Difference Between Leasehold and Freehold
The key difference between leasehold and freehold is that in case of the Leasehold, the property is given on lease to the lessee by the owner of the property where there are various restriction for its usage, whereas in case of the freehold owner has the full ownership of the property with no restrictions on its transfer, modification or construction.
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Source: Leasehold vs Freehold (wallstreetmojo.com)
The owner of a freehold property has unrestricted, undisputed, and absolute right over his property irrespective of time. The owner is free to gift, sell, or transfer the ownership or responsibility of the land to whomsoever 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 is free to modify or renovate the property without taking permission from anyone. That is the reason why buying a freehold property requires more capital than owning a leasehold property.
A leasehold property is different from a freehold 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 who legally owns the asset granted on a lease (rented for a long tenure) to the lessee who pays a single lump sum amount or regular payments for using that asset.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. This is how a lessee owns the leasehold property. A leasehold property can be leased for any duration of time. The lessee may require to pay the maintenance, improvement and planning of the property depending on clauses applicable.
The lease period can vary from 30 years to as high as 999 years. Any lease with a duration of fewer than 90 years can cause a problem as it affects the valuation of the property adversely. Moreover, a lease whose duration left 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
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Key Differences
- In the case of freehold property, the owner has a full undisputed and unrestricted right over the property, whereas, in a leasehold property, the lessee does not have unrestricted and absolute right over the property.
- For freehold property, the owner does not require anyone’s permission or authorization to make any modifications, whereas, in a leasehold property, the lesseeThe LesseeA Lessee, also called a Tenant, is an individual (or entity) who rents the land or property (generally immovable) from a lessor (property owner) under a legal lease agreement. read more needs to take permission and refer to the rights in the agreement to make any alterations.
- A freehold property does not have any term or time frame associated, but a leasehold property is leased for a specific period.
Leasehold vs. Freehold Comparative Table
| Nature | Leasehold | Freehold |
|---|---|---|
| Ownership rights | The owner permits the lessee to hold the property for a limited period. | The owner owns the property outright. |
| Tenure | Generally, 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. |
| Approvals | The 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 rights | Requires permission from the state or any other relevant authorities to transfer the property | Does not require any permission from the state or any authority to transfer the property |
| Purpose of Investment | There 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 involved | The 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 Finance | Most 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 freedom a lessee has and restrictions put by the lessor and permission needed, whenever the lessee wants to modify or construct anything in 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, leasehold comes with several restrictions, clauses from the lessor. The lessee has got right 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 a lot of 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 wherever possible it’s better to buy a freehold property than to buy a leasehold property. However, most of the time the owner do 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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