Ground lease in Amsterdam: How it works

If you are an Amsterdam resident, the property you’re living in is considerably likelier to come under leasehold tenure than being a freehold. The municipality of Amsterdam has been busy implementing a major overhaul of its ground lease system (erfpacht) for the past few years which will go anything but unnoticed financially by leasehold owners. Expat Notarization, an Amsterdam-based notary (notaris), explains.

The renewable leasehold (erfpacht) system

The central notion of the municipality of Amsterdam’s leasehold system is that bare ownership, be it of the land underneath your property (“land tenure”) or of the property itself (“property tenure”), rests with the municipality, meaning the leasehold owners pay annual ground rent (the fee they are charged for the use of the municipality-owned land or property).

The system offers leaseholders the option of ground rent prepayment for a set period of time by making a particular lump-sum payment as a financial arrangement, which leaves the leaseholder’s basic status unaffected.

The majority of residential leasehold properties for private use have been issued under the renewable leasehold system, the essence of which is that the leasehold right as such is set to continue in perpetuity but is divided into time periods (typically of 50 years each).

When a leasehold period reaches its trigger point, the municipality has the right to perform a review and change (increase) the ground rent, and a new 50-year term will once more be an option.

It is this very division into set periods of time which lies at the heart of the average leaseholder’s problem: the new ground rent will always be calculated on the basis of current land (or building) value, and one only has to look at the marked increase in the value of land in Amsterdam over the past 50 or so years to appreciate that the revised ground rent is likely to be fixed at a considerably higher level, so much so that the new annual amount could well represent a tenfold (or even greater) increase compared with the old situation.

In addition to driving up the leaseholder’s cost of living, it will also affect the sales value of the property itself, as prospective buyers will be likely to factor in the steep annual ground rent charges when putting in their bid.

The perpetual ground lease system

It was with these hefty and unpredictable increases in mind that the municipality of Amsterdam saw fit to overhaul the existing renewable land or building tenure regime and replace it with the newly devised perpetual leasehold system.

Here too leasehold rights are set to continue in perpetuity, the main difference with the old system being the abolition of the division into set periods of time in favour of a single never-ending term for which a particular amount in ground rent is fixed once and for all, albeit that the ground rent will be subject to annual index-linking to keep pace with inflation. As before, leaseholders have the option of lump-sum ground rent prepayment (in perpetuity!).

Making a switch: Leasehold commutation scheme

A switch from the renewable to the perpetual leasehold system starts with the leaseholder filing an application with the municipality to present them with a commutation offer. The municipality incentivises the leaseholder community by offering favourable commutation terms, in that it applies historical (read: reduced) land values when making its perpetual ground rent and corresponding lump-sum prepayment calculations.

The leasehold commutation scheme is open to all leaseholders who acquired their property prior to January 8, 2020, and applied for the municipality’s offer in good time, i.e. ahead of the property acquisition date.

Those who acquired their property prior to January 8, 2020, but omitted filing a timely application can make use - until July 31, 2023, at the latest - of the municipality’s “leasehold commutation grace scheme”, which likewise features favourable commutation terms.

A sample calculation

Let’s assume that you bought a leasehold property in 2019, the current (renewable) leasehold term for which expires in 2033. The ground rent for the property currently stands at 600 euros per annum, but is set to skyrocket in 2033 to, say, 6,000 euros per annum. Let’s also assume that you have decided to sell your property by 2028.

Under the circumstances, prospective buyers would make allowances for the expected significant increase in annual overheads or the sizeable lump-sum prepayment to be made from 2033 (this being the trigger point) onwards, which would most probably inspire them to downgrade their bids accordingly. The upshot of all of this would be that even though you yourself would not be having to fork over the increased ground rent or make the lump-sum prepayment (as you would by then have sold the property), you’d still be suffering financially, owing to the value of your property coming under pressure.

Having acquired your property in 2019, you would be eligible for making the switch on favourable terms to the perpetual leasehold system. The difference between effecting the commutation from renewable to perpetual leasehold with and without favourable terms easily works out at a factor 2 to 4 (or greater).

If we assume - quite reasonably - that the favourable commutation terms would enable you to lock in the ground rent at 800 euros per annum, commutation on application of regular (as opposed to favourable) terms would produce a ground rent fee in the range of 1,600 to 3,200 euros per annum. And if you decided to go for ground rent prepayment in perpetuity, here too you would be paying two to four times as much in a “regular” commutation scenario than if the favourable terms had applied.

Clearly, the commutation scenario subject to favourable terms will turn out very different from that lacking such attractive terms, and this is bound to have a commensurate impact on the sales value of your property.

The way forward

Amsterdam-based property experts don’t mince their words when they say that “indecision isn’t an option”. Even if the trigger point of your current leasehold still feels like being light years away, the leasehold choices you make right now will have a direct impact on the value of your property. Your decision at this time to “wait and see” may well come back to haunt you at a later stage.

Given the complexity of the Amsterdam land and property tenure system, Expat Notarization's advice is to explore your options, seek advice and mind the deadline for filing your commutation application! For more information contact them now.