ONE can own real estate as their primary residence or as an investment by means of a rental property, and their ownership is determined through what is known as a title.
There are several different kinds of real estate title such as freehold title, sectional title, consolidated title, as well as other less common methods of holding title to a real estate property such as leasehold title.
Leasehold land is title that is held by a leaseholder (lessee) for the term specified in the lease.
The lessee is granted the right to occupy land/stand and is permitted to develop the stand all the while paying monthly/annual rent.
In simple language, the lessee owns the building and improvements on the stand, however the ground remains under the ownership of the landlord.
Therefore an individual can have an official right obtained through a leasehold title or lease agreement to have exclusive use and access to the stand to the exclusion of others including the landlord for a fixed term.
A leasehold agreement involves the lessor (landlord) who is the owner of the land that is leased or rented to another party known as the lessee (tenant).
The following is the typical procedure to gaining a leasehold title:
l A leaseholder has a lease agreement with the owner of the stand, which sets out the legal rights and responsibilities of either side;
l Once the services are completed the compliance certificate will be issued by City of Harare (COH) and the client can start to build their home;
l Once lessee has access to the stand, the monthly or annual “ground rent” payments are due to the lessor of the ground; and
l The lessor is expected to register the leasehold interest with the deeds office where they will obtain a registered Deed.
In order to understand the valuation of interests of a person in leasehold land, one needs to understand different types of leases, termination and interpretation of the provisions and different clauses within the different types.
There are different types of leaseholds and these vary in characteristics as to the period of lease and the relationship between the landlord and the tenant. However, there are four main types of leasehold ownership which are:
l Lease for a fixed number of years, for example, one, five and 10-year are common refers to a property that has a specific duration of time as defined in the lease agreement. This type of lease clearly specifies the starting and ending date;
l Indefinite or in perpetuity is a leasehold agreement that specifies a long and renewable period of tenancy which outlasts the length of the agreement because it does not end after the specified period ie. it renews automatically at the end of the term;
l Leasehold at will is a type that has no end date and no initial period of tenancy defined in the agreement. The leasehold continues as long as the owner gives the tenant permission to occupy the property; and
l Leasehold at sufferance refers to a person in possession of the property with permission from the owner.
An indefinite or a perpetual lease means an unlimited leasehold interest, arising out of or created by an instrument that conveys to a person designated as a lessee the right to possess, enjoy and use the land with no fixed maturity date — in other words forever. It can provide for 35-99 years leasehold with the lessee having the first right of refusal or else known as an offer to purchase the land should the owner ever wish to sell it.
It guarantees the lessee, also known as the tenant, use of an asset at a significantly reduced cost (thus making it more affordable) and guarantees the lessor, the ground owner or landlord, regular payments for a specified period in exchange (another way of looking at this is comparing it to the interest rate the bank would charge a land owner for their mortgage).
In a leasehold agreement both the landlord and the lessee have specific duties that they undertake. The landlord has the responsibility to put the tenant in legal possession of the property.
The landlord will also ensure the certificate of compliance is in place and that the stand is serviced with water connection, tarred roads, sewer connection (to those that require connection to mains) and storm water drains.
On the other hand, the lessee has the duty to pay the agreed amount of rent when it is due and to erect buildings and improvements on the stand.
The advantages of a leasehold are as follows:
l Typically less expensive — it frees up 90% of the funds typically used in buying a stand to enable the owner to build their dream home using the capital saved instead of having spent it on a stand;
l Cash flow positive — low deposit with affordable monthly payments which allows for easy financial planning. Residual funds can be used to invest in other projects or businesses;
l Transfer of assets — rights to sell the home or pass it down to beneficiaries therefore leaving a legacy;
l Financial flexibility and debt freedom — with leasehold ownership, there is no need to resort to a loan to own the land ie. Ownership of a home without the burden of expensive debt because the value of land is typically 30 to 40% of the total value of buying a home; and
l Tax deductibility — a company entering into a leasehold agreement can deduct the rental payments it makes on the underlying land or structure from its state income taxes.
In the Zimbabwean context leasehold interest has always been in existence, under farms, industrial, commercial and government residential leases.
The lessee enters into a leasehold agreement with the Lessor. This is then registered at the Deeds office where a registered Deed is issued.
The registered Deed with the registrar provides an undivided share relating to the property, coupled with the exclusive right of occupation.
In conclusion, whether you choose to invest on a leasehold or freehold title, the cost of building a house or improvements is fixed and thus the total variable cost is only the cost of the land yet the expected return from rentals remain the same and hence the net return on a leasehold property will always be significantly higher than on a freehold one.
The main advantage of a leasehold title is that you are able to either own and live in your dream home at a much lesser cost or alternatively rent it out at a much higher return.