What is a freehold estate in real estate? Types and examples

Freehold estates grant indefinite rights to property, making them a valuable aspect of estate planning and property law. They aren’t just about holding land; they give owners lasting authority to sell the property, lease it, or pass it down as they wish.
In this blog, we will explain the main examples of freehold estates. These include fee simple absolute, fee simple defeasible, and life estates. We will also show how each type works in real-life situations.

Freehold estate definition

What is a freehold estate? A freehold estate means owning property for an indefinite amount of time.

These estates do not have a set end date, unlike leasehold estates. Some freehold estates can be inherited. This means the owner can pass down the property to heirs with a future interest. Other estates last only for the owner’s lifetime.

Types of freehold estates

Two main types of freehold estates exist depending on their conditions and ownership interests:

• Estates of Inheritance: These estates can be passed down to heirs. Examples include fee simple absolute and fee simple defeasible. Both can last forever if passed through a will or by law.

• Estates Not of Inheritance: These estates last only as long as the owner’s life. They don’t go beyond the owner’s lifetime and instead pass to someone else as specified once the owner dies. Life estates fall into this category.

Freehold estates give owners significant control, making them a unique form of property ownership.

Summing-up: what is a freehold estate?

A freehold estate is a type of property ownership that gives an owner rights for an undefined time. This allows an owner to use, lease, or pass down the property to their heirs. That’s the essence of the definition of a freehold estate!

Types of freehold estate

Let’s look at the three main types of freehold estates in more detail.

Fee simple absolute

Fee simple absolute is the broadest and most common form of estate ownership. This type of freehold estate gives owners full control over the property with no time limits. The owner can pass it down to their heirs or keep it for life without restrictions. As long as the owner pays taxes and meets obligations, they can sell, lease, or use the property freely.

Fee simple is a term you’ll find often in your studies. Especially when talking about types of estates in real estate. But what is it about?

What does “fee simple” mean in real estate?

In real estate, “fee simple” means the owner has complete ownership of the property. It’s the strongest form of ownership, giving the owner full control. They can live on the property, rent it out, sell it, or pass it down to their heirs.

A fee simple estate is a type of freehold estate that has no end date. Ownership can continue forever and pass down through generations.

Why is it called fee simple?

The term fee simple comes from the old feudal system in the Middle Ages. Back then, a fief was land given by a king or noble to someone in return for loyalty or work. While the person could use the land, the ownership stayed with the lord or king.

Over time, this idea changed, and “fee” meant full ownership of the property. In real estate, fee simple ownership means you have full control of the property. You do not owe anything to a lord or ruler.

Fee simple defeasible

A fee simple defeasible estate gives the owner property rights but with certain conditions. If the owner doesn’t follow these conditions, they could lose the property, or another party could take it. For example, a person can sell a family farm on the condition that it remains used for farming.

If the new owner does not follow the rules, the property may go back to the original owner. It could also go to someone else listed in the agreement.

Here are the three types of fee simple defeasible estates:

1. Fee Simple Determinable: Ownership automatically returns to the original owner if conditions are broken.
2. Fee Simple Subject to Condition Subsequent: If the owner doesn’t follow the conditions, they might lose the property. The original owner can take legal action and reclaim it.
3. Fee Simple Subject to Executory Limitation: Ownership goes to a third party if the conditions are not met.

Life estate

A life estate is a type of property ownership that lasts only for the owner’s lifetime, called the “life tenant.” When the life tenant passes away, the property doesn’t remain with their estate. Instead, it goes to a person called the “remainderman” or reverts back to the original owner, based on the arrangement.

Life estates are often used in estate planning to allow someone to live in a property while ensuring it transfers to heirs smoothly after their death, avoiding probate.

Creating a life estate is not always the same. Here are the types of life estates you may come across:

• Life estate pur autre vie: This type of life estate lasts for the lifetime of someone other than the life tenant. For instance, if a life tenant’s right to the property is based on the life of another individual, they can use the property until that third person dies. After that, the property goes to the remainderman or reverts to the original owner, depending on the original agreement. Then, that person will hold an interest in the real property.

• Life estate with reversion: In this arrangement, the life tenant holds the property for their lifetime, but when they pass away, the property reverts to the original owner or the owner’s estate.

• Life estate with remainder: Here, the life tenant holds the property during their lifetime, but upon their death, the property automatically transfers to a third party, known as the “remainderman.” For example, Jacob gives Jane the right to live on his property for her lifetime. After Jane’s death, ownership passes to Luis, the remainderman, who has full rights over the property.

