Keep your land, still make money from it: the building lease

In a sale, ownership changes completely; with a lease, it stays with you. You only grant someone else the right to put up, or keep, a building on your land. This right is called an easement, recorded in the land register.¹

An independent building lease set up for at least 30 years, or indefinitely, can be entered in the land register as its own property.¹³ It then carries its own value for the building party. You set the buildings' location, size and purpose, and the use of open land, in the contract. This binds later owners too.¹

A notary must certify the contract. The ground rent follows the same rule, if it is to be noted in the land register.¹ Our page on the floor area ratio shows what you may build at all.

What this means for you: set out in the contract exactly what may be built. Work it out with a notary; the contract often binds you for decades.

An independent building lease may run for at most 100 years.¹ That sounds long, but it can be tailored to your situation: a shorter term is just as possible.

The agreed term may end, or the lease may end for another reason. Either way, the building automatically reverts to you as the landowner. This is called Heimfall.¹ In exchange, you owe the former leaseholder fair compensation. The building becomes yours, but not for free.¹

A building lease can be extended at any time, by a further 100 years at most, if both sides agree. Neither side can be bound in advance to agree to an extension. The building party cannot force one, and neither can you as the landowner.¹

What this means for you: the compensation due at Heimfall only falls due at the end of the term. Start planning for that amount now, even if the end is still decades away.

Instead of a one-off sale price, a building lease gives you an ongoing ground rent, usually paid yearly.¹ You can have this rent noted in the land register. As with the lease itself, that needs formal certification by a notary.¹

As security, you also have a right to a lien (Pfandrecht) on the lease, limited to three years' worth of payments.¹ Have it entered in the land register – only then does it secure your rent.

If the building party grossly oversteps its right, or breaches its contractual duties grossly, you can also demand early Heimfall.¹ That is only possible once the compensation for it has been paid or secured. A one-sided, uncompensated reclaiming of the land is not provided for.

What this means for you: you release the land for use without giving up your influence over it. The rent, the lien and early Heimfall work as three layers of security, each on top of the other. A notary drafts all three into the contract for you.

The ground rent (Baurechtszins) is not a tax-free side income. The Cantonal Tax Act of Zurich counts income from building lease contracts as taxable property income, like rent.² Each year, you declare the rent as ordinary income, at your own personal tax rate.

This is where a building lease differs clearly from a sale. There, you pay property gains tax once, on the profit from the sale, and the matter is then settled for tax purposes. Our page on property gains tax covers this tax on building land in more detail.

A one-off payment for granting the lease is treated separately. If the lease permanently and substantially restricts the use or value of your land, that payment can itself trigger property gains tax.²

What this means for you: a building lease does not replace tax planning. It merely shifts it from a one-off item to a recurring yearly one. Have your own situation confirmed by a tax adviser or a notary before you sign.

Yes, land carrying a building lease can still be sold. However, a buyer then acquires land on which someone else is already entitled to build, or has already built. This affects both market value and how easily it can be financed.¹

With an independent and permanent building lease, the law protects both sides with a mutual right of pre-emption (Vorkaufsrecht). This is the right to buy first if the other side sells. If you sell the encumbered land, the building party holds this right. If it instead sells the lease, you as the landowner hold the same right.¹

This way, neither side is suddenly faced with a new counterparty it did not expect.

What this means for you: a building lease does not rule out a later sale. It only ties that sale to extra conditions. Anyone wanting to buy your land with a running lease needs realistic expectations on price and say-so. That is a conversation we are glad to lead for you, as your selling partner.