Freehold Versus Leasehold

A developer who intends to develop a strata project will either purchase or lease the necessary land. The choice determines whether those who purchase the strata lots obtain a freehold or leasehold interest in their strata lots.

 

Freehold

If the developer first purchases the property before creating the strata development, the developer becomes the registered owner of that property in fee simple. Fee simple means the owner exercises the greatest degree of control over the property that the law of private ownership permits.

When a developer subdivides the property by depositing a strata plan, the Registrar of Land Titles records the developer as the fee simple owner 1 of each of the newly created strata lots. The developer may then sell the fee simple title to a strata lot to a purchaser. We call this a freehold strata development because purchasers acquire fee simple title to their strata lots.

Leasehold

Generally speaking, when a tenant enters a lease over land, the tenant obtains exclusive possession of the property for the term of the lease.

In a leasehold strata plan, a landlord is the registered owner of a property in fee simple. A developer leases the landlord’s property and then, as tenant, creates a strata development on the landlord’s land. To create the development, the developer must file a strata plan, which in this case is called a leasehold strata plan. The leasehold strata plan subdivides the landlord’s property into strata lots and common property. In the case of each newly created strata lot, the landlord remains the registered owner in fee simple, and the developer remains a tenant with exclusive possession of the strata lot for the balance of years remaining under the lease. Later, in the case of each strata lot, the developer sells to a purchaser an assignment of the developer’s interest, as a tenant, under the lease.

Over time, that purchaser further assigns his or her interest under the lease, as tenant, to the next purchaser. These assignments continue until the term of the lease expires.

Leasehold Basics

The Strata Property Act limits leasehold development by restricting the persons who may lease their land for this purpose. In a leasehold strata development, the landlord is called the leasehold landlord. Only the following may be a leasehold landlord: 2

  • the federal or provincial government,
  • a municipality,
  • a regional district,
  • a Nisga’a Village or the Nisga’a Nation,
  • a university as defined in the University Act (e.g.; the University of British Columbia)
  • the Sechelt Indian Band, 3
  • the Provincial Rental Housing Corporation, or
  • a board under the School Act. 4

The long term landlord leases the land to the developer under a document called a ground lease. 5 The ground lease sets out the terms and conditions upon which the developer has leased the property. 6

When a developer wishes to register a strata plan over land that is subject to a ground lease, we call it a leasehold strata plan. To ensure, among other things, that the leasehold landlord is aware of the developer’s intentions, the Registrar of Land Titles will not accept the developer’s leasehold strata plan unless it is signed by the leasehold landlord. 7 In addition, from the date the leasehold strata plan is filed at the Land Title Office, there must be at least 50 years remaining under the term of the lease. 8

When the developer, as the long-term tenant, deposits the strata plan, several things happen. First, the Registrar of Land Titles issues new fee simple titles in the name of the leasehold landlord for each of the strata lots created. Next, the deposit of the strata plan automatically converts the ground lease into individual strata lot leases of the leasehold landlord’s interests in each strata lot. The lease for each strata lot takes the form of a Model Strata Lot Lease attached to the ground lease. 9 This means that in the case of each strata lot, the leasehold landlord is the owner and the developer is the tenant under a lease whose form is shown in the Model Strata Lot Lease.

Note that a Model Strata Lot Lease must be attached to the ground lease. Anyone checking the ground lease for a leasehold strata plan in the Land Title Office may view the attached Model Strata Lot Lease.

What the Buyer of a Leasehold Strata Lot Acquires

When a developer “sells” an individual leasehold strata lot, the developer sells his or her interest as a long term tenant under the ground lease for that strata lot. When a buyer “purchases” a leasehold strata lot, he or she acquires an interest as a long term “leasehold tenant.” In effect, the strata buyer takes an assignment of the developer’s interest as a tenant under the strata lot lease with the leasehold landlord. Unless the ground lease requires otherwise, section 204 of the Strata Property Act dispenses with the requirement for the leasehold landlord to sign an assignment of each strata lot lease from the developer to its first buyer. When the first buyer “sells” to the second buyer, the first buyer assigns his or her interest as a tenant under the ground lease to the second buyer, and so on with each subsequent “sale.”

