Leases are often used in business and for housing and holiday home properties. The rules governing ground leases are complex, and in many cases clients need to consult lawyers with the required legal expertise.
Dalan’s lawyers possess expertise and experience within this branch of law and they advise both private and commercial clients in ground lease cases.
The Leasehold Act
The Leasehold Act applies to all types of leases, regardless of whether the land is used for commercial premises, warehouses, homes, holiday homes, apartment buildings, garages etc. However, the rules do differ depending on the nature of the property involved: Special protection is afforded to leaseholders in homes and holiday homes, and these protective regulations will in many cases overrule the leasehold contract. For other types of lease (not homes or holiday homes), the basic rule is that the provisions of the Act are only applied as long as the leasehold contract does not stipulate otherwise. The demarcation between land for homes and holiday homes or land for other purposes, e.g., business premises, is often clear, though this is not always the case.
Dalan’s lawyers have expertise and experience within this branch of law and they advise both private and commercial clients in ground lease cases.
Where do we draw the line between a lease for a home or holiday home, and one for another purpose?
The crucial point in determining whether a lease is for a home or not, will be the purpose behind obtaining the land in question. A home may be anything from a detached house to an apartment block. It makes no difference if the leaseholder is a person, a condominium, or a housing cooperative etc. If, on the other hand, the purpose is to obtain financial reward for the leaseholder, the lease will not be considered to be for a home. A similar assessment — own use/financial gain ¬ will also apply when the land is leased for a holiday home.
If a building is use for several purposes it will be the main purpose that counts. It is the purpose as it was when the lease was signed that forms the basis for assessment. If, when the lease was signed, the building was intended as a home, this original purpose will not be changed as a consequence of the owner letting his home.
The Leasehold Act requires that leasehold contracts entered into after 2002 clearly state whether the lease applies to land used for a home or holiday home, or land used for another purpose.
Commercial properties are not “homes and holiday homes”, and therefore come under the category “leases for other purposes”. This means that the provisions of the Leasehold Act can only be applied unless otherwise stipulated by the lease, cf. that which is described above relating to the duration, adjustment and redemption of the lease.
Our lawyer and partner Harald O. Sletner is a co-author of the book Tomtefesteloven with commentaries, published by Gyldendal.
Read more about the book here.
There is a difference whether a contract applies to homes and holiday homes, or to land used for other purposes.
Leasehold contracts for homes or holiday homes entered into after 2002 apply until they are terminated by the leaseholder. The leaseholder is entitled to extend contracts entered into before that time when they expire. This means that all leases — new as well as old — associated with homes and holiday homes will continue to apply for as long as the leaseholder does not wish to terminate the contract.
If the lease is for other purposes than a home or holiday home, the leaseholder does not have the legal right to demand the contract be redeemed or extended. The parties in these cases are bound by the stipulations of the contract with respect to duration, redemption etc. If the contract expires and the parties have not reached agreement regarding extension or redemption, the leasehold arrangement will be dissolved.
Ground rent is the annual fee that the leaseholder pays to the lessor. The original ground rent was set in the leasehold contract. It is up to the parties entering into new leasehold agreements to decide on what the ground rent should be.
As far as homes and holiday homes are concerned, special rules govern the lessor’s right to adjust the ground rent. These rules stipulate that the lessor, as a general rule, cannot ask for the ground rent to be increased by more than the consumer price index. This is the case even if the leasehold contract specifies another basis for adjustment.
The Leasehold Act does, however, permit the lessor to ask for an extraordinary adjustment in connection with the expiry/extension of a contract. Such “one-off increases” are only possible if the contract was originally agreed with an expiry date (non-perpetual contract). Moreover, no one-off increase is possible if the contract states that the lessor is entitled to an extension and that no greater adjustment shall be made than that which is attributable to the change in monetary value.
In a one-off increase, the ground rent can be raised to an amount that is equivalent to 2% of the value of the land, but not more than the legal maximum amount per decare. The maximum amount rises at the same rate as the consumer price index, and is NOK 12,842 in 2020. The parties can ask for a new one-off increase when 30 years have elapsed since the last increase.
Along with the aforementioned one-off increase, there is also another special rule giving the lessor the right to raise the ground rent in connection with the “first adjustment after 2002”. Of decisive importance for such an adjustment is that which has been agreed “without a doubt” in the leasehold contract. In this case as well, an upwards adjustment will be restricted to the legal maximum amount per decare.
As far as leasehold contracts for other purposes than homes and holiday homes are concerned, the parties will as a rule be able to ask for adjustments in accordance with the provisions of the leasehold contract. If the contract does not govern this aspect, the parties will be able to ask for an index-based adjustment every tenth year.
One may ask to redeem a lease for a home or holiday homes when the leasehold contract has run for 30 years (unless a shorter period has been agreed), or when the lease period expires. Once the contract has run for 30 years, one can ask to redeem a leasehold contract for a home every other year, while one can ask to redeem a leasehold contract for a holiday home every tenth year. There are exceptions to the right to redeem. The most important of these is the so-called “agriculture exception”, which gives the lessor, on closely defined terms, the option of refusing the redemption of land for a holiday home if the land is part of an operational agricultural property.
If a plot of land has been leased without an expiry date (perpetual contract), and the lessor has not agreed any right to terminate the contract, the sum paid to redeem the land is set at 25 times the annual (adjusted) rental fee. In other cases, the rule is that the redemption fee shall be set at 40% of the value of the plot as “greenfield land”.
As far as leasehold contracts for other purposes than homes and holiday homes are concerned, the leaseholder will not have a right of redemption unless this is specifically stated in the leasehold contract.
A leasehold contract for a commercial property often has provisions enabling the ground rent to be adjusted otherwise than in accordance with the consumer price index. In many contracts adjustments shall be made on the basis of the value of the land, which means that new ground rents will represent a return on the value of the land at the time of adjustment. Two main elements are required in order to calculate the new ground: the sales value of the land (excluding the value added by the leaseholder) and the ground rent interest. The sales value is based on what a normal buyer would pay for the property in a normal sale. The ground rent interest will be equivalent to the reasonable return that could be expected if the land was sold and the money invested elsewhere.
Commercial property leases will often have a time limit. When the contract expires the leaseholder has the right to an extension only if this has been specified in the contract or in another agreement between the parties. In the lack of any agreement to extend the leasehold contract will be dissolved. If there are no provisions concerning dissolution in the contract, this is governed by Section 39-41 of the Leasehold Act.
The main rule is that the leaseholder shall remove buildings and other fixed equipment from the land. However, exemption from this duty may be granted if removal would involve an unnecessary loss of assets. If this should be the case, the lessor has the right and duty to take over the buildings and fixed equipment standing on the land.
The consideration to be paid by the lessor on takeover can be calculated using two different models, usually described as “technical value” and “utility value”. The technical value may be determined on the basis of what it would cost to erect a similar building at the time of takeover, with a deduction made for decreased value owing to age and usage. The utility value is based on an appraisal of the value that building has for the lessor. This is conditional, however, on the buildings being used in the most economical way possible.
The choice of which calculation model to use will depend on whether it is the lessor or leaseholder who is asking for the lessor to take over. If it is only the lessor who is asking for this, the value shall be set at “technical value”. If the leaseholder — or both leaseholder and lessor – are asking for this, the value shall be set as an “utility value”, which will allow for a consideration to be paid that is higher than the technical value.
Disputes concerning the lessor’s right/duty to take over, as well as the calculation of the consideration, shall be resolved by judicial assessment, although the parties may well have agreed on another method of settlement, including arbitration or ordinary legal proceedings.