There are several reasons why people decide to sell their property as leasehold as opposed to freehold. The following article explains about advantages and disadvantages of leaseholds.
The first major reason could be that there is a readily available market for leasehold properties as there are many people looking for premises on a short term basis. Secondly, when a property is a part of the bigger property or building, each unit within this building is held under lease rather than freehold. This concept applies to both residential as well as commercial properties such as office suites etc. Also, in some areas of Wales and England, especially those that have a long history behind them, it is common for the residential property to be sold as leasehold rather than as a freehold.
Advantages
The first advantage of leasing property is that it provides home for people having short-term residential needs. Although the terms of the lease are fixed, the length of the lease can vary, and can be of any duration. This is sometimes mutually convenient for both parties; lesser and the lessee. As for the landlord, he not only has access to steady income from the property, but also retains an interest in it. He can sell-off his freehold interest in the property which is separate from the leasehold interest.
Another major advantage of choosing to lease properties is that it is easy to enforce covenants in the case of leasehold than in the case of freehold. In the case of freehold property, positive covenants cannot be directly enforced against the future owners of the property. However, in the case of leasehold property, all covenants, irrespective of the fact that they are positive or negative, are enforceable against all future successors of title.
In instances, where the enforcement of positive and negative covenants is particularly important, leases are used. This is especially true in the case of household units within a single building. Here landlords find it easy to let rather than to sell, thereby ensuring that all tenants should undertake repairs of their respective units. This also works in favour of the tenants where they can be assured that common parts that are retained by the landlord shall be maintained by him. Usually in practice, the landlord undertakes maintenance of the common parts, but recovers the cost incurred for the same by way of a ‘service charge’. Payment of this service charge is an implied positive covenant. The enforcement of such covenants would present huge problems in the case of freehold property.
Disadvantages
Leases are usually disadvantageous for the tenant rather than the landlord. Since the lease is for a fixed period of time, it will eventually expire, after which the tenant will have to again approach the landlord for a renewal of lease. The landlord may either agree or refuse to renew. If the lease has a capital value, it becomes a wasting asset in the tenant’s hand. Some tenants have a statutory right to renew or extend the length of the lease under certain circumstances. But when such a right is not guaranteed, it becomes a big problem for the tenant.
Another problem faced by tenants is that of covenants. Leases impose considerable burden on tenants by way of covenants imposed to repair, contribute towards maintenance of common parts of the building, restrictions on dealing with the property, etc. The landlord is given considerable remedies to ensure compliance of these covenants. He can also forfeit the lease and bring it to an end. This can be difficult for tenants, especially when the lease has a capital value, as the value would be lost with the lease.
When considering the landlord’s point of view, leases can sometimes become a disadvantage because he is liable for continuous obligations such as repairs, insurance, etc. These obligations could have been disposed, had he chosen to sell the property. The burden of these obligations is however, subject to the income received as rent from the property along with the covenants agreed to be performed by the tenants.
Photo courtesy: Ina Widegren