Since the buyer purchases a leasehold interest as a tenant under a lease, he or she buys the right to occupy the strata lot for the balance of the term remaining under the lease. With each passing year, the term remaining diminishes.

Terminology

By acquiring the developer’s interest as a tenant in the strata lot, the buyer becomes a leasehold tenant. Although the Act uses the term “leasehold tenant,” most people informally refer to the buyer as the leasehold owner or, simply, the owner. The definition of “owner” in the Strata Property Act includes a leasehold tenant of a strata lot in a leasehold strata plan. 10

If a leasehold owner rents his or her strata lot to a tenant, the person who rents the unit is technically a subtenant.

What Happens at the End of the Strata Lot Lease?

As the end of the term of a strata lot lease approaches, the leasehold landlord has several options:

  • renew the lease for a strata lot,
  • buy out the leasehold tenant’s interest in that strata lot, or
  • sell all of the leasehold strata lots to their respective tenants and, in that fashion, convert the development to a freehold strata plan.

Renewal of a Strata Lot Lease

At least one year before the term of a strata lot lease expires, section 210 of the Strata Property Act requires the landlord to advise each leasehold tenant in writing whether the landlord elects to renew the lease for the term specified in the notice. If a leasehold landlord neglects to notify a leasehold tenant in writing about the landlord’s decision, the Strata Property Act requires the landlord to renew the lease for a term of five years.

If a leasehold landlord chooses to renew a strata lot lease, or the lease is automatically renewed, the renewal must be on the same terms as the current strata lot lease, except that the term and the rent may be changed. According to the Strata Property Act, in a renewal, “the rent must be that share of the current market rental value of the land included in the strata plan, excluding all buildings and improvements, apportioned to the strata lot in the proportion that the most recent assessed value of the strata lot bears to the total of the most recent assessed values of all the strata lots included in the leasehold strata plan.” 11

If a leasehold landlord elects to grant renewals to fewer than two-thirds of the strata lots in the leasehold strata plan, that election is not effective unless the leasehold landlord meets certain conditions in section 212 of the Act.

Buy-Out of the Leasehold Tenant’s Interest

If a landlord chooses not to renew a strata lot lease, the leasehold landlord must purchase the leasehold tenant’s interest in the strata lot, as a tenant, according to section 210(5) of the Act.

If a leasehold landlord or a leasehold tenant wishes to determine the value of the tenant’s interest in the strata lot, they must first check the Model Strata Lot Lease for a formula. If there is no formula in the Model Strata Lot Lease, they must look for a schedule filed with the lease-hold strata plan in the Land Title Office. If no schedule is found, the Act requires them to use the fair market value of the leasehold tenant’s interest, calculated according to the regulations, as if the strata lot lease did not expire. 12 As at the date of this writing, the province has not yet passed regulations to establish a formula for this calculation. If there is no formula in the Model Strata Lot Lease, or in a related schedule, or in the regulations, the leasehold landlord and the leasehold tenant respectively should obtain legal advice about the value of the tenant’s interest for the purposes of a buyout.

Alternatively, if the eligible voters by unanimous resolution consent, a leasehold landlord may change the basis for calculating the final purchase price of each leasehold owner’s interest by filing an amended schedule with the leasehold strata plan. 13

Sale of Fee Simple Title to All Leasehold Strata Lots

At any time, section 216 of the Act permits a leasehold landlord to sell the fee simple title in a strata lot to its leasehold tenant, but only if the landlord similarly sells the fee simple title to every other strata lot in the leasehold strata plan to its respective leasehold tenant. After the leasehold landlord transfers the title to each of the strata lots, each strata lot lease ceases to exist and the strata plan continues as though it were never a leasehold strata plan.

This procedure converts the owners from leasehold tenants to freehold strata owners. Instead of having only an interest under a long-term lease to sell, an owner may now sell fee simple title to his or her strata lot.

