Fee Simple vs Leasehold Ownership

When it comes to the ownership of land most of us only think of one type of real estate ownership: fee simple, also known as freehold. But there is another form of ownership known as leasehold.

Fee Simple

It is probably the most familiar form of ownership to buyers of residential property. Fee simple is sometimes called fee simple absolute because it is the most complete form of ownership. A fee simple buyer acquires ownership of the entire property, including both the land and buildings. The fee simple owner does not pay ground rents, but does pay maintenance fees and property taxes.

The fee simple owner has the right to possess, use the land and dispose of the land sell it, give it away, trade it for other things, lease it to others, or pass it to others upon death.

Leasehold

The leasehold interest is created when a fee simple land-owner enters into an agreement or contract called a ground lease with a lessee. A lessee buys leasehold rights much as one buys fee simple rights; however, the leasehold interest differs from the fee simple interest in several important respects. First, the buyer of residential leasehold property does not own the land and must pay ground rent. Second, his use of the land is limited to the remaining years covered by the lease. Therefore, the land returns to the lessor, and is called reversion.

Depending on the provisions of any surrender clause in the lease, the buildings and other improvements on the land may also revert to the lessor. Finally, the use, maintenance, and alteration of the leased premises are subject to any restrictions contained in the lease.

Difference between Leasehold and Fee Simple

The simplest difference between fee simple ownership and leasehold is whether you own real property in perpetuity. The preference to have fee simple ownership or have a leasehold agreement depends on the individual and the property’s use.

In many cases, homebuyers prefer fee simple ownership for the sake of full rights over the property and the ability to sell the property in full. When the property is being used for a business, leasehold is often seen as preferred over fee simple ownership.

Fee simple ownership requires no rent be paid, though property taxes still must be paid to the local and state government where applicable. Leasehold requires rent be paid to the true property owner, and depending on the terms of the lease, the lessee may also pay property taxes. How much you pay in leasehold rent varies widely by the type of property, value of real estate and where the property is located.

With fee simple ownership, your association with the property lasts as long as you want to keep it, and after your death you can pass on to your next of kin. Leasehold has an established term, though the term can be quite long. You could have leaseholds in industrial properties that last 15 years or 10 years. You could have leaseholds in commercial and retail that last five to 10 years.