A ground lease is an agreement that permits a tenant to develop a piece of property during the period of the lease. After the lease period, the land and all improvements the tenant makes return to the property owner. Ground leases may also be referred to as land leases since the landlord is leasing out only the land.
Ground leases should include the following essential aspects:
Ground leases involve leasing land for a long-term period to a tenant who then constructs a structure on that property. A typical ground lease covers a period from 50 to 99 years.
A ground lease defines:A ground lease stipulates that the property owner will own any improvements unless the parties create an exception. This type of contract also stipulates that the tenant will pay relevant taxes during the period of the lease. Landlords may be able to sell the property on the land at a higher rate once the term of the lease expires because they can assume all improvements at that point.
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A landlord may choose to use a ground lease in order to:
Ground leases are primarily used in commercial agreements. However, these types of leases are very different from other leases that you might find for office buildings and shopping complexes. Other commercial leases do not usually assign the lessee to take responsibility for the unit, charging tenants rent so they can operate their business instead.
When using a ground lease, however, a tenant will usually assume responsibility for any kind of expenses. Expenses that would be the responsibility of the tenant on a ground lease include:
You'll find two main kinds of ground leases: subordinated and unsubordinated. The difference between these two types deals with what happens if a tenant has financial difficulties during the term of the lease. Many times, tenants will take on debt to finance projects on the land they lease.
A landlord will agree to be a lower priority in terms of any other financing obtained on the property when signing a subordinated ground lease. If the tenant signs a subordinated ground lease on a plot of land, borrows money to build on that land, then defaults on the loan, the lender can go after the property (including the land itself) as collateral.
In other words, the landlord in a subordinated ground lease allows the property deed to act as collateral should the tenant default on a loan used to make improvements. The landlord can negotiate higher rent payments since they are taking on additional risk with subordinated leases. A landlord may also choose to create a subordinated ground lease since constructing the building on their land can increase the property's value.
A landlord who signs an unsubordinated ground lease retains top priority if there are claims on the property. This means that tenant's lenders cannot foreclose on the land if the tenant defaults on the loan. If the tenant defaults, the lender could go after the tenant's business assets . However, the lenders cannot gain full control of the property as they could do with a subordinated ground lease.
Because the lender cannot take ownership of the land in an unsubordinated ground lease should a tenant not pay their loan, prospective lenders may hesitate to extend a mortgage so a tenant can make improvements. As a result, landlords usually have to charge lower rent to the tenant.
Ground leases can offer benefits to both landlords and tenants.
Landlords can look forward to certain advantages when signing a ground lease, including:
Tenants enjoy a few advantages when signing a ground lease as well:
Certain disadvantages also exist for both landlords and tenants when choosing to use a ground lease.
Landlords looking to execute a ground lease should be wary of potential drawbacks:
Tenants also should be aware of drawbacks to a ground lease, including:
It's very important that both the landlord and tenant review the lease with expert support before they sign it. Working with an expert contract lawyer when creating a ground lease can ensure both parties are protected.
ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.
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