When leasing or purchasing property, there are various rights and limitations that go along with ownership versus leasing. If a person owns a property and has the right to buy and sell that property, this situation is known as a freehold estate.
What Is a Freehold Estate?
A freehold estate is a property owned by a landlord. To qualify as a freehold estate, the property has to be immovable, and the property ownership cannot have any fixed timeline. This freedom means the property can be transferred or sold at any time.
3 Types of Freehold Estates
There are three different types of freehold estates, with different characteristics and qualifications.
1. Fee Simple Absolute
A fee simple absolute property is the most common type of freehold estate. With this type of property, the owner can use the property however they want, so long as they are not in violation of any local zoning laws. The owner can also keep, sell, transfer or bequeath the deed to an heir whenever they want.
Kyle D. Tucker, a real estate attorney with Eastman & Smith LTD., said, “If you are the freeholder or the fee simple absolute titleholder, then you have the whole bundle of rights, and there are no reservations or other conveyances that would take any sticks away from the bundle.”
However, there are some governmental limitations that apply to any kind of property ownership. Property owners have to pay property taxes, so landowners are bound to their local government in this way. Through eminent domain, the government reserves the right to convert private property into public property after compensating the owner. Finally, through escheat, the government can seize any unclaimed property or assets in an estate.
2. Fee Simple Defeasible
With a fee simple defeasible property, the landowner can only use the land in the way it was originally intended. For instance, if a commercial property owner buys a fee simple defeasible piece of farmland, then that land cannot be made into a retail center or an apartment complex. Rather, it must remain as farmland.
Tucker added, “If there’s been a reservation from a prior owner — or, for instance, you live near an airport, and there’s a limitation or restriction because the airlines have an easement overhead, and you can only build a building so high — then you probably don’t have the whole bundle of rights.”
In the scenario Tucker described, there are limitations on what you can do with the property, based on rules set in place during previous ownership.
“In other words, part of your property has been carved up, and you don’t necessarily have the freehold fee simple [absolute] title,” Tucker explained.
If the landowner violates the terms of the fee simple defeasible, they lose ownership of the property. This situation is called fee simple determinable. However, if the landowner or owner’s estate agrees to termination, it is called a fee simple subsequent.
3. Life Estate
With a life estate, one person — a grantee — holds an interest in the property for another person — the grantor — who has granted the interest in the first place. The grantee in this case is a life tenant who can live on the property but is required to maintain the property. Once the grantor passes away, though, the grantee has to vacate the property and forfeit their interest in it. However, if the grantee passes away first, an estate in reversion occurs, which is when the property interest goes back to the grantor.
Example of a Freehold Estate in Commercial Real Estate
Any commercial property owned by a landlord qualifies as a freehold estate. For instance, if a person owns a retail property and has the right to transfer or sell it at any time, then that is a freehold estate.
In commercial real estate, Tucker said, when you acquire a property — let’s say an office space, for instance — “you want to make sure that the person you’re negotiating with is the true titleholder of the fee simple absolute interest in the property.” In other words, before buying that office space, you have to make sure this is a freehold estate and there are no leasehold agreements in place.
Before purchasing a property, Tucker always advises clients to run a title search to make sure there are no tax liens or leasehold interests. If the owner of the office space has a lease agreement in place with someone else, then this is not a freehold estate. However, if the owner is free from any leases and retains fee simple absolute ownership of the property, then the office space is a freehold estate.
What Are Nonfreehold Estates?
A nonfreehold estate, also known as a less than freehold estate, refers to the lessee’s interest in a property. With a nonfreehold estate, the lessee possesses the property for an amount of time specified in the lease. Simply put, a nonfreehold estate would be a lease, or a leasehold interest, Tucker explained.
The 4 Types of Nonfreehold Estates
There are four types of nonfreehold estates.
1. Tenancy for Years
A tenancy for years is created by a lease. The term has a beginning and end and terminates automatically without either party having to give notice. So, if a tenant signs a two-year lease, they are a tenant for years, with a set start and end date.
2. Tenancy At Will
A tenancy at will can be ended at any time, at the request of either the landlord or the lessee. This type of nonfreehold estate usually has a short-term, month-to-month lease. However, landlords are required to give the tenant a reasonable amount of time to move out.
3. Tenancy from Period to Period
Tenancy from period to period, or periodic tenancy, occurs after an initial lease period has ended and the tenant becomes a periodic tenant. In this scenario, although the lease time has ended, a tenant can renew the lease and continue to occupy the property and pay rent until the landlord gives notice that they have to move out. Usually, landlords are required to give between 30 to 60 days notice.
4. Tenancy at Sufferance
A tenancy at sufferance is never created on purpose, but rather, it exists due to the circumstances of a situation. When a person legally comes into possession of land but then remains on the property longer than they’re allowed to, without the owner’s consent, this becomes a tenancy at sufferance.
A tenant at sufferance is different from a trespasser in that at one point, the tenant was allowed to be on the property but stayed longer than was agreed upon. This type of tenant can be evicted at any time, and the landlord is not required to give notice.
Always Make Sure You Know Your Specific Property Rights
Overall, any property owned by a landlord, in which the landlord has the right to sell, transfer or bequeath the land, is a freehold estate. While most freehold estates are fee simple absolute, with full rights to do as you please, some freehold estates have limitations. Be sure to understand what rights you retain on your specific property before buying or estate planning.