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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


In order to understand leasehold issues, it is helpful to review some of the basic terminology.

What does leasehold mean?

As the purchaser of leasehold property, you acquire the right to occupy and use the leased property for the time period stated in the lease agreement. In return for this right, you agree to make rent payments to the lessor and abide by the other terms of the lease.

This article is concerned with the ground lease and with those leases related to the ground lease, such as an apartment lease. The ground lease is a lease of land only, usually for a long term (55 years or more, from the original date of the lease). It is a means used to separate the ownership of the land from ownership of the buildings and other improvements constructed on the land. In many cases, a developer enters into a master ground lease with the fee simple owner, agreeing in the lease to construct a residential project within a certain period of time. The developer or cooperative Corporation, or in some cases the ground lessor, then enters into a sublease or a new lease of the land with the apartment owner. The developer may lease the improvements to the apartment owner by way of an apartment lease or sublease, or sells the improvements to the apartment owners by way of a condominium conveyance or apartment deed.

The long-term lease should be distinguished from the short-term rental of an apartment where, for example, a tenant rents and apartment from a landlord for a six months to a year and makes monthly rent payments. In the latter case, the tenant receives no ownership in the land or the unit. The tenant only enjoys the right to use the apartment during the period of the short-term rental. In contrast, the lessee of the long-term lease enjoys the right to sell the leasehold interest to a new buyer.

What is the difference between leasehold and fee simple?

Fee simple ownership is probably the most familiar form of ownership to buyers of residential property, especially on the Mainland. Fee simple is sometimes called fee simple absolute because it is the most complete form of ownership. A fee simple buyer acquires ownership of the entire property, including both the land and buildings. The fee simple owner does not pay ground rents, but does pay maintenance fees and real property taxes. The fee simple owner has the right to possess, use the land and dispose of the land as he wishes--sell it, give it away, trade it for other things, lease it to others, or pass it to others upon death.

The leasehold interest is created when a fee simple land-owner enters into an agreement or contract called a ground lease with a lessee. A lessee buys leasehold rights much as one buys fee simple rights; however, the leasehold interest differs from the fee simple interest in several important respects. First, the buyer of residential leasehold property does not own the land and must pay ground rent. Second, his use of the land is limited to the remaining years covered by the lease. Therefore, the land returns to the lessor, and is called reversion. Depending on the provisions of any surrender clause in the lease, the buildings and other improvements on the land may also revert to the lessor. Finally, the use, maintenance, and alteration of the leased premises are subject to any restrictions contained in the lease.

After a lessor leases his land to a lessee, The lessor retains an interest called the leased fee. Once, the fee owner leases the land to the lessee, the lessor's rights to the land are subject to the rights of the lessee under the lease. The lessor's rights include the right to receive rent payments, the right to enforce the lease conditions such as maintenance, and the right to recover complete possession and control of the property when the lease term expires.

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