A Guide To Hawaii's Residential Leasehold

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 leasehold ownership.

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 to buy.

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.

BASIC TERMINOLOGY

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 death.

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.