So, is a life estate a freehold estate? Yes, it is! Life estates are one of the main types of estates that provide ownership rights indefinitely, though limited to the life of the owner or another individual.

Freehold estate examples

Here are some clear freehold estate examples that show the different rights these types of property ownership provide. There are different types of property ownership.

For example, fee simple absolute estates give full control to the owner. Fee simple defeasible and life estates have certain conditions. Each type helps explain how property ownership works. These cases make it easier to see the freedoms and limits of each type in real life.

Example of fee simple absolute

Here’s a classic freehold estate example of fee simple absolute ownership:

Imagine Mrs. Smith, who owns a large estate in the countryside. Since she holds it in fee simple absolute, her ownership has no time limit or restrictions. She can use the property freely and pass it down as she wishes. In her will, she decides to leave the estate to her longtime caretaker.

When the caretaker inherits the property, he receives full ownership rights. This means he can live on the estate, lease it to someone else, sell it, or even pass it to his own heirs. This unrestricted, indefinite ownership makes it a fee simple absolute.

That’s because the caretaker now has full control over the property. There are no conditions or limits on his ownership.

In summary, a fee simple absolute gives the owner the most complete form of property rights. This kind of freehold estate allows them to manage the property however they choose and pass it down through generations.

Example of fee simple defeasible

In a fee simple defeasible estate, the new owner can keep the property as long as they follow certain conditions set by the previous owner. Imagine a family selling their farmland and including a rule that the new owners must always use it for farming. The new owner has full rights to use the land but must keep it as farmland.

If the new owner tries to turn it into something else, like a shopping center, they would lose ownership because they didn’t follow the rules. In this case, the land would go back to the original family or to another person they chose in the contract.

This type of freehold estate allows the original owners to pass on property with certain limits on how it can be used in the future.

Example of a life estate

A life estate lets someone own and use a property for the rest of their life, but ownership ends when they pass away. For example, a homeowner might set up a life estate so they can live in their home for life, knowing that when they pass away, the property will go directly to their children.

The homeowner called the life tenant, can live in and control the home while they are alive but can’t sell it or leave it to anyone else.

After the life tenant passes, the property automatically goes to the children or another person chosen by the owner without the need for probate. This setup makes it easy for the property to go to heirs while allowing the original owner to enjoy it for their lifetime.

Example of a freehold estate in commercial real estate

Freehold estates are often used in commercial real estate because they give full ownership and control over a property. For example, if someone buys a retail property, they own the land and the building outright. This means they can lease it to businesses and sell it whenever possible. They can even redevelop it into something new, like offices or apartments.

In some cases, multiple owners can share commercial freehold properties, with each owning a portion. For instance, in an office building, different companies might each own part of the building. Then, they all share responsibilities for maintenance and management.

This setup, known as shared freehold ownership, allows multiple owners to have a stake in the property and share in its benefits and costs.

These are all freehold estate examples that show how ownership can work in both residential and commercial properties.

Advantages of freehold property ownership

Freehold ownership offers several benefits:

· Full Ownership: You own the property outright, which means no extra charges like ground rent or service fees.

· Flexibility: You can change the property without needing approval, unlike leasehold properties.

· Investment Potential: Freehold estates often grow in value over time, making them attractive for long-term investment.

Freehold estates and eminent domain

When you hold a freehold estate, you have a lasting interest in real property. This means you have the right to own, use, and transfer the property as you see fit. However, one major exception to complete ownership control is eminent domain.

The government’s power to take private property for public use is eminent domain in the United States. This includes building roads, schools, or parks.

The government can take the property for public use even with a freehold estate. However, it must give “just compensation” to the owner. That way, the property owner receives a payment for their real estate property. And the government can carry out the necessary projects for the community.

Less than freehold estate or nonfreehold estate

Unlike freehold estates, nonfreehold estates (also known as leasehold estates) are temporary and defined by a lease. The leaseholder has the right to use the property but does not own it.

A common example of a non freehold estate is a rented apartment. In that case, the tenant can live in the unit for the lease period. However, they don’t have ownership rights; those are of the property owner.

Bottom line

Freehold estates are at the heart of property ownership, giving owners lasting rights to their property.

From fee simple absolute to life estates, these types offer different levels of control and inheritance options. Check this blog to learn about freehold estates and their types. This will help you understand the concept for your real estate licensing exam.