A guide to freehold estates

A freehold estate is a legal term for owning real property for an indefinite period. It’s commonly contrasted with nonfreehold estates – aka “leasehold estates” – which limit how long you can possess a property with a lease. In other words, a freehold estate means owning real estate, while a nonfreehold estate means renting it.

As a prospective homebuyer, understanding the difference between freehold and nonfreehold estates helps you make more informed real estate investing decisions.

Key takeaways:

• A freehold estate means owning property indefinitely, granting you full rights to use, sell, or pass it down.
• Understanding the different types of freehold estates – like fee simple and life estates – can help you avoid costly mistakes when buying or inheriting property.
• Nonfreehold estates refer to rental arrangements. Understanding different types of nonfreehold estates can help you navigate leases and tenant rights more confidently.

How a freehold estate works

Having a freehold estate generally gives you the right to use, sell, or bequeath a property for as long as you own it. It’s a form of real property, which includes land and anything permanently attached to it, such as structures and minerals.

This type of real estate is valuable in the industry because it lets you benefit from any appreciation in the property’s value, any rental income it can generate, and various tax breaks, such as deducting property expenses and deferring capital gains through 1031 exchanges.

Types of freehold estates

There are different types of freehold estates, and understanding how they differ can help you avoid costly investing mistakes.

Fee simple absolute

Fee simple absolute, or fee simple, is the most common and complete form of freehold estate. It grants owners the right to use or dispose of property as they see fit, provided they don’t breach any easements or zoning laws and continue to pay property taxes.

In addition, fee simple grants ownership indefinitely. That means you can keep the property for your lifetime and pass it down to your heirs or beneficiaries. In short, the owner retains both title and possession of the property regardless of any future events or circumstances.

Fee simple defeasible

Fee simple defeasible is more limited. The owner retains title and possession of the property so long as certain conditions are met.

For example, the owner may be required to use the property solely as a farm. If they turned the property into a baseball diamond instead, they could lose the property.

Three subcategories determine what would happen if the fee simple defeasible terms aren’t met:

• Fee simple determinable. Fee simple interest automatically reverts to the grantor (the person from whom you received the property) if a specific condition is met.
• Fee simple subject to a condition subsequent. If a specific condition is met, the grantor has the right (but not the obligation) to repossess the fee simple.
• Fee simple subject to an executory interest. If a specific condition is met, the fee simple interest is transferred to a third party other than the grantor.

Life estate

A life estate is a joint ownership arrangement in which a life tenant shares ownership of a property with an inheritor during their lifetime. Once they die, the inheritor, or “remainderman,” receives the remaining interest in the property, thereby gaining full ownership.

Think of a life estate as a way to pre-gift your estate to an heir, thereby avoiding the potential for a lengthy and costly probate process. While you’re alive, you retain the right to possess and use the property, and you can generally make renovations or upgrades so long as you don’t damage the property or decrease its value. Keep in mind, however, that life tenants are also responsible for property taxes and expenses.

What is a nonfreehold estate?

A nonfreehold estate gives you the right to use or occupy real property for a limited time. In other words, you rent a property but don't own it. For example, a condo could involve a nonfreehold estate if you lease it from a landlord.

Types of nonfreehold estates

Nonfreehold estates come in different forms, and knowing the difference between them can help you navigate and improve owner-tenant relationships.

Tenancy for years

Tenancy for years is when a tenant has the right to occupy the property for a fixed period of time, with a clear start and end date, as outlined in a lease. Once the term ends, the tenancy automatically expires, and the tenant must vacate unless a new lease is agreed on. This lease type can be for any definite period, though it’s commonly for 1 year or longer.

For example, imagine you sign a lease to rent an apartment from September 1, 2025, to August 31, 2026. This gives you the right to live in the property for a year, after which you must negotiate a new lease with the landlord or move out.

Periodic tenancy

Periodic tenancies do not have a defined end date. Instead, they continue for automatically renewing periods – such as month-to-month or year-to-year – until either the landlord or tenant gives proper notice to terminate. The lease or agreement typically sets the time interval for rent payments and renewal, as well as the amount of notice required to terminate the tenancy.

For example, let’s say you rent an apartment from your aunt, but your lease doesn’t specify an end date. Instead, you must give your aunt 30 days’ notice before moving out. Likewise, your aunt must provide you with proper notice if she wishes to terminate the tenancy.

Tenancy at will

Tenancy at will is an informal arrangement between a tenant and a property owner that either party can terminate at any time – often with little notice, depending on state laws. It has no fixed end date and typically lacks a formal lease or defined rental terms.

For example, imagine your yearlong lease ends, and your landlord says you can stay in the unit as long as you need. There’s no new lease, and rent isn’t clearly defined. This is a tenancy at will, which either party can terminate at any time.

Tenancy at sufferance

Tenancy at sufferance is when a tenant remains in possession of a property after their lease has expired, without the landlord’s consent. Unlike tenancy at will, it is not based on an agreement. The landlord has the right to evict the tenant and collect rent for the period during which the tenant has overstayed their lease.

For example, let’s say your apartment lease ends, but you still haven’t found a new place to live. At this point, remaining in the property would constitute tenancy at sufferance.

The bottom line: Freehold estates explain how land is used and inherited

Knowing the differences between freehold and nonfreehold estates is key to making smart real estate decisions. Freehold estates involve ownership, while nonfreehold estates involve renting.

By learning how these property types work, you can better plan your next home purchase. If you’re unsure which type of property best fits your goals, talk to a Rocket Mortgage® real estate expert who can guide you through the process and help you make the right choice.