Leasehold - an alternative way to owning your own home?

High land prices and limited building land in metropolitan areas present many people with the challenge of realizing their dream of owning their own home. Heritable building rights, colloquially known as "leaseholds", offer an interesting alternative: they allow you to build or buy your own home without having to purchase the often expensive land. This significantly reduces the financial hurdles and at the same time keeps the path to home ownership open.

Content and benefits of the heritable building right

The leasehold gives you the opportunity to build or use a house on a plot of land without having to buy the land yourself. Instead, you receive the right to use the property for a certain period of time - usually between 50 and 99 years. This can reduce the equity required to purchase or build your own home by eliminating the high acquisition costs of buying the land. Instead, an annual ground rent, comparable to rent, is paid to the owner of the land. Especially in times of high land prices, this can make the dream of owning your own home more affordable.

 "In view of rising land prices and the scarcity of building plots, leaseholds can be an alternative to the traditional purchase that is worth considering. However, you should obtain comprehensive information about the advantages and disadvantages as well as the contractual conditions in order to make the right decision for your own life situation.

The great advantage of a leasehold is that you can use the house like an owner, while the land remains the property of a third party. These are often local authorities, churches or foundations. The costs saved on the purchase of the land can be invested in renovations or other projects, for example. Leaseholds can be inherited, given away or sold. The leasehold usually expires at the end of the agreed period. The landowner then acquires ownership of the building, but must compensate the leaseholder for the value of the building.  

Complex contract design

Contracts for the creation or acquisition of heritable building rights must be notarized and are often more complex than traditional property purchase contracts. The landowner often reserves certain rights, such as consent to a resale or to encumber the leasehold (e.g. with land charges or mortgages). "If a loan is required for the construction of a house on a leasehold plot and the leasehold is to serve as loan security, the planned encumbrance of the leasehold should be notified to the landowner and his consent obtained before concluding the loan agreement".

The ground rent is also of great importance. The leaseholder is obliged to pay an annual ground rent to the landowner. This annual interest is often lower than the cost of buying the land. However, the ground rent can change during the term of the leasehold, for example if the ground rent is linked to the inflation rate or a fixed index. In these cases, the ground rent may rise during the term and the financial burden may increase. It is therefore important to clearly regulate possible adjustments to the ground rent in the contract and, as with all contracts, to carefully check the profitability in advance in order to avoid surprises and disputes later on.

Provisions for early termination of the leasehold, in particular reversion, are also common. Reversion means that the leasehold with the constructed building must be transferred back to the landowner under certain circumstances, such as default in payment of ground rent or insolvency of the leaseholder. The non-fulfilment of building obligations, for example the failure to construct an originally planned building on time, can also lead to reversion.

Get good information and advice

"Leaseholds can be a cost-effective alternative to buying a traditional plot of land to realize the dream of owning your own home. "However, due to the long contract term and complex regulations, it is advisable to seek good legal advice. Notaries, as experts, are the central and right contacts here and are ready to implement the ideas of both parties in a legally secure manner."