term.
Important Leasehold terms to know:
- Lease Term – The length of the lease period (usually 55 years or more)
- Lease Rent – The amount of rent paid to the Lessor for use of the land
- Fixed Period – The period in which the lease rent amount is fixed
- Renegotiation Date – Date after the fixed period that the lease rent is renegotiated
- Expiration Date – The date that the lease ends
- Reversion – The act of giving back the property to the Lessor
- Surrender – Terms of the reversion
- Leased Fee Interest – An amount a Lessor will accept to convey fee simple ownership