6 June 2020

Buying off your Amsterdam ground lease (erfpacht)

Category: Leasehold

Buying off a leasehold (Erfpacht) means paying the annual fee for the long lease or the canon (the groundrent) in advance. This can be done in Amsterdam for an unlimited period of time, in which case it will become perpetual ground lease Amsterdam, but sometimes it can also be done for a set period of time, such as 25, 50 or 100 years under older conditions of Amsterdam leases.

Although the word ‘buying off’ suggests otherwise, if bought off, the leasehold will continue to exist, and only the financial compensation (the canon) will be paid for. The market conditions, the housing period, future plans of the leaseholder and the financial situation of the leaseholder play a role in the choice of whether to pay this fee or to continue with the annual fee. Ground rent in Amsterdam can be bought one-off or paid annually.

Why choose to buy off the leasehold canon (the groundrent)?

Buying off the periodic payment of a canon offers the leaseholder security for the future. For the period that the leasehold is bought off, there is no need to pay an annual canon. This payment has nothing to do with the purchase of (or ownership of) the land. In a sense, it gives financial peace of mind. Whether the leaseholder sees this as an advantage will depend on the specific circumstances of the case. It should be kept in mind that the future canon may become lower due to market developments. A leaseholder who has bought off the canon would then not be able to benefit from this reduction. The amount that is bought off also may have to be financed. This can be done by means of bank financing, perhaps through an existing mortgage loan. The leaseholder will usually see financial security as an important advantage, but that security must be able to be funded.

Advantages and disadvantages of buying off the groundrent

The amount of the canon depends on the land value and the interest rate (the canon percentage). If both rise in the future, the ground lease becomes more expensive and the canon will rise. If the interest rate is (historically) low, paying off the canon can be advantageous. However, if the land price is then very high, the assessment becomes more difficult. In the case of (relatively) favourable ground lease conditions, the question as to whether to buy off the canon will not have a straightforward answer. For example, if the canon follows the market interest rate or the interest rate of government bonds. The choice of doing so depends on the preference of the leaseholder itself, and, considerations such as the interest rate, market prospects, and when the canon would be revised in accordance with the conditions. Another advantage of the buy off process is that the periodic revision of the canon may not take place at all; that revision depends on the development of the land price and the interest rate. A disadvantage is that the amount with which the canon is bought off is not deductible from income tax. On the other hand, it may be possible to borrow at a low interest rate (which at some point becomes higher again, which may also lead to a higher canon percentage). Another disadvantage is that if the (land) prices fall, the advance payment of the canon may have been too expensive. The market development then works to the disadvantage of the leaseholder who has paid it off.

Tax aspects of buying off your ground lease

If the canon has been bought off, meaning it has been paid in advance, there is no tax deduction. If the sum has been co-financed by means of a mortgage loan, the interest on this mortgage loan is deductible if the conditions for deductibility have been met. With effect from 2013, the Act on the Revision of the Tax Treatment of Owner-Occupied Homes (Wet herziening fiscale behandeling eigen woning) sets restrictions on the deductibility of costs related to the financing of an owner-occupied home. If a loan is taken out to finance the buying off of the canon of a leasehold right, it will only qualify as an owner-occupied home debt if the loan is redeemed in full, at least annually over a maximum period of 30 years. This requirement does not apply in the event of periodic payment of the canon.

Online leasehold calculation tool for buying off at the municipality of Amsterdam

Leaseholders can use the online calculation tool to see what they will have to pay the municipality if they switch to a perpetual leasehold before the end of the year. There is then is a choice between paying the entire fee in one go or paying a canon index per year: this is a canon that is indexed annually and that follows inflation (the indexation can increase as inflation increases). In this way, the municipality hopes to make the financial consequences of the new system clear to individual homeowners. In order to use the calculation tool, various data such as your postcode, house number and the WOZ value on 1 January 2014 and the type of General Provisions must also be filled in. These General Provisions are mentioned in the deed of purchase or delivery of the house, for example AB1994 or AB 2000. Inheritors who do not have this deed directly available can request the deed online from the land register or a notary’s office.

In the case of a ground lease, there is not an automatically enforceable right of buying off

Amsterdam has offered leaseholder the possibility of buying of the lease, but that is not a standard right for leaseholders in general. The right to buy off the canon is not one that every leaseholder has. Whether this possibility exists depends on the agreement between the leaseholder and the owner. If the applicable leasehold conditions themselves do not offer a possibility, then it is not excluded that the (new) leasehold policy of the landowner allows for a buy off. New policies, such as those for urban leaseholds, are sometimes changed and such a change must be verified with the landlord. The possibility of buying off can occur immediately after the conclusion of the leasehold contract, during its term, or when the canon is revised. If buying off takes place at a later stage, the amount to be paid also depends on the moment in the elapsed period when the canon is redeemed. Usually, the land value at the time of buy off will be used to calculate the amount. Any remaining canon payments will then be discounted when calculating the amount.

Change of use or destination may result in adjustment of canon

The buy off of the canon only applies to the right of a leasehold as in force at the time of payment. If there are changes, the landowner may be able to adjust the (bought-off) canon. This is the case if the change (e.g. change of use) results in an increase in value. This will depend on the applicable leasehold conditions. The canon will then be increased if the ground lease conditions are based on the assumption that the increase in the value of the land will benefit the owner, as, for example, in the case of a ground lease in the municipality of Amsterdam. Changes that can lead to an adjustment of the canon include full or partial changes in the use of the leasehold property, such as dwellings on a long lease in an office building. Adjusting or adding buildings can also be a reason to adjust the canon.

Buying off does not mean the end of the ground lease

In the case of temporary, continuous and perpetual ground leaseholds, the leaseholder is never to become the owner, even after the canon has been bought, unless at some point in the future the owner makes this possible. As long as the leasehold exists, the restrictive provisions of the leasehold will apply. The use of the land may not be changed without permission of the landowner. There is also the possibility of cancelling the leasehold for public interest reasons, although this will soon no longer be possible. In the event of sale, a building is still sold with an existing leasehold, albeit with the purchased canon, with the applicable provisions of the leasehold contract.

For more reading also check out my book “50 Vragen over Erfpacht”.