Ground lease agreements are complicated, especially regarding the control and ownership of the property. A detailed contract compiled by a professional lawyer is the only way to ensure that all parties involved are protected. Ground leases span many years and often outlive the parties initially starting the lease, complicating the owner’s rights.
With a ground lease, the land (ground) belongs to the title holder (landowner). The ownership of any existing structures or newly constructed buildings on the property is subject to the lease terms. Unless specified differently, during the lease period, the lessee owns the building but not the land.
Before you invest in or enter into a ground lease agreement, you must specify the parameters, including the ownership. One great example and a vital question that needs answering is who the building belongs to on a ground lease. In this article, I will discuss the ownership issues of a ground lease.
Who Owns The Building In A Ground Lease
When it comes to a ground lease, identifying who the owner of the building is can be somewhat tricky due to various factors. Generally, or as a practical matter, a building is constructed on a piece of land with a title, and the title holder is the owner. With a ground lease, it is possible for the building to be owned by the lessee (tenant), known as quasi-ownership. If you are confused already, let me explain.
A ground lease, better known as a land lease, consists of two types of land:
- A bare piece of land
- Land with some form of building on it
When a landowner enters into a lease agreement, the full development and improvement rights are signed over to the lessee. In some cases, the lease has stipulations where the landowner has some control over the building. Quasi-ownership is when a lessee has full control of the building and can do with it as they please for the lease period, which can be up to 99 years.
With full control of the building for the duration of the lease, the tenant (lessee) owns it and the full use of it, including renting it out as income or using it for manufacturing purposes, etc. Like I said tricky!
Bare Land Lease
If the landowner leases a bare piece of land, the ground still belongs to them, from which they get a predetermined monthly payment. The building developed at great cost on the bare piece of land constructed belongs to the lessee (tenant) until the lease concludes.
In some cases, the lease agreement with the landowner affords them some form of control like the types of material used, the size, the use, etc. The extent of control is carefully laid out within the lease contract to prevent the landowner from hindering the lessee (tenant). This control does not afford the landowner ownership, only self-interest protection rights within agreed-upon limits.
Land With A Pre-Existing Building Lease
Some ground lease agreements consider the pre-existing structure/s, making the lease more challenging than bare land. When the landowner leases the ground with an existing building, the building is the owner’s property. The tenant is only allowed to improve and make changes within the parameters stipulated in the contract.
In some cases, the landowner surrenders the building to the lessee to demolish, improve, or expand it, which then makes the tenant (lessee) the owner of the building for the duration of the lease. Ground lease agreements with a pre-existing building generally afford the landowner more control than a bare piece of land where the lessee develops the building from scratch.
Can A Lessee Sell A Ground Leased building?
One reason why people often ask to whom the building on a ground lease belongs is because they may want to sell it. Some lease agreements span over 99 years, and unless you plan on growing extremely old, you may want to benefit from selling it.
As the owner of the building, a lessee (tenant) is allowed to sell it, but there are some factors and stipulations set within the lease agreement with the landowner. When the ground lease is carried over to the party who buys the building, they are subject to the approval stipulations within the original lease agreement.
The selling of a building developed on leased land is intricate, and the lessee and landowner must ensure that all the factors and stipulations are carefully detailed within the lease. Here are possible stipulations found in a ground lease when selling the building:
- Approval by the landowner
- Use of the property by the new buyer
- Assessing the viability of the new buyer
- The control of the landowner
- Potential liabilities
- Contract changes with new buyer
- Duration of the lease (how much time is left on the lease)
The impact of the sale mustn’t harm the interests of the lessor or the lessee, especially the landowner, who generally needs protection during the sale. All parties involved must know that once the ground lease concludes, the building becomes the landowner’s property unless specified within the contract.
The Main Types of Ground Leases
Certain conditions and commitments are specific to each land lease, and the lease agreement between the lessee and the owner governs them. Depending on whether the lease is subordinated or unsubordinated, land lease rules also cover what occurs at the end of the lease.
Subordinated Ground Lease
The lessee (tenant) bears less risk than the lessor (landowner) under a subordinated ground lease, particularly regarding the development funding secured. For the developer to secure a construction loan, the landowner offers the land title as security.
Although the landowner owns a sizable portion of the project, defaulting on the loan could result in losing the land title. A higher rental rate than on unsubordinated leases is agreed upon to offset the risk.
Unsubordinated Ground Lease
Maximum claiming power is granted to the landowner in an unsubordinated land lease. The development and improvements made to the property during the lease, including the repayment in the event of a default, are among the items the landowner is entitled to seek.
A property financier may pursue the business’s assets in the event of default, but they cannot seize complete ownership of the property, unlike a subordinated ground lease.
Conclusion
Generally, the building constructed on a bare piece of land leased by an investor (tenant) belongs to the lessee for the lease period, whereafter it becomes the landowner’s property. Every ground lease agreement includes different terms agreed upon by both parties, which include control and ownership constraints.