Do you own a property that you don't use yourself? A long-term lease can provide stable income for decades, but it also carries risks. This article shows you how to design contracts that are legally secure and sustainably increase the value of your property.
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The topic briefly and concisely
A long-term lease ensures stable returns over the years but requires a written contract (§ 585a BGB) for terms exceeding 2 years.
The value of a leased property is determined using the income approach; a good lease agreement can increase the value by up to 15%.
A value protection clause in the contract is essential to protect lease income from inflation and ensure the real yield.
Are you wondering how to generate a reliable and predictable cash flow from your property holdings? Long-term leasing is a proven strategy that ensures financial stability, particularly in agriculture but also in the commercial sector. In fact, around 60% of agricultural land in Germany is leased. A well-structured lease agreement running for 10, 20, or more years protects your assets from inflation and market fluctuations. However, without the right contract design and a well-founded evaluation, you could suffer significant disadvantages. Learn here how to set the crucial course for a successful and profitable lease.
Legal and Economic Foundations of Long-term Lease
A long-term lease is a continuing obligation regulated by paragraphs 581 to 597 of the German Civil Code (BGB). Unlike rental, which only entitles the tenant to use an item, a lease grants the lessee the right to “draw fruits,” meaning to generate income. According to § 585a BGB, contracts with a term of more than two years must be in written form to provide legal certainty for both parties. This contractual foundation is crucial for the stability of your income. A clear demarcation and precise definition of the leased property ensures the long-term strategy of your investment. A thorough understanding of these legal conditions is the first step to avoiding future conflicts.
Financial Assessment: How Leasing Affects Property Value
The valuation of a leased property is primarily conducted through the income capitalisation approach, which relies on expected future earnings. A long-term lease agreement with a financially sound tenant can increase the property value by up to 15%, as it represents a secured cash flow over the years. The value is determined by capitalising the net rental income, with the property's interest rate playing a crucial role. A lower property interest rate leads to a higher income value. Therefore, you should have a professional land valuation for leasehold or lease conducted before signing the contract to have a solid basis for decision-making. Unsure how your lease agreement affects the value? The Auctoa ImmoGPT chat delivers a preliminary assessment in just 2 minutes. The financial evaluation lays the foundation for negotiating the lease rate.
Optimal contract design for long-term security
A precisely worded lease agreement is your most important tool for risk minimisation and securing returns. Over 90% of all disputes can be avoided from the outset by having clear regulations. Pay special attention to the following points:
Term and termination: Set a fixed term of at least 10 years to ensure planning security. Note the statutory notice periods, which can be almost two years for agricultural leases.
Rent and adjustment: Agree on a value preservation clause that links the rent to a consumer price index to protect against inflation.
Usage rights and obligations: Clearly define how the property may be used and who is responsible for proper management.
Maintenance: Clearly stipulate which party is responsible for repairs and maintenance measures to avoid cost traps.
Subletting: Exclude subletting without your explicit consent to maintain control over your property.
These details determine the success of your long-term lease planning and protect your assets.
Risk Management: Safeguarding Against Inflation and Tenant Creditworthiness
Two of the biggest risks with a long-term lease are inflation and a possible default by the tenant. An annual inflation rate of just 2% reduces the purchasing power of your lease income by almost 26% over 15 years. Without an effective value safeguard clause, you will thus suffer a real loss in revenue. Such clauses are usually unproblematic to approve in contracts with a term of more than 10 years. Furthermore, carefully check the creditworthiness of the potential tenant before signing the contract, for example through a Schufa report or the balance sheets of the last 3 years. An upfront lease payment or a bank guarantee equivalent to 3 to 6 months' rent can significantly lower the risk of default. Thoughtful risk management is essential before deciding for or against purchase or lease.
Strategic Comparison: Long-term Lease versus Hereditary Leasehold and Sale
As a property owner, you're faced with the choice between leasing, selling, or granting a building lease. Each option has specific financial and legal consequences. Here's a brief overview:
Sale: You achieve a one-time, substantial gain and relinquish all responsibility. The downside is the loss of future income and capital appreciation of the property.
Long-term Lease: You retain ownership and secure a steady, inflation-protected cash flow, often for more than 12 years. However, this requires active management.
Building Lease: Similar to leasing, but usually with even longer terms (often 99 years), and the lessee (leaseholder) typically constructs a building. The risks and opportunities of a building lease are unique and require careful analysis.
The decision depends on your personal goals: liquidity, long-term wealth accumulation, or passing assets to the next generation. Tax aspects also play a crucial role.
Optimising the tax implications of lease income
Income from a long-term lease is considered "income from rental and leasing" in Germany and is subject to your personal income tax rate, which can be up to 45%. However, you can claim all costs associated with leasing, known as advertising costs, for tax purposes. This includes property taxes, insurance premiums, or maintenance costs that you as the lessor bear. Accurate documentation of all expenses can reduce your tax burden by 10-20%. In the event of an inheritance or gift of the leased property, an ongoing lease agreement can affect the tax value. Early consultation with a tax expert helps to set the right course and fully exploit the tax aspects of leasing.
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A long-term lease is far more than just a passive source of income – it is an active instrument for wealth building that, if handled correctly, provides financial stability across generations. Success depends on a legally secure contract, a fair and adaptable lease, and solid risk management. With a data-supported valuation from Auctoa, you ensure that your rent reflects the true potential of your property. Strategically use the long-term lease to maintain your property while securing continuous income.
Additional useful links
Wikipedia offers a comprehensive overview of leasing agreements in Germany.
The Federal Statistical Office (Destatis) publishes press releases with relevant data on land use and agriculture.
The Federal Ministry of Food and Agriculture (BMEL) provides statistics on lease prices and purchase values of agricultural land.
The Society for Property Research (gif) offers insights into risk management in the real estate industry.
The Deutsche Bundesbank supplies statistics on the residential property market.
The German Farmers' Association provides information on current trends in the soil and lease market.
The IHK Munich provides information on commercial rental and lease agreements.
The Zentraler Immobilien Ausschuss (ZIA) publishes reports with market analyses and forecasts for the real estate sector.
FAQ
How is the lease rent determined fairly?
A fair rental price is based on the property's yield value and comparable rentals in the region. A professional valuation, such as those offered by Auctoa, provides a data-driven foundation. Additionally, a value retention clause should be agreed upon to adjust the rate according to inflation.
What rights do I have as a lessor?
As a landlord, you have the right to timely payment of the rent. You can establish inspection rights in the contract to check the condition of your property and ensure that the management is carried out properly.
What happens if the tenant dies?
If the leaseholder dies, the lease is generally transferred to the heirs. However, both the heirs and the lessor have an extraordinary right to terminate the lease in this case, subject to the statutory notice period.
Do I have to pay tax on rental income?
Yes, income from leasing must be taxed as 'income from letting and leasing' at your personal income tax rate. However, you can deduct all associated expenses (advertising costs) for tax purposes.
What is a value adjustment clause?
A value protection clause (or index clause) ties the amount of rent to an official price index, usually the consumer price index. If the index rises, the rent increases accordingly. This protects you as a landlord from loss of purchasing power due to inflation.
How can Auctoa help with a long-term lease?
Auctoa offers AI-powered property valuations that determine the fair lease price based on the income approach. Our ImmoGPT chat can also quickly and neutrally answer initial questions about contract design and value potentials, helping you make informed decisions.
