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A Guide to Hawaii's Residential Leasehold
Authorized by the Hawaii State Legislature and the State's Housing Finance
and Development Corporation
See also "Purchasing
a Leasehold Property" and "Leasehold-Fee
This article will help you understand some of the issues involved in buying
and owning residential leasehold condominium and cooperative apartments, as well
as dwelling units within Planned Developments (PUD). This article uses the term
apartment unit to refer to all three forms of ownership. Anyone buying a
leasehold residential apartment should be aware of all of the consequences of
Why is it so important for me to understand leasehold issues?
AFFECTS YOUR DECISION TO BUY.
If you are contemplating the purchase of a residential leasehold apartment unit,
there are additional considerations than there are in the event that you were
contemplating the purchase of a comparable fee simple apartment unit. For
example, you will be concerned with the length of the remaining lease term, what
happens to your unit at the end of the lease term, and how increases in the rent
payments are determined. Answers to these questions will enforce your decision
AFFECTS YOUR ABILITY TO OBTAIN A LOAN. As an owner of a leasehold
apartment unit, you some day may want to refinance your leasehold apartment
unit. A short time remaining on the fixed period or term of the lease could
create obstacles to obtain the needed financing. This could be a problem if you
wear seeking to refinance either an agreement of sale or a mortgage that is soon
to become due and payable in full.
AFFECTS YOUR ABILITY TO RESELL. If you want to sell your leasehold
apartment unit, you could find the apartment unit becomes more difficult to sell
as the lease term approaches its rent renegotiation and explicit expiration
dates. Naturally, a buyer would be more attracted if the lease had a longer
period until rent renegotiation or expiration.
Also, lease provisions regarding such matters as the increase of rent and the
expiration date of the lease term may seriously affects the willingness of some
lenders to finance the proposed purchase of the apartment unit. If, due to the
length of the lease term, buyers have difficulty obtained financing, a seller
may need to make concessions in order to sell the apartment unit. The value of a
unit could decrease as the lease term nears the expiration date.
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.
What is the difference between leasehold and fee simple?
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
LEASEHOLD: 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.
LEASED FEE INTEREST: 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.
For more much more information see: "Purchasing
A Leasehold Property" and "Leasehold-Fee
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