Real Estate Principles and Practices Chapter 14 Leases © 2010 by South-Western, Cengage Learning

Key Terms Assignment Constructive eviction Demise Gross lease Ground lease Lease Lessee Lessor Net lease Option clause Percentage lease Periodic tenancy Reversionary interest Sale-leaseback Security deposit Sublet Surrender and acceptance Tenancy at sufferance Tenancy at will Tenancy for years

© 2010 by South-Western, Cengage Learning Overview Leasing advantages for businesses Types of leases Rights and conditions imposed by a lease Residential Commercial

© 2010 by South-Western, Cengage Learning The Lease Lease: Lease: contract and a conveyance of real property Lessee: Lessee: tenant Lessor: Lessor: landlord Demise: Demise: conveyance of an estate under lease “to grant, demise, and let.”

© 2010 by South-Western, Cengage Learning The Lease Reversionary interest: Reversionary interest: property reverts to lessor when lease is terminated

© 2010 by South-Western, Cengage Learning Leasehold Interests 1. Tenancy for years: Definite period of time Stated expiration date Not terminated upon death of either party 2. Periodic Tenancy Specified period to period No set termination date Requires notice 30 days

© 2010 by South-Western, Cengage Learning Leasehold Interests 3. Tenancy at will: Either party may terminate Most states require notice Death terminates the lease 4. Tenancy at sufferance Holdover tenant: Holdover tenant: remains in possession after lease expires Lessor may evict or create a periodic tenancy

© 2010 by South-Western, Cengage Learning Lease Contents 1. Names 2. Description 3. Duration of the lease 4. Amount of rent 5. Possession, maintenance, improvements 6. Liability of the parties 7. Transfer by the lessee 8. Special covenants, conditions, & provisions

© 2010 by South-Western, Cengage Learning Termination of a Lease 1. Expiration of the lease: 1. Expiration of the lease: term expires Tenancy at will and periodic tenancy: written notice Tenancy for years: expires on termination date Tenancy at Sufferance: at any time

© 2010 by South-Western, Cengage Learning Termination of a Lease 2. Agreement between the parties: 2. Agreement between the parties: mutual agreement Surrender and acceptance 3. Breach of condition: 3. Breach of condition: either party breaks the terms of the lease Injured party may cancel

© 2010 by South-Western, Cengage Learning Termination of a Lease 4. Condemnation: 4. Condemnation: Eminent domain Compensation to the tenant Value is the difference between contract rent and economic rent 5. Notice: 5. Notice: if proper notice is not given, lessee may be held for another term

© 2010 by South-Western, Cengage Learning Termination of a Lease 6. Eviction Actual eviction: Actual eviction: tenant is dismissed, lessor regains possession Unlawful detainer: Unlawful detainer: tenants failure to move Distraint: owner’s right to seize lessee’s personal property

© 2010 by South-Western, Cengage Learning Termination of a Lease 6. Eviction Constructive eviction: Constructive eviction: tenant may terminate if owner interferes with lessee quiet enjoyment Rent abatement: tenant withholds rent

© 2010 by South-Western, Cengage Learning Lease Provision Statue of Fraud: lease for more than one year must be in writing Rent customarily paid in advance Lessee may enjoy without interruption or invasion by lessor

© 2010 by South-Western, Cengage Learning Lease Provision Unexpired portion of lease in reconveyed and accepted Lessee remains liable if property is abandoned Surrender and Acceptance

© 2010 by South-Western, Cengage Learning Lease Provision Assign: Assign: gives remainder of lease entirely Assignee: new lessee Assignor remains liable unless released by owner Assignment & Subletting

© 2010 by South-Western, Cengage Learning Lease Provision Sublet: Sublet: retains interest and responsibility Sublessor: original tenant Subtenant: new lessee May sublet all or part Assignment & Subletting

© 2010 by South-Western, Cengage Learning Lease Provisions Allows the lessee the right to renew upon expiration Option Clause

© 2010 by South-Western, Cengage Learning Lease Provisions Tax participation clause: lessee agrees to pay all or stated portion of any increase Tax Adjustment

© 2010 by South-Western, Cengage Learning Lease Provisions Landlord is not required to make improvements or alterations Lessee must have approval Trade fixtures Improvements

© 2010 by South-Western, Cengage Learning Lease Provisions Uniform Residential Landlord and Tenant Act Tenant responsibilities Obligations of the Parties Keep property in clean and good condition Normal wear and tear May not destroy or damage May not disturb other tenants Pay rent as agreed

© 2010 by South-Western, Cengage Learning Lease Provisions Uniform Residential Landlord and Tenant Act Landlord responsibilities Obligations of the Parties Minimum housing codes Good repair, safe, livable condition Quiet enjoyment Notice

© 2010 by South-Western, Cengage Learning Lease Provisions Returned upon expiation with deductions for repairs One month rent Ceiling on rent charges Burden on landlord Security Deposits Rent Control

© 2010 by South-Western, Cengage Learning Types of Leases Net lease: Net lease: rent includes all or a portion of the property expenses Long term commercial or industrial Triple net lease Gross lease: Gross lease: Rent includes each tenant’s portion of expenses

© 2010 by South-Western, Cengage Learning Types of Leases Percentage lease: Percentage lease: flat fee plus a % of gross income Common in shopping malls Straight, gross or flat lease: Straight, gross or flat lease: lessee’s responsibility limited to the rental payment Apartment lease

© 2010 by South-Western, Cengage Learning Types of Leases Ground lease: Ground lease: leasing of unimproved land Tenant erects the building Long term Recreational area Oil and gas lease Right to explore Royalties belong to landowner

© 2010 by South-Western, Cengage Learning Types of Leases Sandwich lease: Lessor – top Lessee – middle Sublessee – bottom Reappraisal lease: Reappraisal lease: protects the lessor in a long term lease

© 2010 by South-Western, Cengage Learning Types of Leases Sale-leaseback: Sale-leaseback: property is sold on the condition the seller can lease it back Buyer: lessor Seller : lessee Graduated lease: Graduated lease: stepped- up lease Rent increases at stated intervals

© 2010 by South-Western, Cengage Learning Types of Leases Index lease: Index lease: Periodic increase or decrease in rent based on a national index Air lease: Air lease: right to occupy space over a property