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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

  1. Introduction
  2. Basic Terminology
  3. Purchasing a Leasehold Property
  4. Types of Apartment Unit Leases
  5. Obtaining Financing for Leasehold Property
  6. Renegotiating Lease Rent Payments
  7. Expiration of the Lease Term and Surrender
  8. Purchasing the Leased Fee
  9. Conclusion


Because it is so important that buyers understand the terms of the lease before purchasing a leasehold residence, Hawaii law requires that the seller furnish the buyer with certain information about the lease.

What information must be disclosed?

At a minimum, the buyer must receive a copy of the lease document or documents which contain the major provisions of the lease. The lease documents could be any one of the following:

  • The master lease and any amendments; or
  • The apartment lease and any amendments; or
  • For buyers of new condominium apartments, a copy of the condominium public report.

In addition to the minimum legal requirement, buyers should review other relevant lease Document. For example, the buyer of a cooperative apartment may want to review the master lease in addition to the proprietary lease on the apartment.

The buyer must sign a receipt or a copy of the sales contract to acknowledge receiving the lease documents. The receipt or contract must also include a summary of the major provisions of the lease in plain language, lease rent renegotiation dates, how renegotiated lease rents will be calculated, and surrender clause provisions. Normally this will be accomplished in a separate addendum attached to the contract or receipt. Buyers also must be informed that current law does not give condominium and cooperative leases the right to require that the lessors sells them the leased fee interest in the land under their apartments. Finally, the buyer needs to acknowledge that he or she has read and understands the terms of the lease documents.

Who must disclose this information?

It is the responsibility of the seller to furnish the buyer with a copy of the lease documents and other information about the lease. The seller may provide the information directly or through an agent, most likely the seller's real estate agent. Copies of the recorded lease and amendments are available at the Bureau of Conveyances public record office in Honolulu.

When must leasehold information be disclosed?

The seller or seller's agent must provide the required information to the buyer within 10 days from acceptance of the sales contract (that is, no later than 10 days from the date the buyer and seller reached a final agreement for sale of the property).

What information about the lease should the buyer understand?

As a buyer, you should read the lease carefully and be sure you understand its terms and conditions and how they affect you and relate to your plans and goals. The best time to do this is before you make an offer to purchase your leasehold apartment unit. To obtain a copy of the lease, ask the seller, the seller's agent, or your own adviser. In reviewing a lease, it is especially important to find out the following information:

Find out the length of the lease, how many years are remaining until the lease ends, and whether their is any right to extent.

Be sure you understand how much lease rent you will have to pay (which often includes general excise tax), when it is payable and to whom, what penalties are prescribed for late payment. Lease rents typically adjust periodically every 10 or 15 years. Find out when the rent adjusts, and to what amount. Also find out whether or not your maintenance fee payments include the lease rent.

At some point the rent may adjust, but to an amount which will be renegotiated at that time. Know when the rent payments are scheduled to be renegotiated. The lease likely contains more than one renegotiation date, such as every 10 or 15 years.

Understand how the new rent payments will be determined upon renegotiation, including any procedures involving the use of arbitration. The lease often contains a formula for calculated the new lease rent. This formal is generally based on a percentage of the market value of the unencumbered fee simple land existing at the time of renegotiation. If market value increases significantly, so will your future lease rent.

Read the surrender clause carefully. It tells you what will happen to your apartment unit when the lease comes to an end. Most leases provide that the buildings on the land including your apartment, become the property of the lessor upon the expiration of the term of the lease--automatically and without any payment.

Leases are sometimes amended to reflect a change in the lease terms or an extension of the term of the lease. The best way to tell if their have been amendments is to examine a recent title report on the property prepared by a licensed title company.

Questions to ask before you by leasehold property

  • How long is the lease term? When is the expiration date, and is there an extension clause?
  • How much is the lease rent?
  • When are the lease rent renegotiation dates?
  • How will the new lease rent be determined?
  • What are the terms of the surrender clause?

What is the buyer's right to cancel contract?

The law also provides that, within five days of acknowledging receipt of the lease documents, the buyer has the right to cancel the contract and recover all deposit money. The seller and buyer may agree in writing to reduce or extent the time period required for the seller to provide the lease documents and the buyer to review them.

What is the role of the leasehold addendum at the time of signing the sales contract (DROA)?

Your Standard Sales Contract (also called the Deposit Receipt, Offer and Acceptance or DROA) may contain a detailed addendum that informs you about leases in general and specifically about your own lease. Ask the sales agent for a copy of any standard leasehold addendum so that you can review it in advance of your making an offer. Be sure to ask questions if you do not understand any part of the addendum.

Do I need expert advice?

If, after reading the lease Document and the summary of its major provisions provided by the seller, and discussing this with your real estate agent, you still have questions about the lease, you should see an attorney familiar with real estate leases. The attorney can help you understand how the lease and its consequences affects you and your use of the property.

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