16 Leases
LEARNING OBJECTIVES:
Upon completion of this chapter, the student should be able to:
SUGGESTED ITEMS TO BRING TO CLASS:
1. Copies of various leases, both blank and completed, such as a gross lease, a ground lease, a net lease, an oil and gas lease, a percentage lease, a lease-option, a graduated lease, a lease-purchase, an index lease and an agricultural lease
2. A copy of your state's statute that addresses specific legal requirements in leases, such as disclosures, termination and notice and provisions for handling security deposits
3. A copy of your jurisdiction's landlord and tenant laws, if applicable
LECTURE OUTLINE:
I. Leasing Real Estate
A. Definition - Lease
1. A contract between owner of real estate (lessor) and tenant (lessee) to transfer rights of exclusive possession and use in exchange for the payment of rent and other obligations
2. The owner retains the reversionary right to possession.
3. Lessor’s interest is now a leased fee plus a reversionary right.
B. Statute of Frauds (Consult your local laws)
1. In most states, to be enforceable, a lease for more than one year must be in writing.
2. A lease that can be performed in a lesser period of time is usually enforceable in court even if it is oral.
C. In Practice: The best practice for the protection of all parties is to use written leases. Any written agreement must be signed by both parties.
II. Leasehold Estates (see Figure 16.1)
A. Estate for years (Tenancy for years)
1. Continues for a definite period of time, regardless of how long
2. Specific beginning and ending dates
3. No notice is required to terminate
4. Does not automatically renew
B. Estate from period to period (Periodic tenancy)
1. Exists for a fixed period of time but automatically renews itself
2. The payment and acceptance of the rent extends the lease for another period.
3. Proper notice must be given to terminate the lease.
4. Holdover tenancy
a. created when tenant with estate for years remains in possession.
b. landlord may evict or treat holdover tenant as one who has periodic tenancy.
C. Estate at will (Tenancy at will)
1. Exists with the consent of the landlord
2. Usually informal and oral
3. Indefinite in length
4. Proper notice must be given to terminate
5. Automatically terminates at the death of either party
D. Estate at sufferance (Tenancy at sufferance)
1. Created when the tenant who legally obtained the possession of the property now illegally remains in possession
2. Exists without the consent of the landlord
3. Examples
a. Tenant whose lease has expired but refuses to move out
b. Owner whose property has been foreclosed but refuses to vacate the premises
c. Owner whose property has been taken under eminent domain but refuses to leave
III. Lease Agreements (See Figure 16.2)
A. Requirements (essential elements) of a valid lease
1. Offer and acceptance¾ meeting of the minds of the parties
2. Consideration¾ usually rent but can be labor or other services
3. Capacity to contract¾ all parties must be legally competent
4. Legal objectives¾ intent of the contract must be legal
B. A complete description of the premises should be clearly stated, including specific facilities included in the lease.
1. Preprinted lease agreements better suited for residential property; commercial lease more complex, legal counsel should be consulted.
C. Possession of premises.
1. The covenant of quiet enjoyment for the tenant is implied by law regardless of whether addressed in the lease.
2. Landlord is allowed to enter property with tenant’s permission.
D. Use of premises¾ if the use is to be limited in any manner, that use must be specifically stated in the lease.
E. Term of lease¾ dates should be stated precisely
F. Security deposit (consult your local laws)
1. Held by the landlord during the lease
2. Applied to unpaid rent or repairs
3. State or local law may set minimums or maximums
4. In Practice: The lease should specify whether such funds are security deposits or advance payments of rent.
G. Improvements
1. Generally, neither party is required to make improvements.
2. The tenant may make improvements with permission.
3. Any trade fixtures should be identified in the lease.
4. Accessibility
a. Federal Fair Housing Act (see Chapter 21) makes it illegal to discriminate on basis of physical disabilities. Tenants may make reasonable modifications to property but must restore at end of lease term.
b. American with Disabilities Act (ADA) applies to commercial, nonresidential property; requires they be free of architectural barriers or provide reasonable accommodations for people with disabilities.
