Supreme Court Clarifies: Agreement Alone Is Not Enough to Increase Ground Rent

In a ground lease arrangement, the leaseholder owns the buildings and leases the land against an annual payment (ground rent). Ground lease arrangements are governed by the Ground Lease Act (tomtefesteloven). The Act provides strong protection for those leasing land for residential or holiday home purposes and contains detailed rules regarding how the ground rent may be adjusted. In a recently delivered judgment, the Supreme Court clarified that these rules also apply where the parties voluntarily agree to a higher rent during the lease period.
 

When entering into a ground lease agreement, the parties are generally free to agree on the level of ground rent, provided that it is not “unreasonably high”. Subsequent adjustments must, according to the main rule in the Ground Lease Act, follow changes in the Consumer Price Index. The starting point under the Ground Lease Act is that the parties may not agree on terms that conflict with the Act unless the Act itself expressly permits this.
 

The Ground Lease Act allows adjustments other than those based on the Consumer Price Index in two situations:

(i) For certain older agreements, it is possible to carry out a one-time adjustment based on what was agreed regarding regulation according to the land value at the first adjustment after 2002.

(ii) The Ground Lease Act also permits an increase corresponding to 2% of the land value upon expiry of the lease agreement.
 

It has now been established that a landowner and a leaseholder do not have the right to voluntarily agree on an adjustment mechanism other than adjustment in line with changes in the Consumer Price Index, which follows from the Act’s main rule.
 

In the case considered by the Supreme Court, the ground rent was increased at the same time as a contractual right of first refusal was removed. These changes were made at the initiative of the leaseholder, who believed that the right of first refusal would have a depressing effect on the price in connection with a planned sale. Nevertheless, the Supreme Court held that the increase in the ground rent was contrary to the Ground Lease Act because the increase was expressly based on the value of the land and went beyond adjustment in accordance with the Act’s main rule, namely adjustment based on the Consumer Price Index.
 

What If the Leaseholder Receives Something in Return?

The Supreme Court left this question open. A narrow exception may be conceivable where an increase in the ground rent is compensated by an equivalent consideration from the landowner. The Court did not take a position on whether such an exception exists or, if so, where the boundary would be drawn.

It is therefore not established that a higher ground rent becomes lawful simply because the leaseholder receives a benefit in addition to what has been agreed in the ground lease agreement.
 

What Should Leaseholders and Landowners Do Now?

The judgment provides grounds for taking a closer look at agreements where the ground rent has been increased through negotiations. It is not decisive that the parties agreed to the adjustment. The agreement must also remain within the framework of the law.
 

Please contact us if you would like a practical review of what this judgment means for you and your ground lease agreement.