Buying off leasehold, or free hold?

Dossier erfpacht – hot topic 2021

Dossier Leasehold – hot topic 2021

Leasehold is nowadays a hot topic and although it exists in the Netherlands since the 16th century, the biggest changes happened in the last 20 years. Why is leasehold therefore such an interesting and relevant topic? In the 1980s, large-scale new building projects were sold on leasehold ground, whereby the ground lease (the periodic fee) was usually bought off for the first 50 years. Those 50 years are now ending in about 12 to 17 years, which means you have to deal with it soon if you plan on selling or just want to know what will happen at the end of that term. With the current low interest rates, leasehold conversion is very expensive, but more on that later…

What is leasehold more precisely?

The origin of the term can already be found in Dutch real estate history as far back as the 16th century. Further back in time, the Greeks and Romans also had a leasehold system. Originally, leasehold system intended to maintain control over the division and use of land. Later, the possibility of benefitting long-term from urban planning and benefitting from the increase in value were added. If a temporary lease was issued more than 100 years ago (99 years), it was based on the belief that a house could not last longer than that. By leasing out the land, the municipality was able to keep a finger in the pie. If a house or other building no longer met the standards of the municipality, then the municipality could demand at the end of the lease that the leaseholder would vacate it, after which the municipality could repurpose the land and reissue it. By applying this system at a larger scale, the municipality made sure to keep a grip on urban development in the longer term. In addition, according to most general provisions when issuing a leasehold, permission is required for the sale of a leasehold, so you keep control over the land within your city limits. You do not actually buy the ownership of the land, but you pay a periodic fee for using the land, possibly to be paid in advance for a period.

What types of leasehold are there?

Ultimately we know 2 types of leasehold, with a subdivision which is temporary and perpetual leasehold. In both cases there is a ground lease (sometimes very small, from a ground lease from the early 20th century) which is sold temporarily or perpetually. If the ground rent has not been bought off, you pay a periodic fee for the ground lease, which can vary from a few euros per year (we encountered this case in Vlaardingen) to several hundred euros per quarter. If the ground lease has been bought off, you have paid in advance for a certain period. With a temporary leasehold, there is an agreement that must be renegotiated afterwards. In general, there is a periodic increase, which takes into account the rise of land prices.
Furthermore, a distinction can be made between kinds of owners. The bare ownership of leasehold in Rotterdam is held by the municipality or the waterboard (for example if they are dyke bodies). Occasionally, you can come across private leasehold in Rotterdam, but it is less common than in Amsterdam for example. That is a good thing, because private leasehold can be harder to finance than municipality owned. It is also possible that the leaseholder is a housing association such as Havensteder. In that case, the housing association has acquired the land on a long lease from the municipality and subsequently issues it to you on sub-lease.

Do you get a mortgage on leasehold?

As long as the ground lease (or sub-lease) has been issues by the municipality, water board or a housing association, you should not worry about it. With a private leaseholder, it strongly depends on the conditions under which the leasehold is issued. If a bank does not consider the leasehold agreement to be stable enough, then the willingness of financing it is also lower.
An important nuance to consider is how long the leasehold (in case it was bought off) is still bought off for. You will receive (maximum) twice the remaining redemption period as the duration of the mortgage (with a maximum of 30 years in principle). So if you were to buy an apartment in 2021 of which the ground rent has been bought off until 2034 (still 13 years), you can get a maximum mortgage for a period of 26 years, unless you already buy off the additional leasehold now (provided that option is available).

Is leasehold deductible?

Yes! If you pay a periodic ground rent, it is, under current regulations, deductible for income tax – in the same way that the mortgage interest is deductible. If you buy off the ground rent, this lump sum is not deductible. The interest rate on the loan that you possibly take out for it is again deductible.

What happens when the leasehold expires?

Sometimes people restrain from buying a house which is on leasehold because they are afraid of the power that the government has on it. It is also believed that the end of the long lease agreement could lead to a forced eviction. But apart from the fact that you can expect good governance from your government (and if not just make a good legal point out of it) the municipality of Rotterdam, for example, made extensive work since 2003 on in order to reduce the percentage of leasehold. So in the apartment complex that you might live in, there might already be residents who have applied leasehold conversion and now have their own land. This means that one of the objectives of ground lease before valid – which is keeping control of ground in connection with urban development – is now being changed. Those owners therefore could never be forced to evacuate (except expropriation) and the building can no longer be completely demolished at the end of the lease.

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Leasehold bought off or leasehold conversion?

If you now pay a periodic ground lease, or the commutation period ends in a relatively short time, you can consider (if your general terms allow that) to purchase an additional lease, or request the municipality to propose a ground lease conversion. Since 2002, the city of Rotterdam has not issued any new leasehold and has offered all current owners a proposal for leasehold conversion. In 2012 there were approximately 25.000 current leasehold contracts, of which almost 20% had to do with periodically payable ground lease.

Can I buy off the leasehold?

Whether you can additionally buy off the applicable leasehold depends on the conditions under which it was issued. These have changed quite a bit in the last few years.

Calculate leasehold buy-offs

The calculation method for calculating the costs of the (additional) leasehold is complex. How many years have you bought off? What does the agreement say about the indexing/adjustment and when does the agreement expire? Do you have an agreement for 75 years or 99 years? When all of these questions are answered, the present value method is used for the calculation of what you have to pay now to redeem all future installments. With the current low actuarial interest rate, this is considerably more than a few years ago. Recently we saw an additional redemption for an apartment in Delfshaven. The ground lease had already been bought off until 2054, and the buyout up to 2103 amounted to more than 11.000 euros.
The fastest way however is to send an email to the municipality and submit your request to get an indication of the possibility of additional redemption until the end of the lease. Would you like to receive our standard email for this for free? Then leave your details below.

Or should I better choose for a leasehold conversion?

Never want to see an invoice again of something you thought you already paid? Then go for leasehold conversion; here you buy the bare ownership of the land and the leasehold is therefore null and void. However, we do recommend to wait on that a bit. Why? The aforementioned example apartment in Delfshaven had received a proposal for leasehold conversion in 2019. The costs of this amounted to more than 69.000 euros. As this is quite a big amount, it might cause financial problems to the average Rotterdammer. This and various other examples have led to multiple questions for councils in the municipality of Rotterdam. In the city council the municipality has promised to revise the leasehold conversion policies. We therefore expect that the conversion from leasehold to private land will become considerably cheaper and that the municipality will again make a proposal at a reduced rate to the remaining leasehold owners to get rid of the leasehold for good. Our advice: if that proposal comes up, take it!
If you have any questions about it, we are happy to advise you.

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