What Is a Freehold Estate?

Whether you’re buying a home or an investment property, it’s important to understand property ownership rights in real estate. Each type of real property has a classification of ownership that determines what can be done with that asset. A freehold estate refers to real property where the owner has full ownership rights, allowing the property to be passed down indefinitely.

In this guide, we’ll take a closer look at the definition of freehold estates and the implications for property owners.

Definition of Freehold Estate

What is a freehold estate? A freehold estate is an estate in land that has an undefined duration of ownership, while a non-freehold estate involves leased property rights with a specific termination date.

In other words, an owner of a freehold estate has exclusive and indefinite rights to the property. This means that it can be passed on to heirs or beneficiaries for any amount of time. The specifics depend on the type of freehold estate, which we’ll elaborate on below.

Types of Freehold Estates

There are three main types of freehold estates: fee simple absolute, fee simple defeasible, and life estate. Conditions for ownership and how the property may be used vary between each type.

•  Fee simple absolute: This is the most common type of freehold estate. It gives property owners complete rights to a property title in perpetuity and to use the land without restriction, as long as you pay property taxes and avoid violating any active easements and local land use regulations.

•  Fee simple defeasible: This type of freehold estate operates similarly to fee simple absolute but with more restrictions. For example, fee simple defeasible could require that a farm remain as agricultural land. If a buyer violates these conditions, even after closing, the property could legally revert back to the seller or a specified heir or third party. Keep these conditions in mind if making an offer on a home with a fee simple defeasible situation.

•  Life estate: This type of estate is a form of joint ownership that allows a grantee to receive the title to a property upon the grantor’s death, rather than going through probate. Life estates are often created by property owners who want to streamline the process of giving their home or land to a child or heir after they pass. The grantor may continue occupying their home, but selling the property or mortgage refinancing would require the grantee’s approval.

Rights Associated with Freehold Estates

A freehold estate is the highest degree of property ownership, giving the owner the right to use the land for any lawful purpose, unless otherwise restricted by an encumbrance or fee simple defeasible ownership.

With a freehold estate, the property owner has an unlimited duration of ownership. They have the right to sell their home or property, lease it to others, and pass it down to heirs.

Freehold vs. Leasehold Estates

There are non-freehold estate arrangements to become familiar with, too.

If you’ve ever rented an apartment, you’re likely familiar with the concept of a lease agreement. A leasehold estate operates on the same principles. Put simply, it refers to a tenant’s exclusive right to occupy a property for a specific period of time.

When comparing a leasehold and a freehold estate, the key difference is the duration of the occupant’s rights. Leasehold estates are temporary and dictated by the terms of the lease, while freehold estates grant an indefinite duration of ownership.

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Creation and Transfer of Freehold Estates

If you own a home or property, you already are in possession of a freehold estate. How the property is transferred will depend on the type of freehold estate. One way to transfer ownership is through a life estate.

Setting up a life estate can be done through a life estate deed. This legal document is filed with your local recording office to ensure the other person, known as the remainderman, is added to the deed. Again, using a life estate helps an heir receive the property faster by avoiding probate. Creating a life estate is serious business, and it is not the only way to transfer property to avoid probate, so it’s wise to consult an estate planning expert before you sign anything.

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Limitations on Freehold Estates

There are limitations to any type of property ownership, including freehold estates. Of note, there could be a legal claim against a property from a party other than the owner, known as an encumbrance.

There are multiple types of encumbrances, including easements, liens, and encroachment.

An easement grants land use rights or property access to a third party. For example, a utility may have an easement to run a gas line through a property, or an easement can grant access to a shared driveway. This might have an impact on how much a house is worth.

Properties may be encumbered by a lien, which gives another party the right to seize the property for nonpayment of a debt, such as home mortgage loans, property taxes, or homeowners association fees. Since the estate serves as collateral, the property can be sold if needed to recoup unpaid debts.

Encroachments can also limit the use of freehold estates. An encroachment occurs when a neighbor has built a structure that intrudes on a property, limiting its full use.

During the homebuying process, in addition to ordering a home inspection, buyers typically request a formal title search to make sure there aren’t any encumbrances or claims against the property, which could delay closing.

Freehold Estates in Different Jurisdictions

Freehold estates exist in different jurisdictions in the U.S. and abroad. In the U.S., they are dictated by state and local laws.

Local zoning outlines how a property can be used in a specific area, as well as building dimensions and characteristics. Some common types of zoning include residential, commercial, agricultural, and industrial. Residential zoning may also differentiate between single-family and multifamily properties.

Freehold Estates in Estate Planning

Freehold estates are often referred to as “estates of inheritance”, since the estate is transferred to the owner’s heirs upon death. Including freehold estates when doing estate planning can give peace of mind that loved ones will have fewer legal and financial hurdles to deal with. Otherwise, the transfer of property and other assets can get held up in probate court.

The Takeaway

Buying real estate is a major investment. Freehold estates provide owners with indefinite property rights, though there can be limitations depending on encumbrances and the type of freehold estate arrangement.

Unless you’re a real estate professional, some of these terms may go beyond your needs. However, understanding your rights as a property owner and if there are any claims against your property is essential for protecting your investment when you are buying a home or other property.

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FAQ

How does a freehold estate differ from fee simple ownership?

Fee simple ownership is a type of interest that property owners can have in a freehold estate. Fee simple ownership lets you do as you wish with a property, barring any liens or local laws, while the other types of freehold estates carry more conditions for how a property is used and transferred.

Can a freehold estate be taken away by the government?

A freehold estate could be taken by the government through eminent domain, or when the owner dies if there aren’t any heirs or beneficiaries. Eminent domain allows governments to claim private property if it’s necessary for public use and after compensating the owner.

Are there any restrictions on selling a freehold estate?

A freehold estate can be sold or bequeathed as the owner sees fit, without conditions and restrictions. However, there may be specific restrictions for how the property is used if conditions were set by the seller. This is known as fee simple defeasible ownership.

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Photo credit: iStock/Kirpal Kooner

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