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What Is a Leasehold Property?

August 21, 2020


What Is A Leasehold Estate?

With a leasehold property, the owner has the right to occupy the premise as a long-term residential lease for a fixed period (often up to 99 years) or until you sell your right to another person.


The lease agreement is a legal contract between the lessee (leaseholder) and the lessor (leasehold landlord). Most leasehold buildings were created in the early 1970s.


Land ownership in BC falls under five categories: provincial Crown lands, federal crown lands, privately owned lands, treaty settlement lands, and Aboriginal title. The government or other public body that owns the land is called the “leasehold landlord.”


With leasehold ownership, you own the condo unit, townhome, or house, but you don’t own the land. The land is leased, usually from the Government and is for at least 99 years.


Since leasehold properties are private contracts between the leaseholder and landowner, leasehold properties do not comply with the Strata Property Act or the Residential Tenancy Act.


Important Considerations For Leasehold Buyers

Leasehold properties may seem attractive since they are more affordable than freehold or freehold/strata properties.


In addition, leasehold properties are prevalent in some desirable areas of Vancouver’s West End, False Creek South, and Orchard House in James Bay on Vancouver Island. It’s clear why some buyers are interested in this type of ownership because of its popular locations and below-market value prices.


However, leasehold properties are less likely to appreciate compared to freehold properties. Furthermore, financially, lenders may require a larger downpayment because of the risk associated with leasehold properties.


A prospective purchaser, realtor, or lawyer can determine a property’s ownership type from the title document. A property’s title is filed at the Land Title Office and, depending on the ownership type, will affect the property’s value.


As a buyer, it’s essential to have your realtor or lawyer check the terms of the lease. Mainly, how much longer is left on the contract and what your options are when the lease ends (if you’re nearing the end).


If you’ve already bought a leasehold, the original lease should be with your purchase documents. If not, you can contact the Land Titles Office.


What Is The Difference Between Leasehold And Freehold?

Freehold ownership grants the owner(s) full control of their property and buildings subject to any zoning restrictions and local bylaws. It is most commonly associated with single-family detached homes, and freehold is the highest form of ownership.


With freehold ownership, you own the property so long as you continue to make your mortgage payments and pay your property taxes. You also own both the land and the structure. However, freehold properties tend to be more expensive than strata or leasehold properties.


As previously mentioned with leasehold property, you are buying a right to “exclusive possession” for the term remaining under the lease or until you sell your right to another person.


What Happens When A Lease Expires?

Overall, a prospective buyer needs to understand the lease contract. At the end of the lease, the landowner can choose to end the lease or renew the lease at a higher price.


The landlord has the sole discretion as to what will happen at the end of a lease. If the landlord does choose to renew the lease, an owner can i.) accept the new lease and agree to the terms, ii.) sell their unit without accepting the offer or iii.) object to the renewal price and seek arbitration.


If the landlord chooses not to renew the lease, they would have to pay out each owner’s interest at the end of the current lease term.


Can I Get A Mortgage On A Leasehold Property?

Yes, it is possible to get financing on a leasehold property. However, there can be a few challenges. Mortgage lenders may be hesitant to finance this type of property (depending on the lease terms), and as with a typical mortgage, it depends on a buyer’s qualifications.


Lenders will be strict and may require a larger downpayment. Also, the remainder of the lease term will play a huge factor. Lenders will not mortgage a property when the amortization period is longer than the lease term.


For instance, when a new mortgage has an amortization of 25 years but only five years are remaining on the property’s lease.


It’s important to note that the leaseholder is required to pay strata fees to cover maintenance and repair of the common property as determined by the leasehold landlord. The leaseholder will also usually have to pay property taxes.


Overall, a leasehold property may be right for you depending on your needs, financial goals, and overall objectives when purchasing a home. The opportunity to buy a home at below market value may be appealing for some buyers.


However, leasehold properties do not appreciate as much, are more challenging to obtain financing, and can pose additional risks when not understood completely.


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August 21, 2020


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