Inherited property can quickly go from financial boost to a major headache.
What is a leasehold estate?
A leasehold estate refers to the exclusive right of a tenant to occupy a property for a period of time. Usually a written lease agreement is concluded between the owner, who is the lessor, and the tenant, the lessee. This agreement outlines conditions under which the property may be occupied and what the lessor may or may not do. This agreement is legally binding.
When you rent property, you commonly enter into a lease agreement with the landlord or owner. This is known as a leasehold estate. Another term for leasehold is a non-freehold estate.
Although leasehold estate can be concluded by a verbal agreement, particularly for a period of less than a year, it’s good policy to sign a written leasehold estate agreement that explicitly specifies the lease terms.
By entering into a written contract, both the lessee and lessor have a clear understanding of their rights. Furthermore, the agreement offers protection to both parties.
The principle behind leasehold is that possession of the property by the lessee is limited in terms of time. Also, the lessee only can make changes to the property as specified by the terms of the agreement
There are four types of leasehold estates:
- Estate for years — An agreement that permits occupancy between two specified dates, at the end of which the property must be vacated.
- Estate from period to period — This applies to a monthly tenancy that has no specified end date. A party must give notice to end the agreement.
- Estate at will — This has no specified period or date, and to end it, the landlord may have to evict the tenant.
- Estate at sufferance — When a tenant stays beyond the end of a lease with or without the landlord’s permission.
Leasehold estate example
Betty and Karen run a dressmaking business and rent a shop in a large mall. They enter into a leasehold estate for five years. Because their agreement is for a fixed period of time, it is considered to be a tenancy or estate. Conditions attached to their lease specify they are responsible for the upkeep of the shop and that alterations must be made good at the end of the lease.
Are you interested in buying a property but don’t have enough for the down payment? Why not enter into a lease-to-buy agreement while you build up your deposit?