H. Maintenance of premises
1. Historically, the landlord is not obligated to make repairs.
2. Under current landlord-tenant laws, some jurisdictions require landlords to make repairs on residential units to keep them in habitable condition and maintain the common areas.
3. The tenant must return the premises in the same condition as received, except for ordinary wear and tear.
I. Destruction of premises
1. The tenant is obligated to pay rent if the improvements are destroyed when
a. The property is agricultural land
b. In most states, the lease is a ground lease
c. In some cases, the tenant rents an entire building
2. If part of a building is destroyed, the tenant is usually not required to continue to pay rent.
3. In Practice: Destruction of the premises should be addressed in the lease.
J. Assignment and subleasing (see Figure 16.2)
1. Can be prohibited by the terms of the lease
2. Assignment is the transfer of all of the tenant's interest.
3. Subleasing is the transfer of part of the tenant's interest.
4. Either may require the lessor's consent.
5. The tenant/sublessor's interest in a sublease is known as a sandwich lease.
K Recording a lease
1. Recording¾ varies according to state laws and the length of the lease; leases of three years or longer generally are recorded.
2. Possession of leased premises¾ state law generally governs whether the landlord must give the tenant actual possession or only the right of possession.
3. In some states. only a memorandum of lease is recorded.
L. Options
1. The privilege of renewing or extending the lease or purchasing the property at a predetermined price and time
2. The tenant must give notice of intention to exercise the option.
3. The lease is the primary consideration, the option is secondary.
VI. Types of Leases (see Figure 16.3)
A. Gross lease
1. The tenant pays a fixed rental amount.
2. The landlord pays all of the property charges.
3. The result is a gross income to the landlord.
4. Most often used for residential apartment rentals (may differ by local custom)
B. Net lease
1. The tenant pays a fixed rental amount.
2. The tenant also pays some or all of the property charges (net or double-net or triple-net)
3. The result is a net income to the landlord.
4. Generally used for all non-residential property leases.
C. Percentage lease
1. The tenant pays a fixed amount of rent plus a percentage of the gross income of the business.
2. The percentage and basis agreed to between the parties
3. Most commonly used in retail locations
4. Specifics vary with the type of business and its location
5. Math Concept: Calculating percentage lease rents
D. Other lease types
1. Variable leases¾ provide for increases in rent during the lease period
a. Graduated lease¾ provides for increases in rent at set future dates in specified amounts
b. Index lease¾ periodic increase or decrease in rent based on changes in some economic index
2. Ground lease
a. Usually involves separate ownership of land and buildings
b. Allows the tenant to construct a building on land that he or she does not own and use the premises thereafter
c. Generally set up as a net lease
d. Typically for 50 years or more
3. Oil and gas lease
a. The owner receives cash for giving exploration rights.
b. If petroleum is found, the owner usually receives one-eighth of its value as a royalty.
4. Lease-purchase
a. The tenant leases the property in advance of its purchase usually for tax or financing reasons.
b. The purchase is the primary consideration, the lease is secondary.
5. Agricultural lease
a. Rent can be paid by the tenant in advance (cash rents).
b. The tenant and owner can share the profits from the sale of the crop when it is sold (sharecropping).
V. Discharge of Lease
A. Termination
1. No notice is required to terminate a tenancy for years.
2. The parties can mutually agree to cancel the lease.
3. The tenant may surrender the leasehold interest if the landlord is willing to accept it.
4. A tenant who abandons the property is still liable for the terms of the lease, including rent payments.
5. When the owner of leased property dies or the property is sold, the lease does not terminate except for
a. A lease from the owner of a life estate
b. The death of either party to a tenancy at will
c. A sale clause in the lease
6. Oral and written leases without specific expiration dates require proper notice to terminate as required by law.
7. If a lease is breached, it may be terminated by according to state law.
B. Breach of lease
1. If the tenant breaches the lease, the landlord may sue for overdue rent, damages to the premises or other defaults.
2. Suit for possession¾ actual eviction
a. The landlord must serve notice to the tenant; the number of days varies according to law.
b. If the tenant does not leave peaceably, the court may have the tenant and his or her possessions forcibly removed.
