When considering a leasehold condominium or detached house, it's important to understand how it differs from a freehold (ownership) property. In short, with a leasehold (shakuchiken) property, you own the building while the land is rented, and while the price is lower than a freehold property, checking ongoing costs such as ground rent and the contract terms is essential.
- A leasehold is a right to rent land; a monthly ground rent applies, and a renewal fee is generally required when the contract renews.
- The Act on Land and Building Leases (Shakuchi Shakuya Hō) took effect in August 1992, and how renewal is handled differs between old-law leaseholds and the new law's ordinary leasehold and fixed-term leasehold.
- A fixed-term leasehold is, as a rule, a contract under which the land is returned when the term expires.
- The price is lower because it doesn't include land ownership — but there are costs such as ground rent, renewal fees, and transfer-consent fees.
- Mortgage handling varies by financial institution, so it's best to confirm early through a pre-approval application.
The bottom line: you own the building, but the land is rented
With a leasehold property, the purchaser owns the building, while the land is rented from the landowner. Prices are often set lower than for freehold properties, but unlike a freehold property, there are ongoing matters to check — such as paying ground rent and reviewing the contract terms. Carefully checking the contract details through your agent brings peace of mind.
The basics of leasehold
A leasehold (shakuchiken) is a right to borrow and use land from a landowner. If you own a leasehold property, you'll pay monthly ground rent, and a renewal fee is generally required when the contract renews. The level of ground rent and renewal fees varies by contract, so you need to check the contract details before purchase. The timing and method for revising ground rent also vary by property.
Old law and new law
The Act on Land and Building Leases (Shakuchi Shakuya Hō) took effect in August 1992. Contracts that continued from before that date are treated as old-law leaseholds, and how renewal is handled differs from the new law's ordinary leasehold and fixed-term leasehold. An ordinary leasehold can be renewed, whereas a fixed-term leasehold is, as a rule, a scheme under which the land is returned when the contract term set in the agreement expires. Which contract type applies makes a major difference to the future outlook, so it's important to check the type stated in the contract early on.
Why the price is lower
A leasehold property is priced lower than a freehold property because the price doesn't include ownership of the land. However, that comes with costs such as ground rent, renewal fees, and consent fees paid to the landowner when rebuilding or transferring the building. Rather than judging on price alone, it's important to weigh the ongoing costs comprehensively. Estimating the total payments over the long term makes it easier to judge.
Mortgage cautions
Mortgage handling for leasehold properties varies by financial institution, and the range of institutions willing to lend can be narrower than for freehold properties. It's advisable to apply for pre-approval early in your consideration to confirm whether financing is available and on what terms. Consulting several financial institutions widens your options. Depending on the pre-approval results, you may need to revisit your financial plan.
Contract terms to check
Before signing, you need to check the remaining term of the lease contract, the conditions for revising ground rent, whether a renewal fee applies and how much, and the consent conditions for rebuilding or transferring the building. For a fixed-term leasehold, check in the contract how the land is to be returned when the term expires. It's also important to feel free to confirm unclear points with the landowner through your agent. Checking the history of past renewals, not just the contract itself, makes it easier to form a picture of the future outlook.
FAQ
Why is a leasehold condominium cheaper?
Because the price doesn't include ownership of the land. In exchange, there are ongoing costs such as ground rent and renewal fees, plus contractual restrictions.
What happens to a fixed-term leasehold condominium when the term ends?
As a rule, it's a contract under which the land is returned to the landowner when the term expires. You need to check the remaining term and the handling at expiration in the contract.
Can I still get a mortgage on a leasehold property?
It's possible in some cases, but handling varies by financial institution. It's safest to confirm this through a pre-approval application early in your consideration.
Summary
Because a leasehold property means you own the building but rent the land, checking ongoing costs such as ground rent and the contract terms is essential. Consider the purchase with the old-law/new-law difference and mortgage handling in mind as well.