Ground lease: what to check before you buy
With a ground lease you buy the home but not the land. That can be perfectly fine, until the moment the canon is reviewed and your monthly costs jump in one go.
In short
- With a ground lease the land belongs to someone else, usually the municipality; you pay a canon for it.
- The most important question is not the level of the canon now, but the date of the next review.
- With a perpetually bought-off ground lease you pay no more canon; with a continuing lease you pay periodically.
- Lenders sometimes set requirements for the ground lease conditions, which can affect your mortgage.
What is a ground lease?
A ground lease (erfpacht) means you buy the right to use the land, while someone else remains the owner of it: usually the municipality, sometimes a housing corporation or an investor. For that right of use you pay a fee: the canon. The house itself is simply yours.
In the Netherlands ground leases are most common in Amsterdam, but also in The Hague, Utrecht, Rotterdam, Vlaardingen and on the Wadden Islands, and scattered elsewhere. You also come across it in new build and in private ground leases.
The variants, and why they matter
- Continuing ground lease. Runs in periods, of fifty years for example. At the end of a period the canon is set again, based on the land value applicable then. That is the moment when costs can rise sharply.
- Perpetual ground lease. No more periods; the terms are fixed. The canon can still be indexed.
- Bought-off ground lease. The canon has been paid in advance for a period or in perpetuity. With a perpetual buy-off you pay nothing more, but check that it really is perpetual and not "bought off until 2041".
- Private ground lease. The land belongs to a private party or an investor. Terms are often less favourable and less predictable than with a municipality; look extra carefully here.
The questions you ask
- When does the current period end? This is the most important question. A home whose period expires in three years carries an unknown future charge.
- What is the current canon and how is it indexed?
- Has the canon been bought off, and if so, until when?
- Which general conditions apply? With municipal ground leases there are several generations of conditions (those of 1966, 1994, 2000 or perpetual, for example). They differ materially in what may happen at a review.
- Are there use or building restrictions? Ground lease conditions can determine what you may do with the property, including letting and extending.
Ground lease and your mortgage
Lenders generally do finance homes on leasehold land, but they set requirements, often about the remaining term and about whether the conditions are in line with the market. With a private ground lease containing unusual provisions a bank can be reticent. So mention the ground lease early to your mortgage adviser; it is one of the few things that can derail financing late in the process.
How do you factor it into the price?
A home on leasehold land is generally cheaper to buy than a comparable home on freehold land, the canon is, after all, a recurring charge. That is a fair trade as long as you know that charge. What you want to avoid is buying on the basis of the current, low canon while the period expires within a few years. In that case, ask the ground lessor what the indicative new canon will be, and work it into your monthly costs before you bid, together with the buyer's costs.
Ground lease conditions differ per municipality and per generation of provisions. Always have the deed and the general conditions assessed by your notary.
Frequently asked questions
Is a home on leasehold land worth less?
Usually somewhat, because there is a recurring charge attached. How big that effect is depends on the canon, the remaining term and whether it has been bought off.
Can I buy off the ground lease?
With many municipalities you can, sometimes in perpetuity. The cost depends on the land value and the timing. Ask for an indication before buying; the amount can be substantial.
What happens when the ground lease period expires?
As a rule the lease does not end; the canon is set again based on the current land value and the conditions applicable then. That new canon can turn out considerably higher than the old one.
Is a ground lease tax-deductible?
The canon is deductible as owner-occupied home costs under certain conditions. The rules change fairly regularly, so check the current position with the tax authorities or your adviser.
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