What is a Ground Lease?
Ground Lease may be described as a long-term lease of land in which the tenant is allowed to occupy and develop the land during the lease period. After the lease expires, the land with all improvements, buildings and other structures will be restored to the owner. Ground leases are typically for ten years or more.
Ground Lease Agreement
The lease agreement usually permits the construction of a building on the lease by the tenant. The lease agreement will also stipulate conditions for the disposition of the building at the expiration of the lease term. The building, although built at the expense of the tenant, will legally belong to the land owner, unless otherwise stated in the agreement. In rare cases, it may be agreed that the tenant recovers the cost of the building, wholly or partly from the land owner, upon expiration of the lease period.
The terms and conditions to be incorporated in the lease agreement are to be decided mutually between the land owner and the prospective tenant. Furthermore, all taxes and other fees during the lease period is the responsibility of the tenant and the landlord does not incur any expenses.
If the lease agreement provides for it, then the tenant is authorized to sub-let a part of the land and collect rent from the sub-tenant. In such cases, it is understood that the building the tenant builds on the leased land is either for the tenant's use or to let it to sub-tenants.
Termination of Ground Lease Agreement
The lease agreement can be terminated for the following reasons:
• Expiration of the lease period and the landlord does not want to renew the lease
• Premature surrender of the land by the tenant, after giving the required notice and paying termination charges
• Breach of agreement conditions by the tenant or landlord
• Subjecting the land to illegal uses
• Willful destruction of property not caused by natural or unforeseeable disasters
• Default of rent or non-payment taxes
If a lease agreement has been signed, it is advisable for the tenant to obtain from the landlord written lease termination agreement acknowledging re-possession of the land - for whatever reasons. Continued occupation of the land by the tenant after expiration of the lease agreement will empower the landlord to initiate eviction proceedings.
If the building is destroyed by fire or natural disaster, it will not absolve the tenant of his liability to pay rent and other dues. However, all the States have now enacted laws which provide that in case of the destruction of the entire property, the tenant may vacate and the lease is deemed terminated.
Advantages/Benefits of Ground Lease
Ground leases offer many advantages to the landlord. A ground lease will usually involve construction or improvements that will be profitable to the landlord. Since the landlord maintains ownership of the land, the landlord can sell the land for a much higher value or pass on the appreciated value of the land to his heirs.
There is also a positive advantage of ground lease for tenants. A ground lease allows the tenant ready use of the land avoiding blocking of huge money in a large land purchase. Leasing the land will facilitate the tenant to use funds for more productive expenses.