Leasehold vs Freehold

Updated on April 29, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Difference Between Leasehold and Freehold

The key difference between leasehold and freehold is that in the case of the Leasehold, the property is given on lease to the lessee by the owner of the property where there are various restrictions for its usage, whereas in the case of the freehold owner has the full ownership of the property with no restrictions on its transfer, modification or construction.

Leasehold vs Freehold Comparison

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The freehold property owner has unrestricted, undisputed, and absolute rights over his property. The owner is free to gift, sell, or transfer the ownership or responsibility of the land to whomever he wants. The owner can construct any structure in the freehold property. In a way buying freehold property is true of purchasing any real estate property. When someone owns a freehold property, he can modify or renovate the property without taking permission from anyone. That is why buying a freehold property requires more capital than owning a leasehold property.

A leasehold property is different from a freehold property. It is how a lessee owns the leasehold property. In the case of a leasehold property, there are two parties involved. One of them is the owner or lessorOwner Or LessorA lessor is an individual or entity that leases out an asset such as land, house or machinery to another person or organization for a certain period.read more who sells the property, and the other party is the lessee who buys the property. In a leasehold property, the owner (lessor) permits the lessee to hold the property for a limited period. A leasehold property can be leased for any duration of time. The lessee may be required to pay for the maintenance, improvement, and planning of the property depending on the clauses applicable.

The lease period can vary from 30 years to 999 years. Any lease with a duration of fewer than 90 years can cause a problem as it adversely affects the property’s valuation. Moreover, a lease whose duration is less than 30 years will face a challenge to warrant any bank finance. That’s why the lessee should ensure that the tenure is increased.

Leasehold vs. Freehold Infographics

Leasehold vs. Freehold Infographics

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Key Differences

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Leasehold vs. Freehold Comparative Table

Nature LeaseholdFreehold
Ownership rightsThe owner permits the lessee to hold the property for a limited period.The owner owns the property outright.
TenureGenerally, the leaseLeaseLeasing is an arrangement in which the asset's right is transferred to another person without transferring the ownership. In simple terms, it means giving the asset on hire or rent. The person who gives the asset is “Lessor,” the person who takes the asset on rent is “Lessee.”read more is for a period of 30,60,99 or 999 years.Once owned, the owner has the right to the property perpetually.
ApprovalsThe lessee needs to adhere to the conditions set by the lessor to modify or construct in the leasehold property.Has full authority to modify or construct without any permission
Transfer rightsRequires permission from the state or any other relevant authorities to transfer the propertyIt does not require any permission from the state or any authority to transfer the property
Purpose of InvestmentThere is a risk attached to buying leasehold properties as the lease may not get extended, and also the lessee doesn’t have the freedom to modify the property to suit his needs.As an investment purpose its advisable to invest in freehold properties
Costs involvedThe cost is generally lesser given the conditions and tenure applicable to hold the property.Generally costly to buy in comparison to a leasehold property.
Bank FinanceMost banks do not finance projects in a leasehold property whose lease tenure is less than 30 years.It is easier to fetch finance from banks for freehold properties.

Conclusion

The primary difference is the lessee’s freedom and restrictions put by the lessor and permission needed whenever the lessee wants to modify or construct anything on the property. A freehold property has no restrictions on whom to transfer what to alter and build in the property. Moreover, once bought, the right of the property is with the owner forever.

On the other hand, leaseholdLeaseholdA leasehold arrangement is one in which the property owner, also known as the landlord, leases out his property to another party for a fixed period of time. A lease agreement is a legal agreement between a person who takes a lease on a property (lessee) and the landlord (lessor).read more comes with several restrictions and clauses from the lessor. The lessee has got rights to the property only for the duration of the lease period, which is subject to extension. The investor in a leasehold property needs to take care of many moving parts, which encompasses factors like the lease period, valuation of the property, transfer clause, availability of the bank finance, approvals from the state authorities, and other relevant agencies wherever applicable.

Due to all these factors, it’s better to buy a freehold property than to buy a leasehold property. However, most of the time, the owner does not have a choice if he wants to buy a property in a preferred location as the properties of that entire location can be bought only as leased property.

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