What is a leasehold estate?

If you’ve ever rented an apartment, you’ve entered into a leasehold estate — this is what establishes the exclusive right of a tenant to occupy a property, usually for a specific period of time. While a leasehold estate grants the tenant interest in the property, it does not transfer any ownership to them.

Usually, this type of estate is a legally binding agreement laid out in a written lease signed by both the property owner (the lessor), and the tenant (the lessee). It outlines the conditions under which the property may be occupied, and what the lessee may or may not do.

What is a leasehold estate?

Think of a leasehold estate as a typical rental lease. In it, a property owner or landlord grants a tenant an interest in that property. It basically gives the tenant legal permission to use the property in a specific way — for example, to live there or operate a business there — in exchange for a specified amount of money, usually monthly rent.

Although a leasehold estate can be established by a verbal agreement, particularly for a period of less than a year, it’s good policy to sign a written agreement that explicitly specifies the lease terms. By entering into a written contract, both the lessee and lessor have a clear understanding of their rights.

A written agreement also offers protection to both parties. It gives the lessor a legal leg to stand on if the lessee doesn’t meet their end of the deal (ie, stops paying rent). At the same time, the lessee also gets a layer of protection, so long as they don’t violate the terms of the lease.

To provide all of that clarity and protection, the leasehold estate should lay out the length of the tenancy, the exchange between the lessor and lessee (specified amount of rent, and how and when it must be paid) and the rules to which the lessee is subject. Typically, those rules specify that the lessee can only make changes to the property as outlined by the terms of the agreement and is responsible for a certain level of maintenance at the property. It might also clarify what happens at the end of the lease term — for instance, giving the lessee the option to renew the lease.

Types of leasehold estates

There are four types of leasehold estates. The first type is most common:

• Estate for years: An agreement that permits occupancy between two specified dates, at the end of which the property must be vacated.
• Estate from period to period: A monthly tenancy that has no specified end date. A party must give notice to end this type of agreement.
• Estate at will: An estate at will has no specified periods or dates attached to it. To end one, the landlord may have to evict the tenant.
• Estate at sufferance: This occurs when a tenant stays beyond the end of a lease, either with or without the landlord’s permission.

Freehold vs. non-freehold estates

A freehold estate grants an individual indefinite ownership of a property. When you buy a house, for example, you enter into a freehold estate — essentially, you are free to do with the property as you wish for the duration of your life, and you can pass it on as you see fit after your death.

A leasehold estate, however, is a non-freehold estate. Your rights to use or occupy a non-freehold estate property are limited by the terms of your lease, and you do not own it outright.

Leasehold estate example

Betty and Karen rent a two-bedroom apartment together. They enter into a leasehold estate for one year (i.e., estate for years). The terms of their lease specify that they must pay rent to the property owner on the first day of every month, and that they must seek approval from the owner before making any alterations or improvements to the property.

Assuming they hold up their side of the agreement, the leasehold estate grants them rights to use the apartment as their living space for one year, the term of their lease.

Bottom line

“Leasehold estate” is a legal term for a property rental or lease. It does not grant ownership but grants the lessee, or tenant, certain rights to use the property for a specified amount of time, in exchange for a specified payment made to the lessor, or owner/landlord.