Chapter 3 Leases and Leasing

I. Lease - Definition LEASE is a contract which transfers possession from an owner (lessor) to a tenant (lessee). Since a lease is a contract, the four basic contractual requirements apply. Mutuality Capacity Legal Purpose Consideration Adequacy of consideration could be used to show that the lease was NOT freely entered into (undue influence) or the presence of fraud, both of which would allow the injured party to void the lease.

II. Statute of Frauds Every state has a statute of frauds indicating which documents must be in writing. Even though a lease might NOT have to be in writing, it “should” be in writing.

III. Types of Leases ESTATE FOR YEARS PERIODIC TENANCY Do NOT confuse 30 days with one month—they are NOT the same. Month-to-month tenancies are the most common of the periodic tenancies.

III. Types of Leases (cont.) RENT-PAYING PROVISIONS Gross Lease Net Lease Net leases are generally for commercial or industrial property. Net leases are usually long-term leases and often contain provisions for rent increases. The most common provision ties the rent to the Consumer Price Index (CPI) Percentage Leases CORPORATIOON LEASES Where either the lessor or lessee is a corporation, the board of directors must give approval to corporate officers to sign the lease or management contract. GROUND LEASE is a lease for land only. Ground leases are usually long-term leases.

IV. Assignment and Subletting Unless a lease prohibits assignment or subleasing, a lease can be assigned or subleased.

V. Qualifying Tenants INCOME DETERMINATION While income should be checked, the character of the prospecting tenant is more important. CHARACTER

VI. Proposal to Lease When lessor and lessee are serious about leasing, but many of the terms have NOT yet been agreed upon, they may exercise a letter of intent that shows the parties intend to negotiate in good faith to effectuate a lease

VII. Drafting Leases USE OF STANDARD FORMS Don’t attempt to use a standard lease that is NOT appropriate for the tenancy. TITLE OF LEASE The authors consider this practice deceptive and unprofessional LEASES PREPARED BY LESSEES With the advent of laser printers, some landlords (and even tenants) will prepare leases which appear to be standard form leases. CONTRACTS OF ADHESION A CONTRACTS OF ADHESION is a one-sided contract where one party has superior bargaining ability and will not allow any modification.

VII. Drafting Leases (cont.) EXPIRATION DATE For residential property, you want your leases to expire when rentals are in most demand in your area. LENGTH OF THE LEASE As a lessor, if you believe that rents will go up significantly, and there will be a relatively low vacancy factor, then shorter term leases would be in your best interest.

VIII. Lease Negotiations There is no lease until the lease has been agreed to

VIII. Lease Negotiations (cont.) UNDERSTANDING POSITIONS AND EXPECTATIONS

VIII. Lease Negotiations (cont.) GIVE A LITTLE Always let the tenant gain something by the negotiation process. If a tenant feels that you’re unreasonable but gives in to your position, you will have generated ill will which could come back to haunt you at a later date. Never get personal in negotiations. DO IT QUICKLY The longer a period of lease negotiations, the greater the tenant’s apprehension.

VIII. Lease Negotiations (cont.) RENT INCENTIVES The only way to get above market rents is to offer something special. Rental concessions should be considered where there are many vacancies or there has been a vacancy for a long period of time, such as a commercial building vacant over a year. Free Rent Free rent is the most common concession offered. Tenants who received rental incentives are more likely to leave at the end of their leases than are tenants who do NOT receive incentives. The likelihood of moving increases directly with the amount of incentives given. A Desirable Premium Name that Building Give Them the Building

VIII. Lease Negotiations (cont.) LEASE RENEWALS Residential tenants are more likely to move because of rent increases than are commercial tenants. Don’t offer to defer rent without owner’s written concurrence. DEALING WITH IMPASSE Break Bread FOREIGN LANGUAGE NEGOTIATIONS If you negotiate a lease in any language other than English, make certain the tenant fully understands the lease as written.

VIII. Lease Negotiations (cont.) RECORDING LEASES Generally, possession is considered constructive notice that a person has an interest in real estate. Property managers for franchises and corporations, which lease a great deal of space, generally record their leases as soon as they are completed. DISCLOSURES While a property manager is generally the agent of the owner and has duties to the owner to obtain the most advantageous lease possible, the property manager has duties of fair play and honesty towards prospective tenants.

VIII. Lease Negotiations (cont.) DISCLOSURES Hazardous Substance Failure to notify the prospective tenant about any hazardous substance could be the basis for the tenant voiding the lease and possibly obtaining damages. Lead-Based Paint Providing the lead-based paint pamphlet is a federal requirement. Flood Hazard Area Military Ordnance Death If you feel that the death or manner of death is information which a prospective tenant would want to know, we recommend disclosure even if the disclosure is NOT required by state law.

VIII. Lease Negotiations (cont.) AIDS The statutes generally do NOT prohibit disclosure but states that you need NOT disclose. You should be aware that if you make such a disclosure, you could be held responsible for slander or libel if you are incorrect. Stigmatized Property Stigmatized property is property which has developed an undesirable reputation in the community.

Chapter Summary Lease - defined Statute of Frauds Assignment and Subleasing Qualifying Tenants Proposal to Lease Drafting Leases Lease Negotiations