The distinction between freehold and leasehold properties plays a pivotal role in shaping investment decisions and property ownership dynamics. While freehold properties offer outright ownership of both the land and the building, leasehold properties grant the buyer the right to use the property for a specified period, typically through a lease agreement with the landowner. This article delves into answering the question why would anyone buy a leasehold property over freehold ones, with a particular focus on the Nigerian real estate market.

What is a Leasehold Property?

Before delving into the intricacies of leasehold properties, it’s essential to grasp the fundamental concept. A leasehold property entails owning a property for a predetermined duration, as stipulated in the lease agreement with the landowner. While the leaseholder enjoys certain rights to utilize the property, including making alterations or renting it out, ultimate ownership of the land remains with the freeholder. Leasehold agreements commonly span decades, although longer leases, such as those lasting 99 years or even 999 years, are not uncommon.

Freehold vs Leasehold Property

The key distinction between freehold and leasehold properties lies in the nature of ownership. Freehold properties confer absolute ownership of both the land and the building to the buyer, granting them unrestricted rights over the property. Conversely, leasehold properties involve a lease agreement where the buyer obtains the right to use the property for a specified period, subject to the terms outlined in the lease.

While freehold ownership offers autonomy and control, leasehold ownership introduces certain limitations and obligations. Leaseholders typically pay ground rent and may be subject to service charges and restrictions outlined in the lease agreement. Additionally, the diminishing lease term of a leasehold property can affect its market value and resale potential.

Drawbacks of a Leasehold Property

Here are the drawbacks associated with leasehold properties:

Limited Ownership Duration

Leasehold properties come with a finite lease term, typically ranging from several decades to a few centuries. Once the lease expires, ownership reverts to the freeholder, unless renewed, which can lead to uncertainty and potential loss of investment.

Ground Rent Obligations

Leaseholders are often required to pay ground rent to the freeholder as part of the lease agreement. Failure to meet these obligations can result in penalties or even forfeiture of the leasehold interest, adding to the financial burden of ownership.

Service Charges and Maintenance Costs

Leasehold properties may be subject to service charges and maintenance costs for the upkeep of common areas and amenities. These additional expenses can escalate over time and impact the affordability of owning a leasehold property.

Restrictions on Alterations

Leasehold agreements typically impose restrictions on alterations or renovations to the property without prior consent from the freeholder. This can limit the leaseholder’s ability to customize or upgrade the property according to their preferences.

Uncertainty Over Lease Renewal

The process of lease renewal can be complex and uncertain, depending on the terms outlined in the original lease agreement and the willingness of the freeholder to extend the lease. Leaseholders may face challenges in negotiating favorable renewal terms, leading to anxiety and instability.

Lack of Control

Unlike freehold properties where owners have complete autonomy, leasehold properties grant limited control over the land and building to the leaseholder. Decisions regarding maintenance, management, and use of the property may be subject to the freeholder’s approval.

Potential for Disputes

Disputes between leaseholders and freeholders can arise over various issues, including lease terms, service charges, maintenance responsibilities, and lease extensions. Resolving these disputes can be time-consuming, costly, and emotionally draining for all parties involved.

Difficulty in Selling

Leasehold properties with shorter remaining lease terms or unfavorable lease conditions may face challenges in the resale market. Prospective buyers may be deterred by the uncertainties and risks associated with leasehold ownership, leading to longer selling periods and lower sale prices.

Understanding these drawbacks is crucial for prospective buyers considering leasehold properties, as they weigh the advantages and disadvantages of this form of ownership in the real estate market.

Why Would Anyone Buy a Leasehold Property in Nigeria?

Despite the apparent drawbacks associated with leasehold properties, they continue to garner interest from buyers in various real estate markets, including Nigeria. Several factors contribute to the appeal of leasehold properties:

Affordability

Leasehold properties often present a more affordable entry point into the property market compared to freehold properties. The initial purchase price of a leasehold property, particularly one with a long lease term, may be substantially lower, making it an attractive option for budget-conscious buyers.

Location and Amenities

In urban areas where freehold properties are scarce or prohibitively expensive, leasehold properties offer an opportunity to access prime locations and desirable amenities. Buyers may prioritize location over ownership type, especially when considering proximity to schools, workplaces, transportation hubs, and recreational facilities.

Investment Potential

Leasehold properties can serve as viable investment assets, particularly for investors seeking rental income or capital appreciation. Despite the lease term limitations, leasehold properties can generate steady rental yields, providing a source of passive income for investors. Moreover, improvements and renovations made to the property can enhance its value over time.

Flexible Financing Options

Financing options for leasehold properties may be more accessible compared to freehold properties, particularly for individuals with limited financial resources or credit history. Lenders may be more inclined to extend loans for leasehold properties, given the underlying asset’s potential for generating income.

Maintenance and Management

Leasehold properties often come with built-in maintenance and management services provided by the freeholder or a management company. This relieves leaseholders of the burden of managing the property and ensures that common areas are well-maintained, contributing to a higher quality of living.

Conclusion

In conclusion, while freehold properties offer outright ownership and autonomy, leasehold properties present a viable alternative for buyers seeking affordability, convenience, and investment opportunities.

In the Nigerian real estate market and beyond, the decision to purchase a leasehold property is influenced by a myriad of factors, including financial considerations, location preferences, and lifestyle choices.

This should answer why anyone would buy a leasehold property instead of freehold ones in Nigeria.