Erfpacht (ground lease) in Utrecht: what does it mean?

Erfpacht (ground lease): we see it in a listing. We think of red flags – what is it actually? But is it always something to be nervous about? Is it not as bad as it seems? Should you buy a home like that, or not?

Contents

• What is erfpacht?
• Types of ground lease conditions in Utrecht
• Buy-out conditions 2017
• Hardship clause
• Advice

When I worked at Lauteslager I had no idea what erfpacht in Utrecht involved. I came to work for Robert Dunning, and together with Ed Jansen he did a lot of valuations for the municipality. He had to determine what the land was worth and what the new canon (ground rent) for the erfpacht would be. I really had no idea what this involved. I didn't understand any of it. Robert printed out the ground lease conditions we had, gave me a highlighter and said: ‘By the end of the day I want to hear what the differences are and what you would advise people.’ I swore under my breath, or maybe just out loud. I really didn't feel like doing this. But actually, to this day I'm grateful to Robert for it. Robert is a walking housing-market encyclopaedia anyway, and he taught me an enormous amount. Lauteslager is located on the old AZU site, where you have a lot of properties under the 1983 Erfpachtvoorwaarden (ground lease conditions). So it's handy to know what you're advising your client.

What is erfpacht?

The Algemene Erfpachtvoorwaarden (General Ground Lease Conditions) of the Gemeente Utrecht are a set of legal conditions that govern how erfpacht works in the city of Utrecht. Erfpacht is an arrangement in which the municipality remains the owner of the land, but a private party (the leaseholder) is given the right to use or build on that land in return for paying a ground rent (erfpachtcanon) to the municipality. These ground lease conditions set out the rights and obligations of both the municipality and the leaseholder.

Types of ground lease conditions in Utrecht

In Utrecht we have different types of erfpacht. Most ground lease land has been issued by the municipality of Utrecht. The conditions that go with the municipality of Utrecht's ground lease land are standard. Banks readily finance homes under the municipality of Utrecht's ground lease conditions. Of course, the conditions do affect your borrowing capacity. But it's also possible for a private individual or a company to issue land on a ground lease. In that case individual agreements can be made. A house with a private ground lease is often somewhat harder to finance. In Amsterdam, 80% of homes stand on ground lease land. There you see many different forms of erfpacht and different conditions. In Utrecht this is a bit more straightforward, and in general a home is easy to finance with the usual banks.

Here are the main features of the Algemene Erfpachtvoorwaarden of the Gemeente Utrecht from 1974, 1983 and 1989, as well as the differences between them:

1. Algemene Erfpachtvoorwaarden of the Gemeente Utrecht 1974: Duration: These conditions provided for ground lease contracts with a term of 50 years, with the option of extension. Canon: The canon (the annual fee for the use of the land) was in many cases fixed and could only be adjusted in the event of major changes to the ground lease arrangement or if the leaseholder made improvements to the plot. In some cases the canon is paid every 10 years. Buy-out: There was no option to buy out the ground lease in exchange for a perpetual ground lease.
2. Algemene Erfpachtvoorwaarden of the Gemeente Utrecht 1983: Duration: These conditions provided for ground lease contracts with a term of 50 years, with the option of extension. Canon: The canon could be revised and indexed during the term of the contract, which could lead to higher costs for leaseholders. You pay €11.34 a year in administration costs. This used to be 25 guilders. Buy-out: A buy-out scheme was introduced that allowed leaseholders to buy out the ground lease in exchange for a perpetual ground lease.
3. Algemene Erfpachtvoorwaarden of the Gemeente Utrecht 1989: Duration: no end date; Canon: In 1989 the municipality of Utrecht deliberately introduced a system without a canon in the Algemene Erfpachtvoorwaarden. This means that the leaseholder owes no periodic payments (canon) to the municipality. Buy-out: When the land is issued, the leaseholder pays the municipality a one-off amount, the conversion value. This amount is based on the value of the land and is determined upon conversion to the 1989 Algemene Erfpachtvoorwaarden.

Buy-out conditions 2017

The municipality of Utrecht's 2017 buy-out conditions for ground lease land allow leaseholders to buy out their ground lease on the basis of the Conversieregeling Erfpacht 2017 (Ground Lease Conversion Scheme 2017), also known as the buy-out scheme.

Below is an explanation of the main aspects of this scheme:

• Application: The buy-out scheme applies to leaseholders of a home on municipal ground lease land with a temporary or continuous ground lease, who pay a canon (half-)yearly. The second condition is that the leaseholder lives in the home themselves. In addition, the use set out in the ground lease conditions must be exclusively ‘residential’.
• Annual canon: Prior to the buy-out, the leaseholder pays an annual canon of 5% of the established land value. This canon can be paid (half-)yearly.
• Locking in the land value: During the buy-out period, the land value is locked in at the time of the application. This means that any increases in the value of the land after the application have no effect on the buy-out sum.
• Paying the buy-out sum: As soon as the leaseholder pays the established land value, the ground lease is bought out and no annual canon is owed any more.
• Adjustment of the ground rent: With continuous ground lease rights, the leaseholder pays a (half-)yearly ground rent that is adjusted every 10 years. However, the leaseholder can also choose to buy out the ground rent for 50 years.
• Step-by-step plan for submitting an application: The municipality of Utrecht provides a step-by-step explanation for submitting an application to buy out a ground lease, explaining the process and the preparation.

Hardship clause

The hardship clause in the municipality of Utrecht's 2017 ground lease buy-out scheme gives leaseholders the option of obtaining an exception to the scheme's standard conditions in certain situations. Below is an explanation of the hardship clause and some examples of situations in which leaseholders can invoke it:

• Exception to the scheme: The hardship clause gives leaseholders the option of deviating from the standard conditions of the 2017 buy-out scheme. This is possible in situations where applying the scheme is considered unreasonable or unfair.
• Occupation by first-degree family: One example of a situation in which the hardship clause may apply is when the home is occupied by first-degree relatives of the leaseholder. In this case the leaseholder may be eligible for an exception to the buy-out scheme.
• Inability to sell during the crisis period: Another example is when the home could not be sold during the crisis period and the leaseholder got into financial difficulties as a result. In this situation the leaseholder may be able to invoke the hardship clause to have the buy-out scheme adjusted to his or her specific circumstances.
• Unforeseen circumstances: The hardship clause can also apply in other situations involving unforeseen circumstances that make it unreasonable for the leaseholder to follow the standard conditions of the buy-out scheme. In such cases the leaseholder can submit a request for an exception to the scheme.

Advice

It's smart to buy out the ground lease via the 2017 conversion scheme. That way you won't face any surprises later. Would you like to buy a home with erfpacht? Then get in touch with us.