Leasehold is an accounting term for an asset that is being leased, such an asset is usually a property. The user (lessee) of property or space enters into a contract with the owner (lessor) of the property for the exclusive right to use the property in exchange for a scheduled payment in cash or in kind over the lease period.
A leasehold property is an ownership of a temporary right to use and hold the property by the form of a leasehold title. Leasehold title is an interest in land and entitles the lessee an indefeasible right to use and hold the property. When the lease expires, the land title and property will be reverted to the original owner.
One prominent example of a leasehold property in Singapore is the housing and development board (HDB) flats. Each HDB buyer enters into a leasehold agreement with the government for the right to occupy and use the property for 99 years. When the mortgage on the HDB is fully paid, the buyer does not own the property but a mere right to exclusively occupy the space for the said lease period. Once the 99 years lease expires, the ownership of the HDB will be reverted to the state.
Read also: What is a Lease Option?
Types of leaseholds
1) Fixed term tenancy
This type of tenancy agreement usually lasts for years, with a definitive start and end date, it automatically comes to an end when the fixed term is completed. Since a fixed term tenancy can run for years, it is common practice for tenants and landlords to incorporate a clause to terminate the tenancy prematurely. In Singapore, any agreement that concerns land has to be in writing for it to be recognised by the Court of Law.
2) Periodic tenancy
Periodic tenancy is similar to fixed term tenancy but in shorter duration. Periodic tenancy usually lasts somewhere between weeks to months. The duration of the tenancy is dependent on the term of payment by the tenant. Either party can end the lease agreement at any time, provided that the party has given prior notice of termination.
3) Tenancy at sufferance
Tenancy at sufferance is an agreement that allows the tenant to occupy the property legally after the lease term has expired. This tenancy only comes to an end when the landlord asks the tenant to vacate the property. During this term, original lease conditions and obligations must be upheld by the tenant such as rent payment. Otherwise, the tenant may be evicted from the property at any time without notice.
4) Tenancy at will
Tenancy at will comes into effect when the lease has expired but both parties agree to continue with the lease without any written agreement. In such circumstances, both parties have to follow the terms and conditions that were previously set in the tenancy agreement and only comes to an end when either party has given prior notice of termination.
Read also: What is Tenancy in Common?
Leasehold versus freehold
The main difference between a leasehold and a freehold is the tenure. Leasehold has a definite lease period that is usually 999 years or 99 years and suffers from lease decay. 999-year leasehold is commonly regarded as a freehold equivalent due to its extremely long lease period.
Freehold property has an indefinite period and does not suffer from lease decay. Freehold titles can also be carved out into smaller leasehold titles to be leased out to other tenants. As a result, freehold property usually commands a higher premium over leasehold properties. The government has ceased issuing 999-year leasehold and freehold titles. Such properties can only be acquired through private agreements.
What is lease decay?
Lease decay refers to the process of a leasehold property that is running down its lease. As the lease runs nearer to the end date, the price of property drops exponentially with time. With a shorter lease, it is challenging to find buyers as HDB does not allow buyers to use their CPF to purchase flats with leases less than 30 years. Below is a pictorial representation of lease decay.
Read also: What is a Lease Purchase?
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Disclaimer: The information and/or documents contained in this article does not constitute financial advice and is meant for educational purposes. Please consult your financial advisor, accountant, and/or attorney before proceeding with any financial/real estate investments.