In real estate law, a leasehold estate describes a tenant’s right to occupy a particular property for a specific period of time. In most cases, the property owner and the tenant will have a written contract describing the rights and responsibilities of both parties. This contract – the lease – will govern the terms of the relationship. In some rare cases, there may be no written agreement, in which case the relationship is governed by law.
You won’t hear the term “leasehold estate” used very much these days. But if you’re a landlord, it’s still something you’re bound to run into, and it’s important to understand. Here’s a quick guide to everything you need to know.
What Is A Leasehold Estate?
A leasehold estate is a legal agreement between a tenant and a landlord. The landlord agrees to grant the tenant the right to use the property for a specified time period. In return, the tenant agrees to pay a set amount of rent, usually in monthly installments. Meanwhile, the landlord retains ownership and regains the right to use the property once the lease has ended.
A leasehold estate can be any type of real estate. It can be a residency, a commercial property, or an industrial property. It can even refer to a ground lease for a vacant lot.
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What Are The Four Main Types Of Leasehold Estate?
So far, we’ve established what a leasehold estate is. However, there are four different types of leasehold estate, each with its own implications. Let’s take a quick look at each of them:
Estate for years. An estate for years is a long-term leasing arrangement, normally lasting for several years. There is typically no expectation that the lease will be renewed. When it ends, the tenant leaves without giving notice. For this type of long-term lease, rent does not necessarily have to be monthly. Some lease agreements allow for quarterly or even annual payments, which can be better for corporate leases.
Estate from period to period. An estate from period to period is a lease agreement for a limited period of time. This is the most common type of lease for home and apartment rentals. For example, you could sign a one-year lease, or even rent from month to month. With this type of lease, the lease is expected to renew automatically. Therefore, both the tenant and the landlord will need to give notice if they intend not to renew.
Estate at will. An estate at will is an informal leasing agreement with no defined time period or end date. This kind of lease is most common between family members, such as when an adult child lives with their parents. Unfortunately, because there’s no written lease document, the lease can only be ended via eviction.
Estate at sufferance. An estate at sufferance provides the fewest protections for the tenant or the landlord. This is what happens when a tenant continues to occupy the property after the end of the lease and continues paying their monthly rent. In this case, they have no legal obligation to vacate the property. The landlord must serve them with a notice to vacate. However, because there is no longer a written lease, the landlord does not need to show good cause.
What Is An Example Of A Leasehold Estate?
Paul and Emily open an art shop in an outdoor mall. They sign a five-year lease, which gives them an estate for five years, with the right to occupy the property and run their business out of it. In return, they agree to pay monthly rent and maintain the property in good condition. At the end of the five-year period, they can either negotiate a new lease or vacate the property.
What Are The Responsibilities Of A Landlord In A Leasehold Agreement?
As with any other type of contract, a leasehold agreement imposes certain obligations on both parties. A landlord’s responsibilities under a leasehold agreement include:
Providing a habitable property. The exact meaning of “habitable” is different in different jurisdictions. That said, it normally means that the utilities are hooked up, the roof is not leaking, and the foundation and frame are sound. Essentially, the building has to be safe, and it needs to have power and running water.
Landlords must allow “quiet enjoyment” of the property. This is a legal term meaning that the landlord must not unreasonably interfere with the tenant’s use of the property.
Keep in mind that different states and localities may have additional requirements for landlords to follow. Make sure to comply with all of your local laws, in addition to meeting your basic obligations.
What Are The Responsibilities Of A Tenant In A Leasehold Agreement?
Along the same lines, the tenant also has obligations to uphold under a leasehold agreement. As with the landlord’s obligations, you may have more obligations in your location. That said, here are some of the basics:
They must pay rent on time. Normally, this means paying each month’s rent before the first of the month. However, different leases will have different frequencies and due dates.
They must not damage the property. Damaged walls, fixtures, and other damages are the tenant’s responsibility. This is distinct from ordinary wear and tear, which falls on the landlord.
What Is the Difference Between A Freehold Estate & A Leasehold Estate?
All types of leasehold estate convey a temporary right to use the property. Even in the case of a 99-year industrial lease, the tenant eventually loses that right.
On the other hand, a freehold estate conveys a permanent right to use and occupy the property. Basically, “freehold estate” means “ownership.” In a landlord-tenant relationship, the tenant has a leasehold estate to the property, whereas the landlord maintains a freehold estate.
Like many legal terms, the term “leasehold estate” sounds complicated, but it’s really not. When you hear these words, just think “lease” in your head. It’s essentially the same thing, and it’s a word we’re all familiar with. Regardless, it is a wise move to familiarize yourself with the lingo and acronyms that are commonly used in the real estate industry, whether you are an investor or not.
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