A land lease involves leasing land for a long-term period to a tenant who then constructs a structure on that property. After the lease period, the land and all improvements the tenant makes return to the property owner.
A land lease is a type of lease extension that gives the renter (or “lessee”) the option to extend the lease longer than originally agreed upon while paying the same rate. With a land lease the lessee is not obligated to extend the lease, but they have the option to do so if they choose.
A land lease stipulates that the property owner will own any improvements unless the parties create an exception. This type of contract also stipulates that the tenant will pay relevant taxes during the period of the lease. Landlords may be able to sell the property on the land at a higher rate once the term of the lease expires because they can assume all improvements at that point.
According to Section 1 of the Land Use Act of 1978, the law vests the ownership of all land in the country to the State Government and that power is held by the governor. Under the Act, the nature of interests in real property is leasehold for terms not exceeding 99 years. This means that “buyers” can only lease land and are required to apply for a renewal after the lease expires.
Ground leases should include the following essential aspects:
- Default conditions
- Fees
- Financing conditions
- Rights of the landlord
- Rights of the tenant
- Terms of the lease
- Title insurance
- Use provisions
Benefits of Land Lease
Location
In some states in Nigeria, more properties are available to lease than to purchase, so leasing provides businesses with more options. Leasing may also enable users to occupy spaces in a locations where they couldn’t afford to buy property.
Flexibility
Leasing can provide greater flexibility to users who may need to contract, expand or relocate in the future.
Availability of cash
Leasing typically requires less cash out of pocket than buying. Businesses that lease may have more available funds to invest in the company’s products/services or establish additional locations.
Source of financing
Some small firms that struggle to obtain traditional financing may benefit from leasing since it can be viewed as a source of financing.
Stability of costs
The long-term occupancy costs of leasing are typically simple to estimate. Tenants are generally insulated from unforeseen capital costs that come from upgrading mechanical systems, repairing the property structure or replacing the roof.
Disadvantages of Land Lease
Loss of Control
If a landlord doesn’t include the proper clauses and provisions in their lease, they can end up losing control of the property.
Higher Tax Implications
This varies based on the location of the property, but a ground lease can come with higher tax implications for the landlord. Though landlords don’t realize a gain from selling the property, the rent they charge is considered income. That means rent will be taxed at the ordinary rate, and this can increase the landlord’s tax burden.
