Chapter 16

Georgia Real Estate An Introduction to the Profession Eighth Edition Chapter 16 Real Estate Leases

Key Terms assignment gross lease leasehold estate lessee lessor net lease option clause quiet enjoyment reversion sublessee sublessor sublet © 2015 OnCourse Learning

The Leasehold Estate The lessee is the tenant. The lessor is the landlord. © 2015 OnCourse Learning

The Leasehold Estate A lease conveys to the lessee the right to possess and use another's property for a period of time. © 2015 OnCourse Learning

The Leasehold Estate During this time the lessor possesses a reversion that entitles the lessor to retake possession at the end of the lease. © 2015 OnCourse Learning

The Leasehold Estate A lease separates the right to use property from the property’s ownership. The property owner is denied use of the property but receives rent. © 2015 OnCourse Learning

The Leasehold Estate A tenant's right to occupy the land and/or buildings is called a leasehold estate. © 2015 OnCourse Learning

The Leasehold Estate The two most commonly found leasehold estates are the periodic estate and the estate for years. © 2015 OnCourse Learning

The Leasehold Estate The periodic estate is one for a definite period of time with an automatic renewal if not terminated. A month-to-month lease is an example of this. © 2015 OnCourse Learning

The Leasehold Estate An estate for years is a lease with a specific starting date and a specific ending date. It can be for any length of time, does not automatically renew itself, and does not require notice to terminate. © 2015 OnCourse Learning

The Leasehold Estate An estate at will is for an indefinite period of time and can be terminated by either the landlord or the tenant giving notice. In Georgia, the notice requirement for the tenant is 30 days and the requirement for the landlord is 60 days. © 2015 OnCourse Learning

The Leasehold Estate A tenancy at sufferance occurs when a tenant stays beyond the legal tenancy without the consent of the landlord. The tenant is called a holdover tenant. © 2015 OnCourse Learning

The Leasehold Estate No advance notice is required for eviction. A holdover tenant differs from a trespasser in that the original entry onto the property was legal. © 2015 OnCourse Learning

Creating a Valid Lease As a conveyance, the lease conveys rights of possession to the tenant in the form of a leasehold estate. As a contract, it contains provisions for the payment of rent. © 2015 OnCourse Learning

Creating a Valid Lease For a valid lease to exist, it must meet the usual requirements of a contract: The parties must be legally competent there must be a mutual agreement lawful objective sufficient consideration © 2015 OnCourse Learning

Creating a Valid Lease The main elements of a lease are: the names of the lessee and lessor description of the premises agreement to convey provisions for the payment of rent starting date and duration of the lease signatures of the parties © 2015 OnCourse Learning

Creating a Valid Lease In Georgia, a lease for a term longer than one year must be in writing to be enforceable in a court. © 2015 OnCourse Learning

Provisions of the Lease The lease sets forth the agreement between the tenant and the landlord. Due to their complexity, commercial and industrial property leases will require legal counsel. © 2015 OnCourse Learning

Provisions of the Lease Term The beginning and ending of the lease should be clearly stated along with rights and methods of termination. © 2015 OnCourse Learning

Provisions of the Lease Use Restrictions There can be restrictions such as the number of occupants, the right to have pets, operation of the business from the least home, types of vehicles that can be parked, and so on. © 2015 OnCourse Learning

Provisions of the Lease Maintenance The lease should clearly state who is responsible for the maintenance of the property. © 2015 OnCourse Learning

Provisions of the Lease Security Deposit The security deposit is paid by the tenant as security for breach of the lease or damage to the property. © 2015 OnCourse Learning

Provisions of the Lease Quiet Enjoyment The tenant has the right to use the property for the purposes for which they have leased it. If that right to use is destroyed by the landlord, the tenant may claim a constructive eviction, leave the property and have no further responsibility to pay rent. © 2015 OnCourse Learning

Provisions of the Lease Disrepair The tenant may not cause undue harm to the property. © 2015 OnCourse Learning

Provisions of the Lease Destruction of the premises A good lease would recommend that the tenant have renters insurance and stipulate that the landlord has no liability for damages out of their control. © 2015 OnCourse Learning

Landlord – Tenant Laws The landlord must maintain the premises in a fit condition for a living, and the tenant is to keep the unit clean and not damage it. © 2015 OnCourse Learning

Setting Rents Under a gross lease, the tenant pays a fixed rent, and the landlord pays all the operating expenses of the property. © 2015 OnCourse Learning

Setting Rents If a tenant wants a longer lease term, the lease may have a step up, or graduated rent. For example, each year the rent per square foot would increase at predetermined amounts. © 2015 OnCourse Learning

Setting Rents Office and industrial leases often include an escalator or participation clause. This allows the landlord to pass along to the tenant increases in property taxes, utility charges, and maintenance. © 2015 OnCourse Learning

Setting Rents When a tenant pays for all the property taxes, insurance, repairs, utilities and so on, in addition to the base rent, this is called a net lease. © 2015 OnCourse Learning

Setting Rents Another system for setting rents is the percentage lease, where the owner receives a percentage of the tenant’s gross receipts as rent. © 2015 OnCourse Learning

Setting Rents Another way of setting rents on long-term leases is to create an index lease. The rent would be indexed to some economic indicator. If there is inflation, rents increase; if there is deflation, rents decrease. © 2015 OnCourse Learning

Option Clauses Option clauses give the tenant the right at some feature time to purchase or lease the property at a predetermined price. © 2015 OnCourse Learning

Assignment and Subletting Unless otherwise provided in the lease contract, a lessee may assign the lease or sublet. An assignment is the total transfer of the lessee's rights to another person. © 2015 OnCourse Learning

Assignment and Subletting The assignor remains liable for the performance of the contract, unless released in writing by the landlord. To sublet means to transfer only a portion of the rights held under a lease. © 2015 OnCourse Learning

Assignment and Subletting The original lessee is the sublessor. The sublessee pays rent to the lessee who, in turn, remains liable to the landlord for rent on the entire premises. © 2015 OnCourse Learning

Lease Termination Most leases terminate because of the expiration of the term of the lease. A lease can be terminated if the landlord and the tenant mutually agree. This should be done in writing. © 2015 OnCourse Learning

Eviction If a tenant fails to live up to the terms of the lease agreement, the landlord has grounds for eviction. Usually this is for nonpayment of rent, but it can be for violation of some other aspect of the agreement. © 2015 OnCourse Learning

Eviction An actual eviction process begins with the landlord having a notice served on the tenant requiring the tenant to comply with the lease agreement or move out. If the tenant neither complies nor vacates, the landlord takes the matter to court. © 2015 OnCourse Learning

Eviction The court will terminate the tenant‘s lease rights and authorize a sheriff to go on the premises and force the tenant out. © 2015 OnCourse Learning

Eviction A lease agreement may also be terminated through constructive eviction. This occurs when the landlord does not keep the premises fit for occupancy. © 2015 OnCourse Learning

Eminent Domain The government, under its right of eminent domain, can also terminate a lease, but must provide just compensation. © 2015 OnCourse Learning

Foreclosure A mortgage foreclosure can also bring about the lease termination unless the mortgage contained a nondisturbance clause. © 2015 OnCourse Learning

Foreclosure A nondisturbance cause is an agreement of a lender to not disturb a performing tenant on a valid lease in the event the lender has to foreclose. © 2015 OnCourse Learning