Restrictions on Lease, Assignment or Occupancy

A leasehold landlord may impose restrictions on the lease, assignment or occupancy of the strata lots included in a leasehold strata plan. A restriction must be set out in a schedule of restrictions filed with the leasehold strata plan in the Land Title Office. The restrictions are binding on the strata corporation and everyone who buys a leasehold interest in any of the strata lots. 14

In some circumstances, a leasehold landlord may, on its own, or upon the request of the strata corporation, change any of the restrictions. Before the strata corporation may ask the leasehold landlord to change a restriction, it must pass a resolution to change the restriction by a 3/4 vote at an annual or special general meeting. The provincial cabinet must approve any change to restrictions imposed by a leasehold landlord, unless the leasehold landlord is the provincial government itself, in which case cabinet approval is not required. 15

If there is a change to an occupancy restriction in the schedule of restrictions, the amendment does not affect persons who were leasehold tenants immediately before the change. The amendment, however, affects persons who become leasehold tenants as a result of a sublease or assignment of the strata lot lease after the change occurs. 16

A schedule of restrictions ceases to apply if, in respect of every strata lot, the leasehold landlord sells fee simple title to the leasehold tenant, as described in “Sale of Fee Simple Title to All Leasehold Strata Lots” above. 17

Rent Review and Periodic Payment Clauses

Before buying an interest in a leasehold strata lot, the buyer should review the ground lease with a lawyer for the presence of any clause imposing a rent review or other similar liability as described below.

Generally speaking, there are two types of ground leases: those which require regular rental payments throughout the lease, and those in which the developer prepays all of the rent due under the lease.

Where a lease requires on-going payment of rent, the lease typically requires payment of annual rent. If a ground lease requires annual rent payments throughout the term of the lease, every strata lot must pay its share of the annual rent under its Model Strata Lot Lease. 18 Typically, leasehold tenants are allowed to pay the annual rent in 12 equal monthly instalments throughout the year, usually on the first day of each month.

This type of ground lease may contain a rent review clause, which allows the landlord to periodically adjust the rent. Typically, a rent review clause allows the leasehold landlord to adjust the rent every 20 years or so to reflect the property’s current market value. Rent reviews usually trigger substantial increases in the rent payable.

Begusic v. Clark, Wilson & Co. 19 illustrates the importance of checking the ground lease for a rent review clause. Although the case involves a housing cooperative, its ground lease governed the payment of rent in a manner similar to that found in leasehold strata developments.

Case Study

A cooperative association leased land in North Vancouver from the landlord for a term of 66 years under a ground lease. Members of the cooperative purchased shares in the association and took, in effect, an assignment of the ground lease as it applied to their respective units. Each cooperative member was responsible for a prorated share of the monthly rent payable under the ground lease. Many of the association’s members were retired persons living on fixed incomes, who joined the cooperative for its secure, affordable housing.

The ground lease contained a clause requiring a rent review every 22 years. The clause required that the rent be adjusted to an amount equal to 7.5 per cent (7.5%) of the fair market value of the land. The ground lease scheduled the first rent review for 1990.

In 1983, the buyer purchased an interest in the housing cooperative. The buyer did not know about the rent review clause in the ground lease. Nor did the buyer expect a rent increase in the future. The buyer thought her portion of the monthly rent would remain nearly constant for the 50 years or so remaining under the term of the ground lease.

In 1987, the association’s members first noticed the rent review clause. Calculations established that the 1990 review would raise the cooperative’s annual rent from $21,225 to approximately $375,000. The buyer’s prorated monthly share of the rent in respect of her unit would increase proportionately.

The buyer was one of many members of the cooperative who sued a variety of defendants, including the developer and various real estate licensees, lawyers and notaries.

Faced with the prospect of higher land value before the next rent review, the cooperative association decided to purchase the property from the landlord. It had to raise approximately $7.925 million in mortgage financing to complete the purchase and convert the property to a strata development.

The assessment of damages was complicated. The court assessed damages as at the approximate date when members of the association first learned about the pending rent increase. Generally speaking, the court assessed the global damages at $7.925 million less various amounts. In mitigating their damages by purchasing the property, the cooperative’s members converted their leasehold interests to freehold strata title, which gave them an advantage. The court took account of that advantage by subtracting 20 per cent (20%) for betterment. 20 The claimants were entitled to their respective prorated shares of the global award.

