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For Buyers: Leasehold vs. Fee Simple
A Guide to Hawaii's Residential Leasehold
Authorized by the Hawaii State Legislature and the State's Housing
Finance and Development Corporation
- Introduction
- Basic Terminology
- Purchasing a Leasehold Property
- Types of Apartment Unit Leases
- Obtaining Financing for Leasehold Property
- Renegotiating Lease Rent Payments
- Expiration of the Lease Term and Surrender
- Purchasing the Leased Fee
- Conclusion
Several possibilities exist at the expiration of the lease term, and most leases
contain a reversion and surrender clause.
REVERSION
The typical apartment lease provides that the land reverts to the
lessor at the end of the lease term. In other words, when the lease expires, the lessor
retakes possession of the land. When you buy an apartment unit on leased land, it is
important to consider what happens to the unit after the lease expires.
SURRENDER CLAUSE
Apartment unit leases typically contain a surrender clause
providing that, upon expiration of the lease, the land, all apartment units, and other
improvements become the property of the lessor. The clause generally requires that the
lessee surrender to the lessor, upon expiration of the lease term, all apartment units,
garages, roads, landscaping, and swimming pools, even if these improvements where built
and maintained at the lessee's expense.
What are the different possibilities that occur at the expiration of the lease?
ATTEMPT TO NEGOTIATE AN EXTENSION OR NEW LEASE
The lessee could attempt to
negotiate a new ground lease or extend the ground lease even though the lessor may not be
legally obligated to do so. The lessor may be unwilling to extend or enter into a new
lease if the lessor has plans to redevelop the property. On the other hand, a lessor who
plans to maintain the project as a residential property may be willing to grant a new
lease. In this situation, however, the new lease rent could be the market rental price of
the land and the apartment unit, as both became the property of the lessor at expiration
of the original lease.
SURRENDER IMPROVEMENTS TO LESSOR
If the lessee is unable to negotiate an
extension of the existing lease or a new lease, the lessee may be forced to surrender the
apartment unit to the lessor and move out.
REMOVAL OF IMPROVEMENTS
The surrender clause may instead require the apartment
lessees to remove the structure and restore the leased land to its original condition at
the end of the lease term. In the case of a condominium or cooperative, the initial
apartment owner would be legally required to pay his or her proportionate share of the
expense of removal of the building that contains the apartment unit when the lease
expires.
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