If you were interested in purchasing a home, you might have come across land lease agreements. In most home purchases, the buyer purchases the dwelling and the property or land on which the dwelling sits. With land lease agreements, also called ground leases, the purchaser buys a building or home but rents the land from the landowner. Land leases are common with condominiums, townhouses, manufactured homes, and trailer parks.
Understanding Land Lease Agreements
You may have been looking at a property only to discover that it is a land lease property. The land lease agreement is not always explicitly stated in the real estate listing. A key phrase in listings is leasehold interest which means the owner desires the seller to purchase a land lease. Land lease agreements usually last anywhere from 50 to 99 years. The land lease agreement will state all of the rules and obligations for the lessee and the landowner. The agreement will state all of the privileges and limits the less he has while renting the land. It is crucial that you understand what you are signing up for before agreeing to a land lease arrangement.
Advantages and Disadvantages of Land Leases
Several advantages come with land lease agreements. Housing prices are at an all-time high right now, and if you agree to a land lease, you will typically pay a lower price than if you purchase the land and the property outright. Family homes that are part of a land lease agreement tend to fall below the market values of other comparable homes, resulting in a lower monthly mortgage payment. If you are saving money on your mortgage, you may be able to purchase a more expensive home or a home in a better location and school district.
Additionally, since you do not own the land, you will not have to pay property taxes. You may have to pay some local property fees, but they are much less than paying property taxes. In most land lease agreements, homeowners pay fees to a community association that handles the property maintenance and repairs, decreasing their expenses. Many communities that offer land leases provide residents with conference rooms, swimming pools, playgrounds, or other recreational facilities the homeowners do not have to maintain.
Unfortunately, some downsides come with land lease agreements. You will only be able to build equity in your house itself, not from the land, and you could risk losing your Equity after the lease expires. Reselling your property can be difficult because many buyers do not want to get involved with a land lease. You may have to pay HOA fees, and your lease may have to be renewed every year, resulting in instability.
The Benefits of Working With an Attorney to Draft Your Land Lease Agreement
Ground leases are typically long-term legal agreements. If you sign a land lease, you could be paying hundreds of thousands of dollars for the loan. The slightest misunderstanding or discrepancy in your land lease agreement could result in a costly dispute between you and your lender. Any landowner or business that must consider signing a ground lease should consult with a commercial real estate attorney.
Specifically, businesses and landowners should consult with an attorney experienced in land lease agreements as they are a more uncommon arrangement with unique requirements. We recommend working with an attorney who can draft your land lease agreement while paying attention to all of the following aspects:
- The rights of the parties
- The amount of rent in any other required payment
- The terms of the agreement
- The acceptable uses of the property
- Conditions on the tenants financing
- Permitted types of improvements
- Protocols in the event a tenant defaults
- Whether the title insurance is necessary
- Ensuring the agreement complies with land-use and zoning laws
A Transactional Lawyer Can Assist Your With Ground Lease Financing Issues
Businesses that sign ground lease agreements typically finance any capital improvements they make. The lender will typically acquire a security interest in the building. Depending on the arrangement, the ground lease may provide that the landowner’s property interest is subordinate to the lender’s interest. Doing so gives the lender priority should the tenant default on his or her alone. Lenders often prefer this type of arrangement, but it is also possible to secure financing through an unsubordinated ground lease.
Deciding on a subordination will depend on a careful review of all the circumstances involved. These types of decisions often require skillful negotiation on the part of a commercial real estate attorney. At Schwartz & Schwartz, we have represented landlords and tenants and assisted them in successfully working out mutually beneficial lease terms. We will help you negotiate a land lease that allows efficient financing of the improvements you would like to make.
Factors to Consider Before Agreement to a Land Lease
Using a land lease contract, purchasing a home can be a tempting option, especially due to the lower purchase price. It could allow you and your family or your business to finally move into the home or business location of your dreams. However, it is essential that you consider all the terms of the agreement, including the additional costs, such as HOA fees and the lease length. If you plan to stay in the home or business past the end of the lease, make sure the option to renew your lease is in the contract. The best way you can protect yourself is to work with an experienced attorney.
Contact a Delaware Land Lease Attorney Today
Are you considering signing a land lease agreement for a home or commercial property? If so, it is important that you understand all of your rights and obligations under the contract. The experienced real estate attorneys at Schwartz & Schwartz can help you draft a protective land lease agreement. We can also help you negotiate the best terms for your agreement. Contact our Delaware Real Estate Law Firm today to schedule your initial consultation and learn more about our legal services.