Leasehold

Leasehold - A leasehold is a real right that allows a person to erect, maintain, and use a building on another person’s land without having to purchase the land itself.

What exactly does leasehold mean?

Leasehold is governed by the Leasehold Act (ErbbauRG) and constitutes a special form of land use. The leaseholder does not acquire ownership of the land, but rather a time-limited right of use that allows them to erect and use a structure on it. In return, they pay the landowner a regular ground rent, which is usually between 3 and 5 percent of the land’s value per year.

The term of a leasehold right is typically between 50 and 99 years. During this period, the leasehold interest is registered in a separate leasehold land register and can be encumbered, inherited, and sold just like a parcel of land. The leasehold interest is thus a fully-fledged right secured in the land register, which grants the leaseholder a status similar to that of an owner.

In practice, lessors are primarily municipalities, churches, and foundations. These institutions wish to preserve their real estate assets in the long term and not relinquish them through sale. For municipalities, the leasehold right also serves as an urban planning tool, as usage requirements can be specified in the leasehold agreement.

A key concept in leasehold law is reversion. This refers to the landowner’s right to reclaim the leasehold prematurely under certain contractually defined conditions, such as in cases of breach of contract or neglect of the building. Upon reversion, the leaseholder receives compensation, the amount of which is specified in the contract. Even upon the regular expiration of the leasehold, the previous leaseholder is entitled to reasonable compensation for the building.

Leasehold vs. Land Purchase - Comparison

Feature	Leasehold	Land Purchase (Full Ownership)
Ownership of the land	No - temporary right of use	Yes - permanent full ownership
Term	50-99 years (contractual)	Unlimited
Initial investment	Lower (no land purchase)	Higher (land share 20-50% of total value)
Ongoing Expenses	Ground rent 3-5% of property value p.a.	None (only financing costs)
Real estate transfer tax	Only on the capital value of the ground rent (more favorable)	On the full purchase price (Bavaria 3.5%)
Financing	Limited - banks charge surcharges	No special conditions
Appreciation	Proportional (building), not land	Full (building + land)
Risk at end of term	Reversion - building reverts to owner	No term risk

Advantages and disadvantages for buyers and owners

The greatest advantage of leasehold rights lies in the significantly lower initial investment. Since no land needs to be purchased, the often substantial land costs are eliminated. Especially in metropolitan areas where building land is scarce and expensive, the leasehold right can make the dream of home ownership possible in the first place. Real estate transfer tax applies only to the leasehold right, not to the full value of the land.

However, there are significant disadvantages. The ongoing ground rent represents a long-term financial burden that adds up over the decades. Many contracts contain adjustment clauses that link the ground rent to general price trends, so the burden increases over the term. Additionally, financing can be more difficult, as banks value leasehold properties differently than freehold properties and often apply higher interest rates or lower loan-to-value ratios. The remaining term also significantly influences the value: the shorter the remaining term, the more difficult a future sale becomes.

Practical Tip for Owners in Nuremberg and Franconia

In the Nuremberg metropolitan region, leasehold rights are granted primarily by the City of Nuremberg, the Evangelical Lutheran Church in Bavaria, and various foundations. Historically, leasehold properties are particularly common in neighborhoods such as Langwasser, Ziegelstein, and parts of Schwabach. Anyone wishing to buy or sell such a property should have the leasehold agreement carefully reviewed, particularly with regard to the remaining term, ground rent adjustment clauses, and renewal options.

Our network of experts recommends clarifying the terms of a potential contract extension with the leaseholder before purchasing a leasehold property and calculating the total cost of ground rent and financing expenses over the planned holding period. This is the only way to assess whether the leasehold is more economically advantageous than purchasing the land in a specific case.

Frequently Asked Questions

Can a leasehold be extended?

Yes, an extension is generally possible and is also common practice. Under Section 31 of the Leasehold Act (ErbbauRG), the leaseholder has a legal right to renewal provided the leasehold serves residential purposes. The terms of the extension, particularly the new ground rent, are negotiated between the contracting parties. We recommend initiating extension negotiations at least five to ten years before the existing contract expires.

Is financing leasehold properties more difficult?

Financing is possible, but typically involves stricter requirements. Banks consider the collateral to be less secure than with full ownership, as the land itself does not serve as collateral. Lenders often require a higher down payment or charge a higher interest rate. The remaining term is crucial: if the remaining term is less than 30 years, many banks will refuse financing or offer only unfavorable terms.

What happens when the leasehold expires?

Upon expiration, the building reverts to the landowner. However, the previous leaseholder is entitled to reasonable compensation for the structure, which must amount to at least two-thirds of the market value. In practice, however, an extension is usually agreed upon. It is important to be fully aware of the contractual provisions regarding reversion and the end of the contract before purchasing a property with a leasehold.

Back to the Real Estate Glossary.