Ground lease: Overview, definition, and example
What is a ground lease?
A ground lease is a long-term lease agreement in which a tenant (lessee) is granted the right to use and develop land owned by the landlord (lessor) for a specified period, typically 30 to 99 years. Unlike typical leases for buildings or apartments, a ground lease involves leasing the land itself, and the tenant is responsible for constructing and maintaining any structures or improvements on the land. At the end of the lease term, ownership of any improvements or buildings on the land typically reverts to the landowner, unless otherwise specified in the lease agreement. Ground leases are often used for commercial or industrial purposes, but they can also be applied to residential developments.
For example, a company might lease a plot of land from a landowner to build a shopping center, with the lease terms specifying that the company will pay rent for the land but own the buildings and improvements on it.
Why are ground leases important?
Ground leases are important because they allow tenants to use and develop land without having to purchase the property outright. This can be especially beneficial for businesses or developers who want to access prime real estate but do not have the capital to buy the land. For landowners, ground leases provide a steady, long-term income stream without selling the property. Ground leases are often used in urban development, large-scale commercial projects, and in cases where a landowner wants to maintain control over the property while benefiting from the tenant’s investment in improvements. They can also offer a flexible way to structure real estate transactions and investments.
Understanding ground leases through an example
Let’s say a developer wants to build a luxury apartment complex in a downtown area but doesn’t have the funds to purchase the land. The developer enters into a ground lease agreement with the landowner for a 50-year term. The developer is responsible for constructing and maintaining the apartment buildings and paying the landowner an annual rent. Over the course of the lease, the developer benefits from the rental income generated by the apartments, but after 50 years, the land and the buildings revert to the landowner unless the lease is renewed or extended.
In another example, a retail chain leases land in a busy commercial district for the purpose of building a store. The company pays rent on the land for the duration of the lease, but at the end of the lease term, ownership of the building on the land would transfer to the landowner. The retail chain benefits from using the location for business operations without the need to purchase the land.
An example of a ground lease clause
Here’s how a ground lease clause might appear in a contract:
“The Lessee shall lease the land described in Exhibit A for a period of [insert number] years, beginning on the Commencement Date. During the lease term, the Lessee shall be responsible for constructing, maintaining, and insuring any buildings and improvements on the land. Upon expiration or termination of the lease, all improvements shall revert to the Lessor, unless otherwise agreed upon in writing.”
Conclusion
A ground lease is a real estate arrangement where a tenant leases only the land, typically for a long period of time, and is responsible for constructing and maintaining any improvements. Ground leases offer significant benefits for both landowners and tenants, providing long-term income for landowners and access to prime locations for tenants who may not have the capital to purchase land. These leases are common in commercial, industrial, and large-scale residential developments and are an important tool in real estate investment and development.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.