What is a leasehold property?

Our legal system distinguishes between ownership and possession. In a lease, the landlord owns the property, but gives possession to the tenant for the term of the lease. In most condominium developments, people own their strata lots. These are called freehold developments – each owner holds “fee simple title”. The Strata Property Act permits a government body, for example, the City of Vancouver, to be the landlord of a leasehold strata development. In a leasehold development, the landlord owns the property, but grants a long-term lease to a developer (say, for 99 years) to build a strata development there. The developer is a long-term tenant who, with the landlord’s permission, creates a strata development on the landlord’s property.

In this example, suppose the developer, as the long-term tenant, builds a high-rise apartment building on the City’s land. After the developer files the strata plan (called a leasehold strata plan), the high-rise apartment building is divided into strata lots and common property. The government owns each apartment and is the long-term landlord. The developer is the long-term tenant, entitled to possession of the apartment for the rest of the 99-year lease. The developer does not own the apartment, so it cannot sell it. But the developer can sell its leasehold interest in each apartment under the long-term lease. In other words, the developer may sell to a buyer who can then occupy the apartment for the rest of the long-term lease. But most buyers don’t stay in one place that long. Instead, that buyer will probably sell their leasehold interest (as long-term tenant under the lease) to the next leasehold buyer, and so on. A long-term lease in a strata development may last for many years, as this example shows.

If a person is registered on title as the long-term tenant under a long-term lease in a leasehold strata development, the Strata Property Act treats that person as an owner. The long-term tenant must pay the monthly strata fees and any other contributions, such as a special levy. Depending on the project, the developer may prepay all the rent due under the long-term lease. Or, rent may be payable every year under the lease. In that case, the lease usually requires payment of annual rent, but permits payment in 12 equal monthly instalments, usually on the first of each month.

In addition to paying monthly strata fees, long-term tenants must pay their proportionate share of the monthly rent under the long-term lease. When the long-term lease ends, the Strata Property Act allows several options. Normally, the long-term tenant must vacate the strata lot, unless other arrangements are made. At this point, possession of the strata lot goes back to the landlord. But the landlord must pay an amount to the departing long-term tenant. The compensation is calculated using a formula in the long-term lease or by government regulation. This is why the fair market value of a leasehold strata lot is usually much less than the value of a comparable freehold strata lot. If you plan to buy the interest of a long-term tenant in a leasehold strata lot, you should make any offer subject to first reviewing the long-term lease and all related documents with your lawyer.

This information is provided by “The Canadian Bar Association” www.cba.org