Understanding a leasehold title

ONE can own real estate as their primary

residence or as an investment by means of a

rental property, and their ownership is determined

through what is known as a title.

There are several different kinds of real

estate title such as freehold title, sectional

title, consolidated title, as well as other less

common methods of holding title to a real

estate property such as leasehold title.

Leasehold land is title that is held by a

leaseholder (lessee) for the term specified

in the lease.

The lessee is granted the right to occupy

land/stand and is permitted to develop the

stand all the while paying monthly/annual

rent.

In simple language, the lessee owns the

building and improvements on the stand,

however the ground remains under the

ownership of the landlord.

Therefore an individual can have an official

right obtained through a leasehold

title or lease agreement to have exclusive

use and access to the stand to the exclusion

of others including the landlord for a fixed

term.

A leasehold agreement involves the lessor

(landlord) who is the owner of the land

that is leased or rented to another party

known as the lessee (tenant).

The following is the typical procedure to

gaining a leasehold title:

l A leaseholder has a lease agreement with

the owner of the stand, which sets out the

legal rights and responsibilities of either

side;

l Once the services are completed the

compliance certificate will be issued by City

of Harare (COH) and the client can start to

build their home;

l Once lessee has access to the stand, the

monthly or annual “ground rent” payments

are due to the lessor of the ground; and

l The lessor is expected to register the

leasehold interest with the deeds office

where they will obtain a registered Deed.

In order to understand the valuation of

interests of a person in leasehold land, one

needs to understand different types of leases,

termination and interpretation of the

provisions and different clauses within the

different types.

There are different types of leaseholds

and these vary in characteristics as to the

period of lease and the relationship between

the landlord and the tenant. However,

there are four main types of leasehold

ownership which are:

l Lease for a fixed number of years, for example,

one, five and 10-year are common

refers to a property that has a specific duration

of time as defined in the lease agreement.

This type of lease clearly specifies the

starting and ending date;

l Indefinite or in perpetuity is a leasehold

agreement that specifies a long and renewable

period of tenancy which outlasts the

length of the agreement because it does not

end after the specified period ie. it renews

automatically at the end of the term;

l Leasehold at will is a type that has no end

date and no initial period of tenancy defined

in the agreement. The leasehold continues

as long as the owner gives the tenant

permission to occupy the property; and

l Leasehold at sufferance refers to a person

in possession of the property with permission

from the owner.

An indefinite or a perpetual lease means

an unlimited leasehold interest, arising out

of or created by an instrument that conveys

to a person designated as a lessee the right

to possess, enjoy and use the land with no

fixed maturity date — in other words forever.

It can provide for 35-99 years leasehold

with the lessee having the first right of refusal

or else known as an offer to purchase

the land should the owner ever wish to sell

it.

It guarantees the lessee, also known as

the tenant, use of an asset at a significantly

reduced cost (thus making it more affordable)

and guarantees the lessor, the ground

owner or landlord, regular payments for a

specified period in exchange (another way

of looking at this is comparing it to the interest

rate the bank would charge a land

owner for their mortgage).

In a leasehold agreement both the landlord

and the lessee have specific duties that

they undertake. The landlord has the responsibility

to put the tenant in legal possession

of the property.

The landlord will also ensure the certificate

of compliance is in place and that

the stand is serviced with water connection,

tarred roads, sewer connection (to

those that require connection to mains) and

storm water drains.

On the other hand, the lessee has the

duty to pay the agreed amount of rent when

it is due and to erect buildings and improvements

on the stand.

The advantages of a leasehold are as

follows:

l Typically less expensive — it frees up

90% of the funds typically used in buying

a stand to enable the owner to build their

dream home using the capital saved instead

of having spent it on a stand;

l Cash flow positive — low deposit with affordable

monthly payments which allows

for easy financial planning. Residual funds

can be used to invest in other projects or

businesses;

l Transfer of assets — rights to sell the

home or pass it down to beneficiaries therefore

leaving a legacy;

l Financial flexibility and debt freedom

— with leasehold ownership, there is no

need to resort to a loan to own the land ie.

Ownership of a home without the burden

of expensive debt because the value of land

is typically 30 to 40% of the total value of

buying a home; and

l Tax deductibility — a company entering

into a leasehold agreement can deduct the

rental payments it makes on the underlying

land or structure from its state income

taxes.

In the Zimbabwean context leasehold interest

has always been in existence, under

farms, industrial, commercial and government

residential leases.

The lessee enters into a leasehold agreement

with the Lessor. This is then registered

at the Deeds office where a registered Deed

is issued.

The registered Deed with the registrar

provides an undivided share relating to the

property, coupled with the exclusive right

of occupation.

In conclusion, whether you choose to

invest on a leasehold or freehold title, the

cost of building a house or improvements is

fixed and thus the total variable cost is only

the cost of the land yet the expected return

from rentals remain the same and hence the

net return on a leasehold property will always

be significantly higher than on a freehold

one.

The main advantage of a leasehold title

is that you are able to either own and live

in your dream home at a much lesser cost

or alternatively