What does leasehold mean?
As the purchaser of leasehold property, you acquire the right to occupy and use the leased property for the time period stated in the lease agreement. In return for this right, you agree to make rent payments to the lessor and abide by the other terms of the lease.This article is concerned with the ground lease and with those leases related to the ground lease, such as an apartment lease. The ground lease is a lease of land only, usually for a long term (55 years or more, from the original date of the lease). It is a means used to separate the ownership of the land from ownership of the buildings and other improvements constructed on the land. In many cases, a developer enters into a master ground lease with the fee simple owner, agreeing in the lease to construct a residential project within a certain period of time. The developer or cooperative Corporation, or in some cases the ground lessor, then enters into a sublease or a new lease of the land with the apartment owner. The developer may lease the improvements to the apartment owner by way of an apartment lease or sublease, or sells the improvements to the apartment owners by way of a condominium conveyance or apartment deed.
The long-term lease should be distinguished from the short-term rental of an apartment where, for example, a tenant rents and apartment from a landlord for a six months to a year and makes monthly rent payments. In the latter case, the tenant receives no ownership in the land or the unit. The tenant only enjoys the right to use the apartment during the period of the short-term rental. In contrast, the lessee of the long-term lease enjoys the right to sell the leasehold interest to a new buyer.
What is the difference between leasehold and fee simple?
FEE SIMPLE: Fee simple ownership is probably the most familiar form of ownership to buyers of residential property, especially on the Mainland. Fee simple is sometimes called fee simple absolute because it is the most complete form of ownership. A fee simple buyer acquires ownership of the entire property, including both the land and buildings. The fee simple owner does not pay ground rents, but does pay maintenance fees and real property taxes. 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: The leasehold interest is created when a fee simple land-owner enters into an agreement or contract called a ground lease with a lessee. A lessee buys leasehold rights much as one buys fee simple rights; however, the leasehold interest differs from the fee simple interest in several important respects. First, the buyer of residential leasehold property does not own the land and must pay ground rent. Second, his use of the land is limited to the remaining years covered by the lease. Therefore, the land returns 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.
LEASED FEE INTEREST: After a lessor leases his land to a lessee, The lessor retains an interest called the leased fee. Once, the fee owner leases the land to the lessee, the lessor's rights to the land are subject to the rights of the lessee under the lease. The lessor's rights include the right to receive rent payments, the right to enforce the lease conditions such as maintenance, and the right to recover complete possession and control of the property when the lease term expires.
PURCHASING A LEASEHOLD PROPERTY
Because it is so important that buyers understand the terms of the lease before purchasing a leasehold residence, Hawaii law requires that the seller furnish the buyer with certain information about the lease.What information must be disclosed?
COPY OF LEASE DOCUMENTS: At a minimum, the buyer must receive a copy of the lease document or documents which contain the major provisions of the lease. The lease documents could be any one of the following:- The master lease and any amendments; or
- The apartment lease and any amendments; or
- For buyers of new condominium apartments, a copy of the condominium public report.
RECEIPT OR CONTRACT: The buyer must sign a receipt or a copy of the sales contract to acknowledge receiving the lease documents. The receipt or contract must also include a summary of the major provisions of the lease in plain language, lease rent renegotiation dates, how renegotiated lease rents will be calculated, and surrender clause provisions. Normally this will be accomplished in a separate addendum attached to the contract or receipt. Buyers also must be informed that current law does not give condominium and cooperative leases the right to require that the lessors sells them the leased fee interest in the land under their apartments. Finally, the buyer needs to acknowledge that he or she has read and understands the terms of the lease documents.
Who must disclose this information?
It is the responsibility of the seller to furnish the buyer with a copy of the lease documents and other information about the lease. The seller may provide the information directly or through an agent, most likely the seller's real estate agent. Copies of the recorded lease and amendments are available at the Bureau of Conveyances public record office in Honolulu.When must leasehold information be disclosed?
The seller or seller's agent must provide the required information to the buyer within 10 days from acceptance of the sales contract (that is, no later than 10 days from the date the buyer and seller reached a final agreement for sale of the property).What information about the lease should the buyer understand?
As a buyer, you should read the lease carefully and be sure you understand its terms and conditions and how they affect you and relate to your plans and goals. The best time to do this is before you make an offer to purchase your leasehold apartment unit. To obtain a copy of the lease, ask the seller, the seller's agent, or your own adviser. In reviewing a lease, it is especially important to find out the following information:LEASE TERM: Find out the length of the lease, how many years are remaining until the lease ends, and whether their is any right to extent.
LEASE RENT: Be sure you understand how much lease rent you will have to pay (which often includes general excise tax), when it is payable and to whom, what penalties are prescribed for late payment. Lease rents typically adjust periodically every 10 or 15 years. Find out when the rent adjusts, and to what amount. Also find out whether or not your maintenance fee payments include the lease rent.
LEASE RENT RENEGOTIATION DATES: At some point the rent may adjust, but to an amount which will be renegotiated at that time. Know when the rent payments are scheduled to be renegotiated. The lease likely contains more than one renegotiation date, such as every 10 or 15 years.
CALCULATION OF NEW LEASE RENT: Understand how the new rent payments will be determined upon renegotiation, including any procedures involving the use of arbitration. The lease often contains a formula for calculated the new lease rent. This formal is generally based on a percentage of the market value of the unencumbered fee simple land existing at the time of renegotiation. If market value increases significantly, so will your future lease rent.
SURRENDER CLAUSE: Read the surrender clause carefully. It tells you what will happen to your apartment unit when the lease comes to an end. Most leases provide that the buildings on the land including your apartment, become the property of the lessor upon the expiration of the term of the lease--automatically and without any payment.
AMENDMENT TO LEASE: Leases are sometimes amended to reflect a change in the lease terms or an extension of the term of the lease. The best way to tell if their have been amendments is to examine a recent title report on the property prepared by a licensed title company.
Questions to ask before you by leasehold property
- How long is the lease term? When is the expiration date, and is there an extension clause?
- How much is the lease rent?
- When are the lease rent renegotiation dates?
- How will the new lease rent be determined?
- What are the terms of the surrender clause?