Ground Leases with Prepaid Rent

If a developer prepays the rent under the ground lease, there will not usually be a rent review clause. A prepaid lease, however, may still contain a clause requiring periodic additional payments to the landlord based upon increases in the property’s fair market value. This is similar to a rent review clause to the extent that it creates a potential financial liability for the buyer in the future.

Default Under a Strata Lot Lease

If a leasehold tenant defaults under a strata lot lease, the leasehold landlord is not entitled to re-enter and take possession of the strata lot. Instead, the leasehold landlord must apply to the Supreme Court of British Columbia for an order for sale of the leasehold tenant’s interest in the strata lot. 21

Generally speaking, the leasehold landlord registers a certificate of pending litigation (a “CPL”, formerly called a “lis pendens” or sometimes an “L.P.”) against title to the strata lot in the Land Title Office at the start of the landlord’s default proceedings. A title search will reveal the CPL, which describes the court proceedings.

 

 

 

 

Notes:

  1. The Strata Property Act, s. 1(1) defines the term owner to mean a person who is the registered owner of the fee simple interest in a strata lot in a Land Title Office or, in the case of a leasehold strata plan, a person who is registered as the leasehold tenant of the strata lot. For more information about an owner, see Chapter 8, Members.
  2. Strata Property Act, s. 199 (definition of “leasehold landlord”) and Strata Property Regulation, s. 12.1 (definition of “public authority”).
  3. The Sechelt Indian Band established under the Sechelt Indian Band Self-Government Act, S.C. 1986, c. 27, s. 5(1).
  4. School Act, R.S.B.C, c. 412, s. 1.
  5. The Strata Property Act, s. 199 defines the term ground lease as a registered lease of land granted by a leasehold landlord for the purposes of Part 12 of the Act [Leasehold Strata Plans], and to which a model strata lot lease is attached. Despite the technical meaning of the term ground lease under the Act, a developer, when talking informally about a leasehold strata development’s ground lease, may sometimes incorrectly use the phrase “head lease.” When speaking about a long-term lease granted by a leasehold landlord for a leasehold strata development, and to which a model strata lot lease is attached, the correct term for the long-term lease is the ground lease.
  6. Strata Property Act, ss. 199 (definition of “leasehold landlord”) and 201(c); Strata Property Regulation, s. 11.3.
  7. Strata Property Act, ss. 199 (definition of “leasehold strata plan”), 201(e).
  8. Strata Property Act, s. 201(c).
  9. Strata Property Act, s. 203.
  10. Strata Property Act, ss. 1(1) (definitions of “convey” and “conveyance” and “owner” respectively) and 199 (definition of “leasehold tenant”).
  11. Strata Property Act, s. 211(2).
  12. Strata Property Act, s. 214(1), (2).
  13. Strata Property Act, s. 214(3).
  14. Strata Property Act, s. 206(1), (2), (3).
  15. Strata Property Act, s. 207.
  16. Strata Property Act, s. 207(4).
  17. Strata Property Act, s. 216(1)(e).
  18. Strata Property Act, ss. 203205.
  19. Begusic v. Clark, Wilson & Co. (1992), 69 B.C.L.R. (2d) 288, 1992 CanLII 292 (sub nom Rieger v. Croft & Finlay) (S.C.), decision on the liability of certain real estate licensees and lawyers. See also Begusic v. Clark, Wilson & Co. (1992), 69 B.C.L.R. (2d) 273, 1992 CanLII 447 (S.C.), decision on the liability of certain real estate licensees and lawyers; and Flandro v. Mitha (1992), 7 B.C.L.R. (2d) 280, 1992 CanLII 798 (S.C.), reasons on liability of third parties 1992 CanLII 830 (S.C.).
  20. Begusic v. Clark, Wilson & Co. (1991), 57 B.C.L.R. (2d) 273, 1991 CanLII 5724 (C.A.), supp. reasons (1992), 66 B.C.L.R. (2d) 253, 1992 CanLII 5962 (C.A.), leave to appeal dismissed without reasons (1992), 139 N.R. 237, 86 D.L.R. (4th) vii (note) and (1992), 90 D.L.R. (4th) 319 (note) (S.C.C.).
  21. Strata Property Act, s. 209(1).