Buying property under an emphyteutic (long-term) lease
According to a study by Statec and the Observatoire de l’Habitat (October 2019), housing prices in Luxembourg rose by 11.3% between Q3 2018 and Q3 2019. In the face of this unbridled growth, one of the ways prospective homeowners can find cheaper housing is via the emphyteutic (or long-term) lease. Don’t worry, it’s simpler than it sounds! myLIFE is here to cut through the jargon.
What is an emphyteutic lease?
The practice of emphyteusis was initially recognised in Roman law. Today, long-team leases are governed by the Luxembourg Law of 22 October 2008 on the promotion of living spaces and the creation of a housing pact with the municipalities, and on the right of superficie and emphyteusis. This kind of long-term lease gives a real right entitling a person to full enjoyment of immoveable property that belongs to someone else.
What property can I buy under the lease?
The term “immoveable property” above refers to the legal definition, denoting land (whether developed or not) and/or anything affixed to it (such as residential or industrial constructions). An emphyteutic lease can cover the land on which a property is built, the property itself, or both together.
For example, in the case of a residential property, such a lease would be a long-term contract between the tenant and the landlord. The landlord confers to the tenant the right to build and/or maintain a property; however they retain ownership of the land. The tenant enjoys all the rights associated with ownership of the property, and undertakes to maintain and improve it throughout the duration of the contract as if they were the owner. The value of the property must increase as a result of these works. As such, in addition to having to specify the exact term of the contract, the lease must also include a thorough inspection of the property.
While the tenant does not own the property, they acquire the right to full enjoyment of the property against an annual payment (known as the “canon”). There are also leases that instead require a one-off payment the time of signature. Whichever you choose, the amount is to be freely agreed between the tenant and the landlord. There is no legal requirement for how much the canon should be, nor the conditions under which it should be paid. If you have any questions or need more information, we encourage you to contact a professional.
The minimum or maximum term may not be changed, not even by way of a special agreement between the landlord and the tenant.
What is the term of the lease?
The lease contract has a term of 27 to 99 years, and takes the form of a notarial or administrative deed. For a residential property, the term of the lease cannot be below 50 years. The minimum or maximum term may not be changed, not even by way of a special agreement between the landlord and the tenant.
What happens once the lease expires?
At the end of the lease, ownership of the land and the property reverts to the landlord without consideration for the tenant, unless otherwise stipulated in the contract. The landlord may agree to extend the contract, but is under no obligation to do so. There is no tacit renewal of the lease contract.
An emphyteutic lease may not be terminated early without the mutual agreement of the parties, except where one of the parties fails to meet its obligations under the contract. The law provides for three situations in which this kind of long-term lease may be terminated:
- confusion, i.e. when the landlord and the tenant become the same person (for example if the tenant inherits the property),
- the total loss or expropriation of the property,
- the extinctive prescription period of thirty years, i.e. when the tenant’s real right extinguishes through failure to use the property or exercise the powers attached to their right.
Since the tenant does not acquire final ownership, the purchase price is significantly lower. It also allows the landlord to enjoy a regular income stream over time.
What are the benefits of this kind of lease?
Since the tenant does not acquire final ownership of the property, the purchase price is significantly lower. This opens up opportunities for those who cannot afford to purchase a home directly, while also granting them full use of the property in the long term (even over multiple generations).
It also allows landlords to receive either one lump sum or enjoy a regular income stream over time while retaining ownership of the land, as well as everything built on it once the lease expires.
Thanks to its unique benefits, certain public bodies and institutions in Luxembourg are now promoting this option for prospective homeowners. According to the website, “the Kirchberg Fund and the Société Nationale des Habitations à Bon Marché (SNHBM) are working together on the residential projects presently underway. Together with the government, they are pursuing a policy of affordable housing.” Among the measures taken, it should be noted that the housing in Kirchberg managed as part of this collaboration is offered to prospective tenants under an emphyteutic lease. The Luxembourg government thus sees these leases as an idea worth exploring within the context of affordable housing.
The downsides of the emphyteutic lease
The tenant has full enjoyment of the property, but they must also use and maintain it properly. Any repairs are made at their own expense, and they are liable for any applicable taxes. The most important thing to remember is that once the contract expires, the tenant gets nothing. In accordance with Article 13-12 of the Law of 22 October 2008, unless otherwise stipulated in the constituting title, the tenant cannot force the landlord of the property to reimburse the value of any constructions that are on the land once the contract expires.
If a tenant wishes to resell their right to enjoy the property before the contract expires, the value of the property will be limited by the fact that the tenant does not own the land and that resale prices are usually linked to construction prices rather than inflation. The landlord also has a right of pre-emption, meaning that if the property is up for resale, they take priority before it can be offered to a third party.
Unlike a traditional lease, an emphyteutic lease that has expired cannot be extended by tacit renewal.
Lastly, unlike a traditional lease, an emphyteutic lease that has expired cannot be extended by tacit renewal. However, the parties may enter into a new contract once the first one ends.
For some people, the downsides of this kind of lease are enough to make it not worthwhile, especially in a market growing at the rate of Luxembourg’s. Among the dissenting voices is Fondation Idea, an organisation created by the Chamber of Commerce that aims to stimulate discourse on sustainable development in Luxembourg and the general economic interest of the country.
Emphyteutic leases represent an interesting compromise, as the tenant acquires ownership of a property without having to purchase the land. However, that ownership of the property is limited and temporary. Based on your situation, only you will know whether it’s a perfect alternative to buying directly, or a terrible idea.