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Rents provide a steady and guaranteed income
Updated August 27, 2011
A leasehold is a form of real estate ownership.
When we speak of a lease, most people have the image of a standard rental agreement for an apartment or business property.
This type of lease is for a short term – usually a year or less and usually provides for a fixed monthly rental fee (although this can be variable, especially with some types of business property) for the duration of the lease.
Unlike a short term apartment or small business property lease, leaseholds are usually for a much longer term, frequently going for periods of up to 99 years.
Ninety-nine years seems to be the maximum term of this type of lease.
The 99 year limit appears to be based upon the common law concept known as the Rule Against Perpetuities. This legal concept is designed to prevent property from being tied up and controlled for too long from beyond the grave.
While it is true that a person cannot take their property with them after death, vehicles such as leaseholds and trusts, can be a way for a deceased person to continue to control, after death, the actions of their survivors.
An example of this is the Disney Corporation where, some four decades after the death of founder Walt Disney, the directors of the Disney Corporation still find their hands tied in certain business dealings because of stipulations in the will and other legal devices crafted by Walt Disney before his death in 1966.
These legal arrangements enable Disney to continue to exercise some influence over the company despite his no longer being alive and physically participating in the affairs of the company.
By limiting the maximum time the terms of a contract can remain in force prevents descendants from being bound by rules and restrictions laid out generations earlier.
Hong Kong - No longer leased by Britain from China
Most land on Hawaii is leasehold
How Leaseholds are Used
In a leasehold the owner of the land and his heirs still hold title to the land but rent it out to tenants for a period of up to 99 years.
The leasehold agreement states the term of the lease, the monthly or annual rental payment (which is usually fixed for the term of the lease) and various other conditions. The tenant, in exchange for the payment of the rent, is able to use the land as if he/she owned it subject to any restrictions in the lease.
In addition to having use of the land and the income produced by it, the tenant can obtain a mortgage based upon the lease (the lender, of course, can only take the lease in foreclosure, not title to the land as in a mortgage on land owned outright by the borrower) and sell the leasehold property.
The buyer of the leasehold property is subject to the terms of the lease and has to pay the stipulated rent but that person too can mortgage, develop, sell, etc. the property, again subject to the terms of the lease.
All improvements, such as buildings, infrastructure such as irrigation systems for agriculture, clearing for agriculture, mines dug, oil wells drilled, etc. revert to the owner of the property upon the expiration of the lease. Basically, being the holder of a long term lease, in its early years, is not much different than being the owner of a property.
During the later years of the lease things become a little more complicated due to the fact that the term of the lease is getting progressively shorter.
It becomes more difficult to sell the leasehold since buyers are reluctant to purchase a property that will revert to its owner in a few years.
Getting a mortgage to purchase the leasehold or finance improvements is also difficult as lenders are reluctant to make a loan when the leasehold securing the loan is about to expire.
HRH Prince Charles, Prince of Wales & Duke of Cornwall - Has substantial income form lands he leases to tenants in Duchy of Cornwall
Leasholds are Not Uncommon
Surprisingly, leaseholds are not that uncommon.
The most famous leasehold in recent years was the 99 year lease the Great Britain had on Hong Kong. The island of Hong Kong was a colony of Great Britain like the Rock of Gibraltar and could legally be held by the British as long as they could defend it and maintain control.
However, a century ago the island outgrew its water supply and also needed additional space to continue its expansion. In 1900 the British government entered into a 99 year lease, on land on the mainland adjoining the island of Hong Kong, with China.
When the lease expired in 1999 the entire colony reverted to China along with the improvements which had made it one of the leading economies in the world (Great Britain could have kept the island but it was so interconnected with the so called New Territories which had been leased opposite it on the Chinese Mainland that it would not have been economically viable alone).
There are also a number of leaseholds in the United Kingdom itself. The British Royal Family and other wealthy people derive good incomes from rents on lands they have inherited and which have been leased on a long term basis.
In recent years Prince Charles and others have seen their incomes increase substantially as some of the 99 year leases on lands they own have expired, enabling them to enter into new lease agreements with rents greatly increased due to increases in land values during the past century.
In the United States, much of the land in the State of Hawaii is owned by descendants of the original missionaries who lease it to the occupants of the land. These occupants have long term leaseholds and pay a fixed rent to the holders of the lease while having the right to sell the lease, improve the property and obtain mortgages on the property much the same as their counterparts in the other forty-nine states who own, rather than lease their homes, farm and business lands.
Changes are being made to the land ownership system in the state of Hawaii and some lands are being sold outright rather than being leased out by their owners, however, a good portion of land in Hawaii is still held as leaseholds.
From a landowners point of view leaseholds are a means by which large tracts of land can remain in the family without the family having to work and manage it. Instead, the long term leases act like bonds which yield a steady fixed income with the rents being periodically increased as leases expire and are renewed at new, and often higher, rates.