Renewal of ground leases: Will cost be a barrier to the exercise of right to renew?

Leasehold (wasting asset/term certain) interests remain by far the commonest form of ownership held in lands in Ghana.

This is largely the consequence of the provisions in the 1992 Constitution that prohibits the grant of freehold interest in stool (communal) lands and the recognition by landowners that granting a freehold interest results in a permanent loss of control over their lands.

To maintain possession, use, and exercise of other rights of ownership upon expiration, lessees must renew their leases on new terms.

Before the passage of the Lands Act, 2020 (Act 1036), lessees needed to have the renewal clause in the lease document to be entitled to the right of renewal.

Fortunately, Clause 50 of the recently passed Lands Act has made the right to the renewal of ground leases automatic for Ghanaian citizens.

In the case of non-citizens, the option to renew must be included in the lease to entitle them to renewals.

The provisions in Section 50 relating to ground lease renewals have removed the uncertainties surrounding ground lease expirations and whether lessees could be denied the opportunity to renew.

The key issue that remains unresolved is the cost associated with lease renewals.

As a matter of fact, the difficulties lessees face with the renewal of ground leases do not so much relate to obtaining the right to renew.

Rather, it is whether they can shoulder the financial burden associated with such renewals.

Practice

In Ghana, the practice of requiring lessees to pay premiums (a lump- sum upfront payment which conceptually is advance payment of part of the ground rent) in addition to periodic payment of ground rents has become the norm in land transactions.

It must be noted that premiums offer lessors opportunities to get upfront part of the ground rent and as a result, the payment of higher premiums typically must results in lower reserved ground rents.

It is, however, becoming increasingly clear that the demand for the payment of high premiums as a condition for the renewal of leases is beginning to have dire consequences for lessees.

There have been reports of households and businesses encountering difficulties in raising the funds for the payment of premiums demanded by lessors.

Reasons

There are two possible reasons for these challenges. First, households and businesses tend not to be aware of the impending expiration of their leases and fail to make preparations for the financial obligations that would be associated with the lease renewals.

Secondly, the amount of premium demanded by lessors is often substantially higher than what one would expect to pay in such circumstances.

Also, the quantum of premium in most cases is not determined objectively and professionally. Sometimes it depends on the financial needs and wishes of the lessors.

In fact, lessees should have a reasonable expectation that lessors would not charge the full market value of properties as consideration for extending the term of their leases.

Such an expectation is grounded in equity and fairness. In the first place, ground leases put the risk of developing the land on lessees and it is through their ingenuity and investments that the lessor can expect to obtain a valuable piece of property upon the expiration of the lease.

It would, therefore, be unfair for the lessor to seek to extract all the gains by charging the full market value of the property especially where the lessee is seeking the renewal to remain in possession and use.

Not surprisingly, section 50(14) of the Lands Act acknowledges this fact by stating that any new terms agreed to by the lessor and lessee must take into account improvements of the land by the lessee.

Unfortunately, the Act did not provide any guide as to the determination of the premium. It is the hope that the Legislative Instrument that would be developed to operationalise the Act will provide some pointers to guide the determination of premium, if it is needed at all.

To avoid conflicts and destabilisation of households and businesses as a consequence of the challenges in extending the term of ground leases, the country must set out a clear policy that would govern the renewal of ground leases, especially in the areas of premium and rent determination.

First step

As a first step, the land sector agencies, professional organisations such as the Ghana Institution of Surveyors, academic institutions and civil society organisations (CSOs) must educate the public about the fact that leasehold estates are wasting assets and lessees must prepare adequately to meet the obligations associated with lease renewals.

It would, for instance, be prudent for lessees who desire to renew their leases upon expiration to set up a sinking fund to raise the amounts that would be required in the future to pay lease renewal expenses especially the payment of premiums.

More importantly, there is the need for a vigorous debate on whether the current practice of demanding premiums for lease renewals should continue and how it can be determined in a transparent, fair and objective manner if we choose to maintain the practice.

In fact, it would not be out of place to advocate the abolishing of premium payment and make the payment of ground rent the only consideration for lease renewals.

In Hong Kong, for instance, where most lands are leaseholds, the policy on lease renewals prohibits the charging of premiums.

Instead, the policy provides for the payment of annual ground rent pegged at 30 per cent of the annual rate-able value (annual rent) for the property.

This is certainly a good public policy as it removes a major barrier to lease renewals.

In addition, it provides a clear framework within which negotiations for the setting of ground rents can be carried out.

Government, acting through the Lands Commission, must engage the key stakeholders in the land sector to begin discussions on a policy framework for renewal of ground leases.

It should be possible to provide a policy blueprint on ground lease renewals for both the state and customary lands sector agencies.

Doing this will prepare the country for the impending mass expiration of ground leases over the next decade and provide an assurance for orderly, fair and transparent dealings between lessors and lessees.

The writers are Senior Lecturers, Department of Land Economy, KNUST, Kumasi.

Writers’ E-mails: redfgyx@gmail.com & jonazinzi@gmail.com