When it comes to purchasing real estate in Metro Vancouver, you may be weighing your options between a leasehold and a freehold agreement.
No matter which option you choose, it’s important to know what kind of terms you’re agreeing to and what it ultimately means for your living situation and finances.
Daily Hive spoke with Vancouver realtor David Hutchenson with Sutton Group-West Coast Realty to learn more about leasehold and freehold agreements and what you should know.
What is leasehold vs freehold?
Let’s start with some basic definitions and information about leasehold and freehold arrangements.
A leasehold is a type of property interest where the leasehold owner has the right to occupy the property for a fixed period, typically over 20 years and under 99 years. However, that does not give them ownership of the land the property sits on.
Hutchinson adds that if you buy a leasehold that has already been leased, “it doesn’t automatically become 99 years again. You just get the remainder of the 99 years.”
Leaseholds can apply to homes, buildings, apartment units, or lots. The leases can be pre-paid or non-pre-paid agreements.
“With the leasehold, you basically are just owning the unit itself… whatever square footage you have and the land below it,” said Hutchenson, adding that leaseholders are essentially “glorified renter[s].”
“You’re kind of just leasing back from the actual owners of the land,” he added.
Leaseholds that have terms longer than 20 years are not covered by the Residential Tenancy Act (RTA). Therefore entering a leasehold is different than being a tenant because you’re not renting the property but occupying it for a set time period.
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However, the RTA would apply if a long-term tenant rents the unit to another tenant.
Moreover, strata legislation (the Strata Property Act) does not apply to long-term residential leases. It only applies to strata lots or leasehold strata lots, according to the province.
A freehold means the owner has the title to the land and property and does not have a time limit on it.
“Basically, you own it forever, and you own the unit itself and the land beneath the strata unit,” said Hutchenson.
Freeholds are the more popular and common choice for many property owners, noted the realtor.
In BC, leasehold properties can be owned by different entities like universities, Indigenous groups, governments (municipal, provincial, or federal), or a private group.
For example, you’d likely see leasehold properties near campuses like SFU and UBC or on First Nations lands.
There are also leaseholds held by the City of Vancouver along South East Marine Drive and Champlain Heights and various corporations have leaseholds in the West End.
Hutchenson noted that First Nations leaseholds are “definitely something we’re going to see more of in the future.”
The upcoming Heather Lands and Jericho Lands projects are also examples of these upcoming leasehold projects spearheaded by First Nations.
Leasehold payments and uncertainty
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Leaseholds are usually considered the cheaper option compared to freehold properties because they do not include land ownership. This means their value doesn’t tend appreciate that much.
It’s also important to note key differences between pre-paid and non-pre-paid leaseholds.
Pre-paid is when the rent on the land has been paid at the start of the lease’s term, while non-pre-paid leaseholds require you to pay a monthly or annual fee.
Leaseholds also involve uncertainty. When a lease on a unit is nearing expiration, the land owner is not guaranteed to renew it, and you may have to renegotiate your terms. The owner might also choose to renew it at a higher cost because the value of the land tends to go up.
Therefore, it’s safer to purchase a leasehold with a longer lease period.
As a leasehold nears the end of its term, its property value may decrease, making it harder to find a buyer.
As for financing a leasehold, that can be “tricky,” he noted.
“Apparently a few different lenders [finance leasehold] but the issue is, and it’s not written in stone, that the rate might be a little bit higher. You might have to put down more of a down payment,” he said.
“It’s more difficult to qualify but [leasehold] are cheaper so that’s the rub , right? You get it cheaper, so you can actually maybe scrabble together 35% down on a $300,000 leasehold compared to a $600,000 freehold.”
Hutchinson notes that while leasehold may have advantages, most folks “want to own something with perpetuity.”
“But for some people, [they’re] saving so much money [with a leasehold], and the numbers make sense.”
Hutchinson advises to speak with a professional realtor before deciding on a leasehold or freehold agreement.