A Guide To Freehold Estates: Different Types And How They Work

If you’re a seasoned home buyer, then you know what goes into purchasing real estate. But real estate is a complex landscape. The type of property you choose to purchase depends on your unique needs as a buyer.

Whether you’re looking to purchase a home as your primary residence, start your side hustle as a landlord or expand your portfolio of real estate investments, you will likely come across a type of real property called a freehold estate. These properties come with no fixed ownership timeline, which you can pass on indefinitely.

Let’s take a look at the definition of a freehold estate and how this type of property works. Then, we’ll get into the different types of freehold estate arrangements and their unique characteristics.

When you own a freehold estate, you have exclusive rights to the property for an undefined length of time. It comes with indefinite ownership, which you can essentially pass on to your heirs or beneficiaries forever. There are three types of freehold estates out there: fee simple absolute, fee simple defeasible and life estate.

They represent an immovable asset in the real estate industry that you hold interest in. Each type of real property fits into a classification of ownership that determines what you can do with that asset.

Let’s dive into the three different types of freehold estates.

1. Fee Simple Absolute

Fee simple estate and fee simple absolute are often used interchangeably and stem from the term freehold estate. In the case of a fee simple absolute, an owner has complete ownership over the property without restriction – as long as they don’t breach any active easements on the property.

With fee simple absolute ownership, there isn’t a limit on the period of time you can own the property. Fee simple ownership allows you to pass down the property to your heirs or beneficiaries as stated in a will or by the law. This type of freehold estate is sometimes referred to as an estate of inheritance because it’s passed on to the owner’s beneficiaries upon their death.

You keep unrestricted ownership of the property as long as you keep up with your obligations as an owner, such as property taxes. As long as you do so, you can use the land as you please.

Fee simple absolute is the most common type of property ownership.

2. Fee Simple Defeasible

A fee simple defeasible is a form of freehold estate ownership that puts more limitations on the owner compared to a fee simple absolute. With this type of property ownership, owning the land comes with certain conditions.

For example, you may have to use the property for a specific purpose with a fee simple defeasible situation. If you don’t follow through, you could lose ownership of the house. Say you were granted a field on a family farm with the stipulation that you would use it to grow corn. If instead you turned it into a baseball diamond, ownership could revert to the original owners.

Remember: Every property will come with its own unique set of parameters, so it’s important to review any documents before you finalize the home purchase.

3. Life Estate

A life estate is a form of ownership you may want to consider during estate planning. Often, homeowners want to give their home to their children after they pass. Through a life estate, a homeowner can make that transition process easier.

The original owner, otherwise known as the life tenant or the grantor, can live out their life in the home. While the life tenant stays there, though, they share joint ownership with the inheritor(s) who hold an interest in the property. They’re also known as the grantees.

The original homeowner still has responsibilities, such as making insurance payments and paying the property tax bill. The only caveat is that the current homeowner needs to get approval from the remainderman, or the person(s) who’s going to inherit the home, for any changes made to the property. These changes may include taking out a mortgage or selling the house.

Once the life tenant passes, they no longer hold rights to the property. Instead, the remainderman/beneficiary takes ownership, allowing them to inherit without needing to go to probate court.

Nonfreehold estates are a type of real property that you have a limited right to use or occupy, but don’t own. In effect, you lease the property without holding any ownership over it. For example, a nonfreehold estate may include a condominium you rent. In contrast, with a freehold estate condo, the unit is owned by the tenant outright.

These types of property are generally called nonfreehold estates, though they’re also called leasehold estates or less than freehold estates. Additionally, since nonfreehold estates involve tenants, they are sometimes referred to as tenancies.

Let’s go over the most common types of nonfreehold estate arrangements.

Tenancy For Years

Tenancy for years is a type of estate created by a lease. When the tenant enters this type of lease agreement, they have it for a fixed amount of time. The contract outlines the beginning and end dates for the tenancy.

Because of this, neither the tenant nor the landlord has to notify each other about termination of the lease. The documentation already specifies the dates. At the end of the term, the tenant either moves out of the property or renews the lease agreement.

You may also hear a tenancy for years referred to as an estate for years or tenancy for a definite term.

Tenancy From Period To Period

Tenancy from period to period, or periodic tenancies, are leases that do not have a defined end date. The agreement may still identify a length of time for the occupancy, like a month-to-month or yearlong lease. However, the landlord and tenant can extend the tenant’s stay and renew the lease indefinitely.

Both parties can also agree that notice is necessary before the lease’s termination. However, the contract should already make this point, along with the time needed for the notice.

Tenancy At Will

You may hear of a tenancy at will referred to alternatively as an estate at will. Under this type of agreement, either the property owner or the tenant can terminate it at any time.

The two parties do not use a binding contract or lease agreement. The agreement doesn’t typically specify the length of time the occupant can rent out the property or the method that the tenant pays the property owner.

Instead of a contract, local and state laws govern the tenure. People often seek out a tenancy-at-will arrangement when they want the flexibility of moving to new rental properties without breaking any contracts.

Tenancy At Sufferance

A tenancy at sufferance works somewhat similarly to a tenancy at will. Like the latter, it doesn’t occur under a contract or lease. Instead, it’s a type of tenancy that takes place after the tenant’s lease expires but before they leave the property.

It occurs without a lease, under the landlord’s permission. However, the tenant still has to adhere to the contract’s original conditions, such as rent payments. If the tenant does not comply, the landlord can evict the tenant without any notice.

Tenancy at sufferance is also called estate at sufferance and is the lowest form of estate known to law.

Every home buyer seeks out a property that matches their needs. Fee simple absolute, fee simple defeasible and life estate are freehold estates that allow you to obtain the level of ownership that fits your specific goals.

Because each type of freehold estate arrangement comes with its own set of characteristics, it’s essential to research the rights you have over a property. Finding the freehold estate that meets the ownership level you need will help you protect your interests in the future.

Whether you’re looking to pursue a freehold or nonfreehold estate, you might be ready to take the next step in the home buying process. Fill out a mortgage application to see how you qualify today.