Written by: Kristine Ravlo og Olav A. Røssaak
About ground lease
It has been common, since the late Middle Ages, to lease out ground that the lessee or “leaseholder” is able to build on. This has been a frequent alternative to sale. It provides the landlord or “lessor” with stable income and the leaseholder avoids having to pay the purchase price. Instead, the lessor normally pays annual rent, known as “ground rent”.
Leasehold agreements and the Ground Lease Act
Lease conditions are stipulated in the leasehold agreement. Like other agreements, the principle of freedom of agreement applies and the parties are relatively free to agree upon the framework of the leasehold. It is always a good idea to familiarise yourself with the contents of the leasehold agreement.
Leasehold agreements commonly include provisions concerning the purpose of the leasehold, the ground rent and the approval of the transfer. The Ground Lease Act contains some provisions about what can be agreed in new leasehold agreements and it also interferes with older agreements on certain points. The rules set out in the Ground Lease Act will normally apply in cases where nothing has been agreed in the leasehold agreement.
Many leasehold agreements are old and have a long or unlimited duration. Leasehold agreements are often inherited through generations. This could result in the conditions set down in the leasehold agreement appearing outdated, especially due to changes to the value of the Norwegian krone. The provisions set out in the Ground Lease Act will prevent the conditions of the leasehold from becoming unreasonable over time.
Use of the leasehold site
Pursuant to Section 16 of the Ground Lease Act, the basis is that the leaseholder has the same right of ownership to the site as an ordinary owner, within the constraints of the framework for this purpose. The limitation of purpose means that a cabin site cannot be used for industrial purposes or for a permanent residence, but you can do what you want within the constraints of the leasehold purposes, provided the measures are lawful and there are no explicit prohibitions set down in the leasehold agreement.
A cabin site leaseholder may, for example, renovate the cabin, extend the cabin, establish water and sewerage facilities on the site and construct boathouses without the lessor being able to object or demand anything in return.
The leaseholder is entitled to transfer and mortgage the leasehold rights and the buildings on the leasehold site, as long as nothing else has been agreed. Even if limitations have been agreed, the lessor must have justified grounds to object. Within the framework of the leaseholder’s leasehold rights, the leaseholder may grant rights to third parties on the leasehold site, for example rights of way across the site.
Application of the Ground Lease Act is mandatory in respect of the leaseholder’s right to require the removal of trees that obstruct views or cause a nuisance, as well as the leaseholder’s right to object to the removal of trees that should be left for the sake of enjoyment. This also applies even if it follows from the leasehold agreement that the leaseholder cannot take decisions regarding trees on the leasehold site. The provisions set out in the Ground Lease Act shall then take precedence over the leasehold agreement.
Redemption of leasehold sites
The redeeming of a leasehold site means that the leaseholder becomes the owner of the site in exchange for paying a redemption fee.
The right of redemption predominantly safeguards the interests of the leaseholder. A leaseholder will often have invested significant time and money to establish buildings and associated facilities on the site and, by becoming the owner of the site, the leaseholder obtains security and is able to benefit from all future increases in value.
Even though leaseholders are generally entitled to redeem a leasehold site, there are some key exceptions. The most practical exception is that a lessor may refuse redemption if the leasehold site forms part of an agricultural property of a certain size and, subject to further terms, forms part of the farmer’s income base.
The right of redemption primarily raises two questions: When are you entitled to redeem the site and at what price?
The Ground Lease Act stipulates that a leasehold site for a cabin may be redeemed when 30 years of the leasehold have passed, unless a shorter time period has been agreed in the leasehold agreement. After 30 years of the leasehold have passed, the leaseholder may request redemption every ten years.
There is nothing to prevent the parties to a leasehold from reaching an agreement concerning redemption at a time other than that which follows from the Act and the leasehold agreement. Nevertheless, the leaseholder has no entitlement to redeem the site on another date.
A leasehold site can also be redeemed upon expiration of the leasehold. This rule is aimed at older leasehold agreements, where leasehold agreements were often entered into for a certain number of years or for life. Leasehold agreements entered into for life may be redeemed by the leaseholder’s immediate family in the event of the leaseholder’s death. Under the Ground Lease Act, leasehold agreements for cabin sites no longer expire even when stipulated in the agreement. They continue to apply subject to the same terms and with the opportunity for the lessor to adjust the ground rent. Nevertheless, the leaseholder has a right of redemption when the agreed expiration date has been reached.
If you are unsure about when you can redeem your leasehold site, you should carefully read your leasehold agreement. The leasehold agreement will stipulate the next available date on which redemption can be requested. If the leasehold agreement was entered into in 1975, you would be able to request redemption of the cabin leasehold site with effect from 2005 at the earliest and then in 2015, 2025 and so on.
After identifying the redemption date, you need to submit a written request to the lessor declaring that you wish to redeem the leasehold site. The redemption request must be submitted to the lessor no later than one year before the redemption date. It is possible to submit a request for redemption several years before the redemption date if you already know that you wish to redeem the site at the next ten-year interval. It is beneficial for the lessor to know well in advance that the leasehold will cease, as the lessor is required to arrange the division of land and transfer of title.
One question that often arises in connection with the redemption of leasehold sites is the amount that will be payable in exchange for assuming the right of ownership of the site. The Act has been amended several times with regard to this matter.
The main rule is that the redemption fee must correspond to 25 times the annual ground rent. The redemption fee must be calculated on the basis of a ground rent that is adjusted up to the redemption date. A lower redemption fee may be agreed but not a higher fee.
Adjustment of ground rent normally takes place in accordance with the consumer price index, but the lessor may, in certain cases, adjust the ground rent in accordance with the value of the site. This applies if such adjustment has been agreed and it the agreement was made before 2002 and if there is less than ten years until the expiration date.
The majority of leasehold agreements are not entered into for life and, in such cases, the lessor may instead demand that the redemption fee be set to 40 per cent of the leasehold site value at the time of redemption, less the value increase that the leaseholder has added to the site. Any value increase added by the leaseholder may, for example, be due to the establishment of roads and water and sewerage facilities.
The rules concerning ground lease are intricate and complicated. This is, among other things, because different rules apply to old leasehold agreements and those that are more recent. Most leasehold agreements were entered before the current Ground Lease Act entered into force in 2002. Even though the main rule is that the Ground Lease Act also applies to older leasehold agreements, there are a number of exceptions to this rule.
This article is limited to providing a general presentation of the rules concerning the ownership and redemption of leasehold sites. There are many nuances and exceptions.
In the upcoming issue of the Hytte og Fritid magazine, we will take a closer look at other important legal matters for cabin owners. As Norges Hytteforbund’s legal associate, we are intimately familiar with the issues faced by members every day.