Kristiana Farris O'Brien

This article was prepared for educational purposes only and may or may not reflect the most current legal developments. All sample provisions herein are for illustrative purposes only and do not constitute a representation or warranty of their appropriateness or suitability for any purposes whatsoever. These materials are not legal advice, and persons should consult an attorney for legal advice pertinent to his or her situation. Commercial and residential landlords seeking clarification should contact Kristi O'Brien.

Designing the Ground Lease Form

1. Ground Leases in General

At its most basic, a ground lease is a lease of bare, unimproved land. The essential characteristics of a ground lease are that the tenant constructs a building and other improvements on the property and all expenses attributable to the land are paid by the tenant (i.e. a net lease).

A tenant may choose to ground lease property rather than purchase a fee simple interest because the property is unique and cannot be purchased or because the expense of purchasing the property is too great. A landlord may be inclined to enter into a ground lease, viewing it as a secure investment. A tenant who builds an expensive building on the property is less likely to default on rent and the term of a ground lease is typically long, which can assure a landlord a steady stream of income on the property. In addition, the tenant improvements add value to the property that reverts to the landlord upon termination of the ground lease.

2. Ground Lease Forms

Ground leases lend themselves less to form leases than traditional office or shopping center leases, and they usually have to be tailored to the particular property and leasing arrangement. Some of the typical components of a ground lease include (i) tenant covenants, (ii) the right to mortgage, (iii) the obligation to build, (iv) structures for escalating and reappraising rent, and (v) insurance issues. Because the tenant is bearing all of the risk and cost of the project, the tenant can expect much greater flexibility and tenant rights in a ground lease than in other types of leases.

3. Key Ground Lease Terms

Described below are some of the key terms in a typical ground lease and some of the considerations that landlords and tenants must take into account in negotiating such a lease.

a. Term

Ground leases typically have significantly longer terms than other types of leases. Often the ground lease term is for 99 years, although the 99 year term may be stated in the form of a shorter initial term, with multiple renewal options. A tenant will want to ensure that the renewal options are not illusory, i.e. not subject to the whim of the landlord (e.g. provisions that the option lapses if the landlord and tenant cannot agree on rent for the renewal term). The ground lease should provide that if the landlord and tenant cannot agree on a rental rate for the renewal term, the rent is determined by an appraisal or arbitration method, described below.

b. Rent

Because ground leases are for longer terms, it is essential that a method be outlined in the lease for adjusting rent to keep up with inflation and the market over time. Typically, rent is adjusted by determining the fair market value of the property and then multiplying such value by the capitalization rate set forth in the lease to determine the rent for the renewal term.

Commonly, the fair market value of the property is determined by an appraisal process. A tripartite appraisal process in which the landlord and tenant each choose an appraiser (or arbitrator) and the two appraisers select a third appraiser is not unusual. There are several variations on how fair market value is determined by the appraisers, such as:

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