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Land Lease Agreement: Part 1

Posted by OneAfrica Properties on July 7, 2021
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What is a land lease agreement?

A land lease agreement is also known as a ground lease, refers to the leasing of a plot of land. It is a type of commercial real estate lease in which a lessee is permitted to build on the rented land. A land lease can be used for a wide range of purposes, stretching from commercial to residential to agricultural.

A land lease agreement differs from other commercial and residential contracts because it focuses on the land itself and the purpose of permissions and responsibilities that the lessee has.

When leasing a land, there are two parties involved; the landowner and the lessee. The two parties sign a land lease agreement that clearly outlines all the contractual responsibilities and rules. The lessee then pays rent to the landlord on a regular basis. 

If the lessee default in the payment of rent, the landlord has the right to evict the lessee. Land leasing is guided by the principle of the transaction the landowners and the lessees are conducting. The Land leasing period ranges between 50 years and 99 years.

BENEFITS OF LAND LEASE AGREEMENT

A land lease agreement helps both the landowner and the tenant to save on the real estate taxes because land purchase requires higher taxes and other expenses when compared to a land lease. 

Unlike the usual purchase where you need to make an advance payment, a land lease saves a lessee from the hustle of an upfront payment. This can reduce the amount of equity required to finance such investment. 

This can help the lessee to acquire a loan facility to invest in other projects and on the other hand, landowners can receive an inflow of income on rental payments whiles they still own the right to the property.

Also, another advantage of the land lease agreement for tenants is, it enables them to access lands in a principal place where it is impossible to buy lands outright.

TYPES OF LAND LEASE AGREEMENT

There are two main types of land leasing agreement namely Subordinated and Unsubordinated. Subordinated land lease agreement: A Subordinated land lease agreement is where the landowner agrees to take a lower priority in the hierarchy of claims on the ownership of the land.          

Essentially, the landowner gives the lessee the right to use the land as collateral to access a load facility for the improvement and progress of the company’s projects.            

This agreement system helps the owner to receive additional income whiles the lessee is enabled to use the property without being the direct owner of the property, however, there is a risk associated to this system, in case a lessee fails to pay for a loan facility obtain with the land, the landowner stands the chance of losing the land since the banks on the lay a siege on the property.

Unsubordinated land lease agreement: With an Unsubordinated land lease agreement, the owner’s land does not allow the use of the property as collateral to access any loan facility. That means there is no risk of foreclosure, so it is a safer investment for landowners. 

Also, landowners in such an agreement charge lesser fees for rental since its carries less risk.

Source: Real Estate Times Africa

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