Ground lease

How BC law treats it

A ground lease is a commercial lease of bare or redeveloped land. It is governed by its own terms, the common law of landlord and tenant, the Commercial Tenancy Act, RSBC 1996, c 57 and the Law and Equity Act, never the Residential Tenancy Act (although strata or residential units built on leased land have their own rules). Key terms include the length of the term, how ground rent is set and reset, who pays property taxes, what happens to the buildings at the end, and whether the tenant may assign, sublease or mortgage its interest. Because the term is long, the lease should be registered against title in the Land Title Office under the Land Title Act, RSBC 1996, c 250 so that it binds purchasers and mortgagees of the land. A lease of only part of a parcel for a long term can raise subdivision approval requirements, so the leased area is usually surveyed and described carefully. Lenders financing a building on leased land take a leasehold mortgage and usually require a lender protection agreement with the landowner. Under the Property Transfer Tax Act, RSBC 1996, c 378, a lease with a term, including renewals, of more than 30 years is treated as a transfer, so property transfer tax may be payable on registration. In Vancouver, ground leases are common on land owned by the City, UBC and the Port, and on First Nations reserve land. Reserve leases are made under federal law or a First Nation's land code and recorded in a federal registry rather than the BC land title register.

What it means for your business

Ground leases let developers and businesses build without buying land, and let landowners earn income without selling. The trade-off is that the tenant's asset shrinks as the term runs down, which affects financing, resale value and strata buyers' willingness to pay. Rent reset clauses can sharply raise costs mid-term. Before committing capital, tenants and lenders should model the end of the term, confirm the lease can be mortgaged and assigned, and budget for property transfer tax. Example: A developer signs a 99-year prepaid ground lease of municipal land in Vancouver to build rental housing. Its lender requires the lease to be registered, a leasehold mortgage over the tenant's interest, and an agreement giving the lender time to cure any default before the City can terminate.

Risks and common mistakes

Failing to register a long-term ground lease against title, leaving it exposed to later purchasers or lenders. Overlooking property transfer tax on a lease whose term, with renewals, exceeds 30 years. Agreeing to a rent reset formula without modelling how high rent could rise. Signing a ground lease that does not allow the tenant to mortgage or assign its interest. Ignoring what happens to the buildings and environmental liabilities at the end of the term.