Leaseholder

Leasehold Grantor - The leasehold grantor is the owner of a parcel of land who grants a third party (the leaseholder) the right in rem to erect and use a structure on or under that parcel of land. In return, the grantor of the leasehold receives an annual ground rent. Typical grantors of leasehold rights in Germany are municipalities, churches, foundations, non-profit organizations, and occasionally private landowners. The grantor retains ownership of the property for the entire term of the leasehold.

Rights and Obligations of the Grantor

The grantor plays an active role throughout the entire term of the leasehold:

Rights of the grantor:

• Right to regular ground rent (annual or semi-annual)
• Right to adjust the ground rent (based on an index clause or value protection clause)
• Right of consent regarding the sale of the leasehold (depending on the contract)
• Right of consent regarding encumbrances on the leasehold (e.g., land charges)
• Right of reversion: Revocation of the leasehold in the event of serious breaches of contract

Obligations of the leasehold grantor:

• Granting of the property for use for the agreed term
• No unauthorized interference with the leaseholder’s use of the property
• Payment of compensation upon reversion (at least 2/3 of the building’s value pursuant to § 27 ErbbauRG)
• Obligation to negotiate an extension (in good faith, if ground rent has been paid for a long period)

Typical leasehold grantors and their motives

Leasehold grantor	Motive
Municipalities	Land policy, affordable housing, urban development management
Protestant / Catholic Church	Income from church-owned property, long-term land retention
Foundations	Sustainable asset preservation, social purposes
Private owners	Income without selling land, estate planning
Non-profit organizations	Promotion of social uses (e.g., housing associations)

Strategic importance of municipalities as leaseholders

Cities and municipalities are increasingly using leasehold rights as a land policy management tool. By granting leasehold properties instead of selling land, municipalities can keep land in public ownership over the long term and thereby influence land price trends. In Germany, municipal leasehold rights are experiencing a renaissance: Many cities have reduced outright land sales and are granting leasehold rights as a matter of preference, particularly in subsidized housing construction.

In Bavaria, for example, the City of Munich makes extensive use of this strategy. In Nuremberg, too, leasehold rights are recognized as an instrument of housing policy, albeit less prominently than in some other major cities. This has practical implications for leaseholders: The grantor of leasehold rights is not a passive contractual partner but pursues its own strategic interests, which play a role in renewal negotiations.

Practical Tip for Owners in Nuremberg and Franconia

In Nuremberg, the City of Nuremberg, the Evangelical Lutheran Church, and various foundations act as leaseholders. We recommend that leaseholders actively maintain communication with the leaseholder-especially when the remaining term falls below 30 years. Negotiating a leasehold renewal early on is crucial for resale value and financing feasibility.

Before any renewal negotiations, we recommend having the current land value assessed by an independent appraiser-because the leaseholder will want to calculate the new ground rent based on the current land value. Documenting past investments in the building also strengthens your negotiating position. We help our clients analyze the contract terms with the leasehold grantor and prepare for negotiations.

Frequently Asked Questions

Can the leasehold grantor terminate the leasehold right early?

No, ordinary termination is not possible-the leasehold is binding for the agreed term. Only in the event of reversion (a serious breach of contract by the leaseholder) can the grantor reclaim the leasehold-but must provide adequate compensation for the building.

Does the grantor of the leasehold right have to consent to a sale of the leasehold right?

That depends on the leasehold agreement. Often, a reservation of consent is agreed upon; however, consent may only be refused for good cause. A complete prohibition on sale would be invalid, as the leasehold right is designed as a transferable right.

How is the ground rent adjusted?

Most leasehold agreements contain a value protection clause under which the ground rent is adjusted to the consumer price index or to the increase in land value. The adjustment requires official approval if it exceeds certain limits. Disputes over the adjustment of ground rent are a frequent point of conflict between the leasehold grantor and the leaseholder.

Is the leaseholder obligated to renew the lease?

There is no legal obligation to renew the lease. However, a long-standing, trusting relationship and an economically reasonable renewal offer may lead the court to infer an obligation to engage in serious negotiations based on good faith (Section 242 of the German Civil Code). Experience shows that leaseholders who approach the grantor early and cooperatively have a better chance of reaching an agreement.

Consent Requirements in Practice

One of the most common points of friction between the leaseholder and the lessor is the requirement for consent in the event of sales and encumbrances. Typical leasehold agreements stipulate that the leaseholder may only sell the leasehold or encumber it with real estate liens with the consent of the lessor. This consent may not be arbitrarily withheld-the grantor must provide an objective reason. In practice, grantors often require that the new leaseholder be vetted for financial reliability or compliance with specific usage requirements (e.g., owner-occupancy for municipal leaseholds for social housing). Buyers of a leasehold should obtain the leaseholder’s consent early on-a lack of consent can significantly delay the purchase process or jeopardize it legally.

Right of Reversion: Risks for Leaseholders

The right of reversion is one of the most powerful tools available to the grantor of the leasehold. It allows the grantor to reclaim the leasehold if the leaseholder breaches serious contractual obligations-such as persistent default on leasehold rent payments, improper use of the property, or serious breach of maintenance obligations. The consequence of revocation is the transfer of the leasehold right back to the grantor in exchange for compensation of at least two-thirds of the market value of the building (Section 27 of the Leasehold Act). For leaseholders who have built and maintained their building over decades, this poses a significant risk-especially if the building’s value is high and the compensation provisions in the contract are unfavorable. We recommend having the reversion clauses in the leasehold agreement reviewed by a lawyer before purchasing a leasehold.

Selection and Creditworthiness of the Leaseholder

When purchasing a leasehold interest, buyers often overlook the fact that the leaseholder, as a long-term contractual partner, is at least as important as the condition of the building. In the case of municipal or church leaseholders, financial stability is generally assured. In the case of private leaseholders or smaller foundations, financial viability should be assessed-because the leaseholder must be able to pay the statutory compensation in the event of reversion. The question of whether the leaseholder is willing to extend the lease and under what conditions should also be clarified as far as possible before the purchase. In Nuremberg, we recommend obtaining information about the respective leasehold grantor-city, church, or foundation-directly from the responsible administrator or via the leasehold land register before making a purchase decision.

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