• DhammikaRanasinghe

Freehold rights and leasehold rights

Updated: Nov 22, 2019

for your reference only


Two forms of enjoying an immovable property is known as

· freehold

· leasehold

In freehold ownership, the owner owns the property absolutely, and his title to the property is paramount. The property is conveyed by a conveyance/sale deed with no restriction on the right of the holder of the property to further transfer the property.

On the other hand in leasehold ownership the lessor holds the absolute user rights to the property. The lessee holds the leasehold title to the property. The terms on which the lessee holds the property on lease are specified in the lease agreement. The respective rights and duties of the lessor and the lessee are detailed in the lease agreement, and they are strictly bound by those. Leasehold properties are not freely transferable. Depending upon the covenants of the lease deed, prior permission of the lessor is required to transfer the property. With a leasehold property lessee gets the right to live or possession there for a set period of time paying a ground rent to the land owner and at the end of the lessee all rights of the property reverts to the owner.

Long-term lease

A person enters into a long-term lease to acquire the security of property ownership, which is theoretically indefinite, without actually having to purchase the property. There can be many reasons to lease a property rather than purchasing real property, but the most common reason to avoid an outright sale is because either it is forbidden or envisage a massive tax. For example, some countries only permit citizens to own land, so non-citizens who wish to reside in those countries typically enter into long-term leases. Also, long-term leases have the benefit of locking in a particular (hopefully low) lease payment, whereas a mortgage payment or a short-term lease will fluctuate with interest rates and the real estate market. Long-term leases are sometimes used to make gifts of real property or as tax and estate-planning devices.

A 99-year lease is simply a long-term lease, and the way it works depends on the terms of the particular lease. Lease terms vary depending on whether a lease is residential or commercial. Even so, almost all leases include terms addressing the length of the lease period; the amount of rent and deposits the lessee must pay; whether the tenant may sublet or assign the property; and landlord access to the property. Commercial leases tend to grant more of the rights and responsibilities of ownership (even in relatively short-term leases of five or ten years), and they usually include detailed terms about legal rights and making improvements to the property.

For a lease term, there is nothing special about 99 years, rather the term of years is intended to convey the idea that the lease runs for the life of the tenant as most individuals don't live longer than 99 years. Other common terms of duration for long-term leases are 50 years, 80 years and 175 years.

Indeed, such long-term leases are usually used in the commercial context, for businesses, rather than in the individual, residential context. Private companies often enter into long-term leases for use of state land. For example, most ports are run by private companies, but the ports themselves are government property. In order to house the employees and business infrastructure, a company might lease a building on the port for a term of 99 years. As well, restaurants, bars, sports clubs and other location-sensitive businesses may enter into a long-term lease because the success of the business depends on staying in that particular location.

Shortcomings of leasehold ownership

Main drawback is lessee’s investment ends at the end of lesase since the property reverts back to the lessor at the end of the lease term. Leasehold ownership has certain drawbacks as opposed to free hold ownership. Especially a lessee shall not be able to sell or alienate the property so leased to him. Alienation can be only be done by the owner with freehold rights.

Non legal but practical issues with a lease

A lessee will not be able to obtain title insurance policy on the property to secure him from any future risk that may arise against the title of the leased property. Title policies are issued to cover the risk accrued to a prospective buyer or the owner. Title policies do not envisage the risk of a lessee irrespective of whether it is a long term lease or a short term lease.

A lessee may run in to the risk of not being able to trace the lessor or his hairs after a certain period of along lease. In the case of a long lease where the Lessor is the Government or a company which has perpetual succession, the lessee will be more secured in the relationship between the parties. IN the case of lessor being a company, for all purposes the lease property will be treated subject to the provisions in the lease agreement.

.A long lease can be understood as an alternate way of acquiring rights of immovable property subject to the provisions in the lease agreement. A lesee can be identified as one who is entitled to enjoy immovable property subject to a Lease Agreement upon payment of agreed rental.

Owner of immovable property can be identified as one who owns such property by acquiring the title to the property having executed a deed of Transfer upon payment of valuable consideration.

In the above context long lease of a property cannot be defined as an alternative to an outright transfer of immovable property

End

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