What Is a Leasehold?

If you’ve never heard of the term “leasehold,” you’re not alone. It’s pretty uncommon. In fact, leaseholds are only really encountered in New York, Hawaii, Florida, and parts of the United Kingdom. Aside from being rare, leaseholds are a complicated real estate term. Here’s what you need to know.

A leasehold is almost like if renting and owning a house had a baby. Put simply, someone who buys a leasehold buys the right to live in a building, but doesn’t own the land the building is standing on. Instead, the owner, called the freeholder, grants the buyer use of the building and the surrounding land for a set amount of time in an agreement called a ground lease. 

Ground leases are unique in that the freeholder establishes how long the leaseholder can live on the property, and requires a down payment. Once this down payment is paid, the leaseholder pays the freeholder rent, called ground rent, every month. When an agreement between a freeholder and leaseholder is made, the parties enter what’s called a leasehold interest.

Leaseholds are most common in commercial properties. Residential leaseholds, on the other hand, are rare in the United States; they only exist in New York, Florida, and Hawaii. Unlike with apartment leases, which are typically granted in one- and two-year spans, leaseholds can be established from anywhere between 40 and 120 years, according to Realtor.com. Once the duration of a leasehold expires, full ownership of the property returns to the freeholder.

A fee simple is what you likely understand traditional homeownership to be—it’s when a buyer is granted complete ownership of a home and the land it’s on. The buyer is given the title of the property, and has the right to sell it, transfer ownership of it, remortgage it, or put it in a will.

A fee simple, according to Zillow, also comes with things like property taxes—and a deed.

“To prove and immortalize the ownership of the property, the owner receives a legal document called the deed, which is then recorded in the county the property resides in. By recording the deed, the owner evidences ownership to the bundle of rights to the property,” explains Karen Kostiw, an agent with Warburg Realty in New York City.

A leasehold, as we’ve learned, is when a person is leasing a property actually owned by someone else for an extended period of time, treating it as their home. Someone with a leasehold can’t execute the kinds of actions a freeholder can, like selling the house or transferring ownership of it.

According to Legal Dictionary, there are four types of leasehold estates. 

1. Estate for years

This means the leaseholder enters a contract indicating a set number of years they’re allowed to live on the property. When the lease comes to an end, the leaseholder is required to vacate, unless another agreement is drawn up.

2. Estate from period to period

Unlike an estate for years which ends on a designated date, an estate from period to period means that the leasehold agreement automatically renews unless the tenant or freeholder decide they want to end the agreement. If that’s the case, either must give 30 or 60 days notice (whatever amount of time that was outlined in the original agreement). 

3. Estate at will

An estate at will is the most loose agreement of the four. No end date is set—instead, the tenant can stay for an indefinite period of time. Either the freeholder or leaseholder can give notice to terminate the agreement at any time. The buffer between giving notice and terminating the lease varies from state to state.

4. Estate at sufferance

This term essentially means that the tenant can occupy the property even after the contract as expired until the freeholder tells them they need to leave.

The beauty of a leasehold is that you can treat it like you would a home that you own. You can make all the improvements you’d like (as long as it meets building codes of the city you live in). Tenants, or leaseholders, can choose what kind of landscaping they’d like, what color they’d like to paint the house, if they want to install a pool, and if the city signs off on it, they can even expand the property by building additional rooms, or guest houses and ADUs.

Is it the best use of a leaseholder’s money? That depends on their philosophy. Since the leasehold agreement can last a lifetime, the tenant may want to renovate the home to their liking and taste. But they do so knowing that they won’t be investing in the property for themselves. Once the tenant reaches the end of the lease, the home switches ownership to the freeholder and they now own the house with all its improvements and renovations.

There are benefits to a leaseholder making improvements on the property besides suiting their tastes. While the renovations will just become a part of the property that returns back to the freeholder, the improvements can be worked into the monthly ground rent—which classifies them as qualified leasehold improvements.

This depends on what the renovations are, how much was invested, and what the depreciation on the improvements look like. For example, you could install brand-new hardwood floors to replace original laminate ones. The hardwood floors are expensive and last 30 years with no wear and tear. So, for 30 years, a leaseholder could work out a decreased ground rent based upon those improvements.