Freehold Estates vs. Leasehold Estates: Learn the Difference

Freehold estates vs. leasehold estates is a common comparison you should know how to make if you’re getting ready for the real estate exam. Why? Because these are the main types of estates. In this field, estate means the degree, quantity, nature, and extent of interest a person has in real property. Depending on the type, these variables may change. For example, estates determine how long a person has the right to a house.

Learn more about freehold and leasehold estates and how to differentiate them.

Definition of Freehold Estate

A freehold estate is a type of real estate in which the property’s ownership or exclusive rights to it are for an indefinite amount of time. There are several types of freehold estates, but all have three aspects in common: an unspecified period of ownership, the right to pass on the property, and the right to inherit it.

Let’s take a closer look at the different freehold estates.

Fee Simple Estate (or Fee Simple Absolute)

It is known as the most complete form of real estate ownership. If a person has a Fee Simple Estate, they can freely enjoy all the perks of property, like making the improvements they want and the right to will—the whole bundle of rights!

But like it’s said in Spiderman, great power comes with great responsibility. The obligations of having a fee simple estate may include:

• Maintaining the property.
• Adhering to laws and regulations.
• Fulfilling mortgage agreements.
• Respecting the rights of others.

Another essential aspect to highlight is that even with perpetual ownership and a wide range of rights, Fee Simple ownership has certain restrictions set by four fundamental government powers: taxation, eminent domain, police power, and escheat. It may also face limitations from encumbrances or conditions specified in the deed.

Fee Simple Defeasible Estate

When a grantor (the person transferring the property) sets conditions or terms on a fee simple estate, we’re dealing with a fee-simple defeasible. That means the holder (who will use the property) must follow these conditions to keep the property. If the holder violates the conditions, they will lose the property to the original owner or a designated person.

Now, depending on the conditions, there are different types of Fee Simple Defeasible:

• Fee simple determinable: A fee simple determinable is a type of fee simple interest that automatically reverts to the grantor once a specific condition is met. For example, if the deed states, “I grant this property to A as long as it is used for a park,” the condition is clear. The property must serve as a park. If it doesn’t, it automatically goes back to the grantor or their heirs without any need for legal action. The term “as long as” is critical in the deed.

• Fee simple subject to a condition subsequent: In this case, the grantor gives the property with a specific condition. If someone violates this condition, the grantor has the right to take back ownership but not the obligation, which doesn’t happen automatically. For instance, if the deed states, “I grant this property to A, but if alcohol is served here, I have the right to retake the property,” it sets a condition subsequent. If A serves alcohol on the property, the grantor has the option to retake the property but usually must go to court to do it.

• Life Estate: As the name suggests, a life estate grants someone (the life tenant) the right to a property only in their lifetime. People with a life estate cannot leave the property to someone in their will. When the life tenancy ends, the property’s full ownership goes back to the original owner (in reversion) or another person designated by the owner (in remainder).

Definition of Leasehold Estate or Less than Freehold Estate

What is leasehold estate? Well, think of it as the typical rented property. It is created through a lease or rental agreement between the property owner (the landlord or lessor) and the tenant (or lessee) for a limited period.

In a leasehold estate, the tenant has legal permission to use the property legally, such as to live in it or operate a business, usually in exchange for a monthly payment.

However, while the tenant may have some rights, the property ownership stays with the landlord; it is not transferred.

Let’s learn the several types of leasehold estates.

Estate for Years

An estate for years is a leasehold estate with a determined period, such as six months or a year, as long as it has a fixed beginning and ending date. In this case, the tenant will keep interest in the property in the stipulated time if they follow the contract terms.

Also, there’s no need to give notice to terminate the rent; it automatically expires on the set ending date, the day the tenant should leave the property.

Periodic Tenancy

Under this type of leasehold estate, a tenant and landlord agree to let the tenant live or use the property for an undefined term until one of them issues a written notice of termination.

A periodic tenancy can be in periods (E.g., month-to-month, week-to-week, etc.), and so will the tenant payments.

Estate at Will

A key element in an estate at will is that it’s an agreement between landlord and tenant without a written contract. The tenancy can end at any time as long as both parties agree, and it could last indefinitely. Notice that this type of leasehold is not allowed in many states.

Estate at Sufferance

It occurs when a tenant stays in a rental property after the lease expires. An example can be when the tenant is notified that the lease is terminated and they don’t go or when a tenant doesn’t pay the rent.

Summarizing: Freehold vs. Leasehold Estates

Freehold estates vs. leasehold estates, what’s the difference in the end? Freehold estates are indefinite property ownership, while leasehold estates don’t mean ownership and are only for a fixed period. Either way, it could be more complex than that when you focus on each type. A good piece of advice for the real estate licensing test is to learn these concepts with flashcards and quizzes.

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