Averting looming social instability: Policy guidelines on renewal of ground leases

By the provisions in the 1992 Constitution and the Land Act (2020), the predominant interest in the lands held by most Ghanaian households and businesses is leasehold.

A distinguishing feature of leasehold interest is its inevitable expiration at some point in the future. A lessee who wishes to continue occupation and use of the property would need to negotiate with the lessor for the renewal of the lease.

While Section 50 (11 &12) of the Land Act (2020) grants automatic right of renewal to citizens, the Act does not contain specific provisions pertaining to the terms and conditions for renewing leases, including the determination of premiums and ground rents.

This apparent gap in the existing legal framework has allowed lessors to adopt distinct approaches to determining the terms for renewing ground leases. Lessees, therefore, face uncertainties on what terms to expect when their leases expire.

Such uncertainties are further exacerbated by the fragmentation of land ownership among numerous groups, including stools/skins, families and the State.

The land market in Ghana has generally operated under market economy principles with minimal interventions by the State. Land transactions occur daily nationwide, with buyers and sellers freely negotiating prices.

For initial purchases of lands, the market system seems efficient and produces outcomes that are largely fair to the parties. However, when an existing lease for a piece of land that has been developed by the lessee expires, the negotiations for a new lease would take place between parties with unequal bargaining power.

Lessors

Clearly, lessors would have an unfair advantage in such negotiations and can extract unreasonable consideration and impose harsh terms for the renewal.

A Lessee, on the other hand, would have very limited options; agree to the lessor’s terms or risk losing the land together with the structure.

The inequality in bargaining power between the parties for lease renewal is a form of market failure and should warrant the State’s intervention through a coherent policy and regulations.

The policy and regulations should aim at standardising the processes for ground lease renewals and creating a framework that allows parties to negotiate the terms of renewal fairly and transparently.

Three pertinent issues must be addressed in the policy and regulations. First, the policy must indicate whether the payment of premiums before the renewal of leases should be mandatory or optional and subject to negotiations or the whims of the lessor.

While premiums (the upfront lump sum payment which conceptually is part of the rent payable) offer lessors an opportunity to obtain large sums of money during lease renewals, they can impose severe financial burdens on lessees and hinder the exercise of the automatic right for renewal.

For households, the possibility of losing their primary residences due to their inability to pay the premiums required to renew their leases would be frightening.

Good arguments can be made for abolishing the charging of premiums during lease renewals but given that it has become a common feature in land transactions, it might be better to maintain the practice and provide regulations on its determination to prevent exploitation and arbitrariness.

Secondly, the policy must provide clear guidance on the basis for determining ground rents. Should the ground rent be based solely on the land, or should the development carried out by the lessee be included?

In our view, ground rents must strictly be based on the land only, as the name suggests, as doing otherwise will be unjust and discourage lessees from improving or maintaining the structures they have developed.

Ground rents would continue to be a constant feature of ground leases, and lessees should expect to pay higher ground rents when their existing leases expire. It is, however, important to point out that ground rents, together with premiums, represent the total consideration for the renewal and must be viewed as trade-offs.

The third issue that must be addressed in the policy is the duration of the new lease. The question that arises here is whether the duration of the new lease should be the same as the existing lease. It will be in the lessors’ interest to grant the new lease for a shorter duration than the existing one.

Unsurprisingly, this preference is taking root, with landowners gradually abandoning the age-old 99-year residential leases for 50-year leases. It would not be a stretch of the imagination to expect ground leases to be granted for even shorter durations in the coming years, especially during lease renewals.

After all, lessors would want the opportunity to charge premiums sooner rather than later, but the implications of such shorter leases on investments and the stability of households and businesses are obvious.

Stability

The country’s stability and prosperity are at stake and there are real risks of social and economic upheavals if the State does not provide a coherent policy and legal framework to regulate the relationships between lessors and lessees in the renewal of ground leases.

The government, acting through the Ministry of Lands and Natural Resources, the Lands Commission and the Office of the Administrator of Stool Lands, must urgently engage the key stakeholders in the land sector to begin discussions on a policy framework for renewal of ground leases.

Providing a policy blueprint on ground lease renewals for state and customary lands sector agencies should be possible.

Doing this will prepare the country for the impending mass expiration of ground leases over the next few decades and assure orderly, fair and transparent dealings between lessors and lessees.

The writers are Senior Lecturers at the Department of Land Economy, Kwame Nkrumah University of Science and Technology and Fellows of the Ghana Institution of Surveyors.

They are also partners at Pacific Real Estate Advisors.
E-mails: redfgyx@gmail.com and jonazinzi@gmail.com