This stuff can be tedious. No doubt. But it’s so important.
Every country has different legal rights and obligations attached to real estate ownership and leasing.
Every country and even cities within countries have different practices for such things as simply signing a sale and purchase agreement.
There are so many issues that it is difficult to know where to begin.
But firstly, always examine the land title. Although there are many variations to the theme, there are generally two different ways in which land rights can be held. The best, and probably most common in most western countries is a form of freehold title. This is where the buyer owns the interest in the land in perpetuity. It is yours for good.
It may be called other things in different countries. But the principle is simple. Your interest in the property does not end at a certain date. In the case of a block of apartments, office, shops, the owner may have a share in the freehold interest of the land that the block sits on.
The other form of land title is leasehold. This is where the title to use the land is limited to a certain period of time. It can be quite long - say 100 to 125 years, or quite short, say 25 to 40 years.
So what happens at the end of the lease? Well, in some markets and jurisdictions the procedures can be quite clear. The original owner of the land is required to renew the lease and there may be a formula that dictates how this is to be done and the mechanism for setting the price of renewal may be quite clear. In many cases it is not. There may not be any formula for lease renewal, and no formula for calculating a price.
In the UK a considerable amount of urban land is held under leasehold title and the process for renewal is quite clear and well documented. As a buyer you have a fairly clear idea of what is to be done and can establish how that renewal might be priced. In many countries this is NOT the case.
As a buyer, you need to be aware of first, whether the land is freehold or leasehold. If it is leasehold, what are the details of the lease? How much time is left to run? Is renewal automatic? What is the cost of renewal? How is that cost calculated? Am I totally at the mercy of the landowner, and open to being financially reamed?
You have to ask the right questions. And a good lawyer should be able to provide the answers you need. Real estate agents are frequently ambiguous on this. A poor or short leasehold is a negative for a property and it’s often not advertised in property listings.
CASE STUDY: The Leasehold Trap: A friend who ignored Rule Number 9…..but using Rule Number 4 averted a disaster….
Recently a friend and his wife joined us for a weekend of sailing around the islands of Hong Kong. He is a senior regional executive of a household name Fortune 500 company. He’s a very savvy guy at what he does.
During the sail out to our favourite island restaurant he excitedly started to describe his new acquisition - a residential investment property in a city we both know well. A deposit had been paid. A sale and purchase agreement had been signed.
He was looking for a solid investment proposition that would spin off cash to help fund his kids' education. Good thinking, I agreed.
He described the property, and most importantly told me of its location. He asked my opinion, knowing we have been buying property recently in that city.
His apartment was in an area I know well. My first question was "What kind of land title comes with the property?" His eyes glazed over and his brow furrowed. I asked if the property was on freehold land title or leasehold title. His reaction - "I don't know, and why should it matter anyway?"
I know that most of the land in that area is leasehold land. Not freehold. It’s either owned by a quasi-government organisation or some "indigenous people cultural group". These organisations own the land in perpetuity, but have sold development rights for the land typically on the basis of a thirty year lease.
Developers build the apartments, offices, shops and then sell them to the public on the basis that the buyer of the flat will be forced to cough up a substantial amount of money in thirty years’ time to renew the lease. The buyer has no idea if the re-grant of the lease is automatic. The buy certainly has no idea of the cost to renew the lease. And that’s assuming the land-owner even wants to renew!
The landowner might even have the right to simply re-possess the property.
Essentially the buyer does not own the property. He is paying an upfront rent that allows him to occupy the property for thirty years.
And it gets worse….
The ultimate land owners have the right to levy an annual “land rental” charge on the buyer at any time they might wish. You don’t necessarily know when or how much. But there are examples of this levy being so huge as to force the owners out of the property that they have bought under mortgage due to the inability to afford this new levy. In some cases the newly levied land fee has been many multiples of the annual bank mortgage amounts. It happens...
By this time my friend was going pale. He had no idea what he had bought. I knew the area and I suspected the worst. I gave him the details of my lawyer, a man I have trusted with my affairs for many years, and a man who is very much involved in the local real estate scene in his own right.
A couple of weeks later I met up with my friend again. He was gushing thanks and shaking his head. As I suspected, the property he had signed up for was on leasehold land. But thankfully my lawyer friend had been able to get him out of the agreement that he had signed.
Disaster had been averted.
A couple of weeks later, my friend appeared again, a beaming smile on his face. He had located another apartment, a penthouse, in a central downtown location with all the add-ons that he could want. The property was already tenanted at a good rental. My lawyer friend knew the development well, owned property there himself and had done the conveyancing for other clients in the development. As such he knew all the legal details, the management structure, the fees, and all the ins and outs that buyers might sometimes overlook. He was able to give the deal his seal of approval.