Although the term “leasehold estate” is rarely used today, according to Kyle D. Tucker, a real estate attorney with Eastman & Smith LTD, it’s still an important concept to understand in commercial real estate, for both landlords and tenants.
What Is a Leasehold Estate?
A leasehold estate is a leasing arrangement in which a landlord, the lessor, allows a tenant, the lessee, to occupy a property for a set period of time, but the landlord retains ownership. Most types of commercial leases in commercial real estate fall under the umbrella of leaseholds.
This dynamic is in contrast to a freehold estate, which is a property owned and occupied by the owner or landlord. Property ownership in a freehold estate does not have any fixed timeline, and the property can be transferred or sold at any time. With a leasehold estate, though, there is a set period of time when the lessee occupies the property.
In a leasehold agreement, Tucker explained, the property owner no longer has fee simple absolute rights, in which the owner can do whatever they want with the property.
“You’re the owner, but you’ve leased [the property] to a tenant for whatever the duration of the lease is,” Tucker said of leasehold estates. The owner no longer has the right to make changes to the property, sell the property or tear down the property so long as the lease agreement is in place.
What Are the 4 Types of Leasehold Estates?
While “leasehold estate” is a broad term to define most lease agreements, there are different types of leasehold estates one might encounter in commercial and residential real estate.
1. Periodic Tenancy
Periodic tenancy is a type of leasehold agreement in which the lessee occupies the property from a specific start date, but with no agreed-upon end date. More often, this deal is known as a month-to-month lease. This lease automatically renews, unless the property owner or tenant gives notice.
2. Estate for Years
An estate for years is when the tenant has a specified start and end date to occupy the property, also known as a fixed period. The tenancy could be one year, two years or even six months, depending on the terms of the lease agreement.
Sometimes tenants can renew their lease after the end date. In that case the tenant and landlord must enter a new agreement..
3. Estate at Will
An estate at will, also known as tenancy at will, has no definitive end date or lease period, and the tenant can occupy the property for as long as the landlord allows. Estate at will is similar to periodic tenancy in that the tenant or landlord must give notice before ending the agreement. However, there usually is no actual lease, and not all states recognize estate at will as a legitimate agreement.
4. Estate at Sufferance
When a holdover tenant remains on the property after their lease has expired, this is called estate at sufferance, or tenancy at sufferance. In this scenario the landlord can use legal measures to force the tenant off of the property. The tenant is illegally staying on the property past the terms of their lease.
An Example of a Leasehold Estate in CRE
Tucker gave the example of a commercial warehouse property as a leasehold estate, which could be written as either a gross or net lease.
“Say I leased my property,” said Tucker. “I have a commercial warehouse, and we lease it to a tenant. They have rights to access the property, store their goods and use whatever office space they might need.”
Tucker added, “Maybe [the tenants] have customers coming and going to buy products, or maybe they’re just using it as a logistical storage facility, and their invitees are customers or truckers who come and load the goods and transport them elsewhere.”
In this example, Tucker has a leasehold agreement with the tenant, in which they pay rent to use the space as needed. If the lease has a specified start and end date, then this is an estate for years, and the tenant has the option to renew the lease after the end date, so long as the landlord is in agreement.
What Are the Responsibilities of a Landlord with a Leasehold Estate?
With a leasehold, the landlord must first make sure the property is habitable, meaning the building is structurally sound, and all necessary utilities, such as water, heat and gas are working.
For residential assets such as multifamily apartment buildings, the property needs to be safe for a tenant to live in. The definitions for “habitable” vary from state to state. If you are a landlord with a leasehold agreement, make sure to check your specific state’s laws.
Landlords also need to allow tenants to use the property without interference, as long as none of the lease agreements are being broken. For instance, a landlord cannot enter a tenant’s apartment without notice.
What Are the Responsibilities of a Tenant in a Leasehold Agreement?
Like the landlord, a tenant has specific responsibilities in a leasehold agreement. The first and most important duty is that the tenant is required to pay rent when it is due. The amount and due date must be written in the lease agreement. The tenant also has to keep the property free from damage. If damage is caused directly by the tenant, they are responsible for paying for repairs.
Leasehold Estates Can Describe Any Commercial Lease Agreement
“Leasehold estate” is a broad term, not often used in current-day real estate transactions. However, the concept is still important to know when buying, selling or renting commercial real estate.
A leasehold describes any lease agreement between a tenant and landlord, and underneath that umbrella term are more specific types of agreements and responsibilities for each. Before renting or leasing a commercial space, it’s important to understand your duties as a tenant or landlord.