Ground Lease (Erfpacht)

The key points in brief

A ground lease (erfpacht) arises when you buy the home but not the land it sits on. Normally you become the owner of both the land and the home, but that is not always the case.

1. What is a ground lease?

A ground lease arises when you buy the home but not the land it sits on. Normally you become the owner of both the land and the home, but in certain cases that does not happen. In the Netherlands it is common for the municipality to own the land your home stands on. When you pay ground lease charges, you do not own the land under your home. You have the right to use it, but it remains someone else's property. A ground lease is not the same as renting, although it does resemble it. Ground leases come in three different forms and are recorded in a notarial deed.

Perpetual buy-out ground lease

The first variant is the ground lease with a perpetual buy-out. This is the most advantageous form because, although the land never becomes yours, you also never have to pay canon (ground rent) for it. When you buy a property or apartment right with a perpetually bought-out ground lease, you will never own the land, but it will cost you nothing on an ongoing basis.

Temporary buy-out ground lease

A second variant is the ground lease with a temporary buy-out. This means the ground lease has been bought out for a fixed period, typically 75 or 100 years. Bear in mind that after that period the ground lease charges will apply again and may be higher than you are used to. You cannot deduct the buy-out of a ground lease as a tax deduction on your income tax. However, if you take out a loan to buy out the ground lease, the interest on that loan is tax deductible. It is possible to switch from a temporary buy-out to a perpetual buy-out.

Ground lease with periodic canon

Third, you can have a ground lease with a periodic canon (ground rent). This most closely resembles a rental agreement, because you pay a canon amount periodically (often monthly or annually) to the lessor. The annual costs are variable, which means housing costs can rise significantly. In most cases the ground lease canon is tax deductible.

2. Ground lease and your mortgage

Is there a ground lease that has not been bought out on a perpetual basis? Then costs in the form of canon may arise over time. When calculating your maximum mortgage, the provider looks at your income and expenditure pattern. Higher outgoings in the form of canon can mean you qualify for a lower mortgage. This does not apply with a perpetual buy-out, since no canon costs will arise now or in the future.

3. When does a ground lease end?

• When the pre-agreed ground lease period expires.
• When the ground lease is terminated.
• When it is ended by mutual agreement.
• When a court lifts the ground lease.
• By statute of limitations through expropriation.
• When the right on which the ground lease is based ceases to exist.
• When the dissolving conditions under which the ground lease was established are met.

4. What is canon?

Canon is similar to rent for the land your home stands on, land that you do not own. You pay the canon to the lessor of the land, the owner who lets you use it in exchange for the payment. In the Netherlands this is often the municipality. You pay the canon for as long as you live in the property, and you otherwise have broadly the same rights as a land owner. The only difference is that you may not do anything that would reduce the value of the land.

The fact that land is subject to a ground lease does not automatically mean canon is payable. In many cases the ground lease has been temporarily or even perpetually bought out. This means that for a period of, say, 75 or 100 years you pay no canon, or that you never have to pay it at all. If the ground lease for the land under your home has been perpetually bought out, no canon will ever be due. You are still officially not the owner of the land, but the situation closely resembles full ownership.

Costs of canon

Several factors determine the level of the canon. First, the value of the land plays an important role in the amount you pay. The intended use of the land and the amounts for comparable ground lease rights also matter. Finally, the costs of management and administration are included in the canon as well.

5. Is canon tax deductible?

Yes, the canon you pay periodically is in most cases tax deductible. This means your net costs are lower than the gross amount you pay. Bear in mind that buying out a ground lease is generally not deductible. If you take out a loan to finance the buy-out of the ground lease, the interest on that loan is deductible again.

Buying out the canon

You can buy out the canon in different ways. It is common to do this on a temporary basis, for example for 75 or 100 years. During that period you have no ongoing canon to worry about, and the ground lease is less likely to cause problems or a reduced value when you sell the property. In some cases you also have the option of a perpetual buy-out. That way you have no further concerns about canon or the ground lease, although you still do not become the owner of the land under the home or the apartment right.

Frequently asked questions

What is a ground lease?

A ground lease exists when you buy a home but not the land it stands on.

What forms of ground lease are there?

There are three variants: a ground lease with a perpetual buy-out, one with a temporary buy-out, and one with a periodic canon.

Does a ground lease affect my mortgage?

If you pay canon on your ground lease, your monthly costs go up and your maximum mortgage may be lower as a result.

Can a ground lease be ended?

There are various circumstances in which a ground lease ends, such as the expiry of the agreed period, termination by a court, termination by mutual agreement, and so on.

What is a canon?

When you buy a home but not the land it stands on, you have a ground lease. With some ground lease arrangements you pay canon (ground rent).

How is the level of canon determined?

The value of the land, its intended use, comparable ground lease amounts, and the costs of management and administration all determine the level of the canon.

Can I deduct canon from my taxes?

The canon is deductible, but the buy-out of a ground lease is not. If you take out a loan to buy out the ground lease, the interest on that loan is deductible.

Can I buy out the canon?

You can buy out the canon on a temporary or perpetual basis.