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| 1 minute read

The return of the leasehold.

By granting a leasehold, landowners allow third parties to use their land for a fixed period to develop it, while retaining ownership of the land. As a right similar to ownership, the leasehold can be inherited, sold and usually mortgaged.

The leasehold is also a good way of generating a regular income from land without having to bear the risk of building and operating a property.

As an alternative to full or partial ownership, the leasehold offers economic advantages to both parties:

  1. The temporary (and long-term) transfer of the land results in lower land costs. After the expiration of the leasehold, the landowner regains full (economical) ownership of the land at a later date and benefits from any potential increase in value. By transferring the construction and management costs of any development on the site and the service obligations to the leaseholder, the cost to the landowner is effectively neutral. 
  2. For the leaseholder, the main benefit is a significant reduction in initial investment (no need to buy land). In other words, it is a win-win situation.

However, drafting such leasehold agreement is a challenge because the factors affecting the leasehold are numerous and complex. This applies in particular with regard to the underlying financing and other encumbrances on the property as well as the sale of a leasehold from one leaseholder to another. The most significant problem for the landowner is an encumbered property in the event of reversion (Heimfall). This is due to the fact that any encumbrances (such as land charges or mortgages) or security mortgages remain in place and pass from the leaseholder to the landowner.

Berlin, 31 May 2023. The average leasehold interest rate for residential properties has declined since 2018. But in view of rising mortgage rates, this trend is unlikely to continue. This is the result of a study by the German Ground Lease Association (Deutscher Erbbaurechtsverband).


real estate, leasehold, comeback, advantages, complex