A ground lease is a long-term lease of unimproved land that requires the tenant to construct improvements. The likelihood that construction costs may surpass the value of the property means a ground lease typically runs 50 to 99 years to allow the tenant to recover its investment. As such, the tenant is typically treated as the owner of the property for most purposes. However, after the lease ends, the rights of ownership will often return to the landlord.
While many standard industry practices may be applicable to any ground lease relationship, the terms of the ground lease will ultimately control. In addition to providing for what happens after the conclusion of the term, the ground lease will also provide for assignment, subletting, mortgaging, insurance and tax requirements. Additionally, the lease may dictate that the initial duration of the lease may be extended under certain conditions.
Ownership of Improvements
The typical ground lease will provide that the landlord is the owner of all improvements and additions constructed by the tenant upon the termination of the lease. This type of provision will ensure that the landlord is the owner not only of the underlying property, but also the improvements which the tenant was responsible for building. The landlord is put at risk because he may inherit any sort of potential environmental liability from the tenant's construction.
The ground lease may also provide that the landlord has a right to any condemnation award that was presented on the property upon the termination of the lease. The landlord and tenant may choose from a number of different formulas in determining who receives the condemnation award. These types of formulas will be outlined in the ground lease and the award may be allocated upon termination of the lease.
The landlord in a ground lease may also be entitled to a termination fee if the tenant elects to cancel the lease before its scheduled termination date. The tenant may want to voluntarily end the lease early for a variety of reasons including a change in the market or conditions which make it impracticable for the tenant to build improvements on the land. The ground lease may provide that the tenant can terminate the lease early but he must pay the landlord an early termination fee.
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