How Does a Leasehold Work?

How Does a Leasehold Work?

A leasehold is another term used to describe a long-term lease or rental. Property ownership returns to the original owner at the end of the term.

A leasehold is a real estate term that is used to describe a piece of property that is rented via an agreement for a long period of time. It most often applies in situations where the renting party is building something new or making improvements to an existing structure on land that is owned by the renter. The period of the rental agreement or lease may be for as many as 99 years.

The term often applies in development situations where a corporation signs a leasehold to build a commercial structure. Most buildings in these situations are obsolete by the end of the leasehold, but as the end of the lease approaches, the corporation typically has three choices:

  • Remove the building
  • Sell the building to the owner of the land
  • Renegotiate the leasehold contract

There are also leasehold arrangements for residential properties, which can be expensive. Leasehold arrangements are popular in various European communities and in a few U.S. locations, like Hawaii. In the case of a residential leasehold, the lessee purchases the property for a certain period of time and is able to make any improvements he or she sees fit. At the end of the period, the entire property, including any improvements or additions, reverts to the original owner.