Real Estate Principles, 9th Edition

By Charles F. Floydand Marcus T. Allen

© Dearborn Real Estate Education 20082

Chapter 7

Real Estate Leases

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Leases

• Agreement between a property owner and tenant that transfers the rights of use and possession

• Requirements of a Properly Prepared Lease– Names of the lessor and lessee – Conveyance of the premises – Description of the premises – Term or duration of the lease– Amount of rent and manner of payment– Duties and obligations of parties– Signatures of the parties

© Dearborn Real Estate Education 20084

Classification of Leases• Duration of term

– Tenancy for stated period– Tenancy from period to period– Tenancy at will– Tenancy at sufferance

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Classification of Leases•Type of Use

•Ground Lease•Very long-term (at least 50 years) •Lease for undeveloped land•Land is developed for commercial, residential, agricultural purposes•At the end of the lease, land and improvements revert back to the land owner•Often used for financing major office developments or where land ownership is not allowed by law.

© Dearborn Real Estate Education 2008

Classification of Leases

•Type of Use•Residential lease

•Relatively short-term (often 1 year)•Commercial lease

•Longer term lease (5-10 years)•Includes provisions for payments of operating expenses•May include provision for changes in base rent

© Dearborn Real Estate Education 2008

Classification of Leases•Methods of Payment

•Gross lease – landlord pays all real estate taxes, utilities, insurance, and operating expenses•Net lease – tenant pays for pro-rata share of operating expenses•Net net lease – tenant pays for pro-rata share of operating expenses plus insurance •Net net net lease - tenant pays for pro-rata share of operating expenses plus insurance plus real estate taxes

© Dearborn Real Estate Education 2008

Classification of Leases•Methods of Payment

•Fixed-rent lease – amount of rent is fixed for entire lease term (common for short-term residential leases) •Graduated-rent lease (Step-up lease) – rent starts out at an initial rate for a specified duration and then increases at a set dollar amount or percentage at given intervals (common in commercial leases)•Reappraisal lease – rent starts at a given amount and then changes with a reappraisal of the building’s value over a given interval (often for long-term leases of entire buildings)•Percentage lease – rent usually includes a base rent and then a percentage of sales above some threshold level (common in commercial retail leases)•Index lease – rent changes at a specified interval according to changes in a specified index such as the CPI

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Issues in the Landlord-Tenant Relationship• Renewal options• Common area maintenance fees (CAM)• Expense stops• Assignment and subleasing

– Assignment transfers all of the tenant’s rights to the new tenant while subleasing only transfers a portion of these rights

– Original tenant is still liable for lease obligations unless released by landlord

• Security deposits• Improvements

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Rights and Obligations of Tenant & Landlord

• Covenant of quiet enjoyment– Right to exclusive possession of the property and to

legally use the property within guidelines set forth by lease

• Implied warranty of habitability– Landlord must maintain the premises in reasonable

condition– See Legal Highlight “Landlord’s Liability for Failure to Provide

Adequate Maintenance”

10

© Dearborn Real Estate Education 2008

Rights and Obligations of Tenant & Landlord

•Maintenance of common areas•Protection against criminal acts•Renewal clause

•Negative renewal clause – notice to terminate must be given or lease automatically renews•Positive renewal clause – notice to renew must be given or lease automatically terminates

© Dearborn Real Estate Education 200812

State Statutes Affecting Landlord-Tenant Relationship

• Each state has enacted laws that regulate the behavior and relationship between landlords and tenants. To view these laws for individual states, visit www.nolo.com on the World Wide Web.