A land lease refers to leasing a plot of land for a long-term period to a tenant who then builds on that property. There are two parties involved here: the owner of the land and the lessee. The two parties sign a land lease agreement that outlines all contractual obligations and rules. The lessee then pays rent to the landlord on a regular basis. If the lessee does not pay the rent, the landowner has the right to evict the lessee. After the lease period, the land and all improvements the tenant makes returns to the property owner.
There are two types of ground leases in commercial real estate, subordinated and unsubordinated.
In a subordinated ground lease agreement, the land owner agrees to take a lower position in the claim hierarchy. If the developer were to default on their construction loan with the bank, this means that the lender has the right to foreclose on the property, sell it, and use the proceeds to repay the loan. Any funds left after the sale would be paid to the land owner.
Section 1 of the Land Use Act of 1978, in Nigeria states that the law vests the ownership of all land in the country to the State Government and that power is held by the governor. Under the Act, the nature of interests in real property is leasehold for terms not exceeding 99 years. This means that “buyers” can only lease land and are required to apply for a renewal after the lease expires.
A land lease should include the following important things:
- Rights of the landlord
- Rights of the tenant
- Financing conditions
- Default conditions
- Title insurance
- Use provisions
- Terms of the lease
Benefits of Land Lease
A major key benefit of a land lease agreement for tenants is it enables tenants to access lands or occupy spaces in prime locations where it is impossible to purchase land outright or where they can not afford to buy property.
Another land lease advantage is that landlords have the security of a long-term tenant and future appreciation of the property because of development. Buildings and improvements completed by the tenants become the property of the landlord unless otherwise stated in the contract.
Source of financing
For the property owner, the major financial advantage is that a ground lease allows them to generate a passive income stream from a vacant piece of commercial property without having to do much work.
Disadvantages of Land Lease
Loss of Control
A landlord can end up losing control of the property if the proper clauses and provisions are not included in the lease.
Leases are renewed by the month or by the year. If a landowner decides not to renew the lease, the tenant would have to move. Also, even though you’re not buying the land, you still may have to pay an annual lease fee. This fee will rise over time at the rate of inflation or greater.
This varies based on the location of the property, but a ground lease can come with higher tax implications for the landlord. Though landlords don’t realize a gain from selling the property, the rent they charge is considered income. That means rent will be taxed at the ordinary rate, and this can increase the landlord’s tax burden.