3. Tenants' remedies¾ constructive eviction
a. If the landlord breaches the lease, the tenant has the right to sue for damages.
b. The tenant may abandon the premises if
(1) The landlord's action or inaction has rendered the premises uninhabitable.
(2) The tenant must remove himself or herself because of the premises not being usable.
C. Pro-tenant legislation
1. Uniform Residential Landlord and Tenant Act
a. The result of consumer awareness
b. Adopted in whole or in part by most states
c. Provides that both parties have certain obligations
d. Provides state-specific remedies for both parties
2. Tenants' Eviction Procedures Act of 1976
a. Applies to government-owned and government-subsidized units and those with government-backed mortgage loans.
b. Does not supersede state laws
c. Provides recourse for tenants in states that have no such laws
V. Civil Rights Laws (See Chapter 20)
A. Fair Housing Laws
1. To ensure that all persons have access to housing of their choice, including rentals, within their ability to pay, without differentiation in terms and conditions, because of their race, color, religion, sex, familial status, handicap or national origin (consult local laws for additional protected classes)
2. Changes in 1988 have significant impact on rental practices.
a. Protections for people with disabilities
b. Protections for families with children
3. Examples: cannot segregate individuals in sections of a complex; must allow people with disabilities to the alter premises; cannot charge different amounts of rent or security deposit
STATE AND LOCAL CONSIDERATIONS:
1. Has your state adopted all or part of the Uniform Residential Landlord and Tenant Act? Are there any local amendments to it? Are there additional local codes that affect leasing practices? What are the specific requirements under any of these laws?
2. What are the specific eviction procedures in your jurisdiction?
3. What are the requirements for leases under the Statute of Frauds in your state? For what period or term are oral leases considered to be enforceable?
4. What government body regulates the habitability of property in your jurisdiction? And what are the habitability standards?
5. What are your local customs regarding the types of leases that are used for various kinds of property?
6. Are there occupancy standards (number of persons) defined in your local ordinances? If so, what are they and have they been challenged under the fair housing laws?
7. Is there rent control legislation in your area and, if so, who administers it?
8. Is a real estate license required in your state for rental agents?
DISCUSSION QUESTIONS:
1. Why do you think tenants’ rights have been emphasized in recent years?
2. Is rent control legislation necessary in your area? What is (would be) the long-term economic effect be on the availability of rental units? Their prices (rent costs)? Their condition and maintenance?
3. Why is it important for real estate licensees to understand leases and landlord tenant rights and responsibilities? At what point should questions about landlord and tenant questions be referred to an attorney for answers and advice?
CLASSROOM EXERCISES:
1. Have your students relate some of their personal experiences as tenants or as landlords.. Ask them how different their perspective might had been if they had been in the opposite position (tenant as landlord, landlord as tenant).
2. Have your students review copies of the various types of leases you bring to class. Have small groups compare the documents to find similarities contained in all of the leases such as the identification of the parties, the consideration to be given, the description of the property and the provisions for assignment or a sublease.
3. Select several students to play-act as tenants. Give them several minutes to prepare a list of grievances and assign another student as property manager and one as owner of property. Have tenants present their complaints to property manager and manager to owner with recommendations for accommodating the tenants. Have them consider what action would be taken if owner refuses to correct problems.
INTERNET EXERCISE:
1. Have students go to the Cornell law site (text page 262) and look up the resources for landlord tenant issues. Discuss in class whether this will this be of any value to them as real estate licensees.
GUEST SPEAKERS:
1. Are there any landlord organizations in your area? Are there any tenant associations in your area? What do these organizations try to accomplish and are they successful? Invite a representative from each organization to form a panel discussions on this topic.
2. Invite a real estate broker whose office handles leases as a part of the overall operation to discuss with the class the standard forms uses, the leases used for commercial properties, the provisions for security deposits.