1. Real Estate Principles, 9th Edition
By Charles F. Floyd
and Marcus T. Allen

2. © Dearborn Real Estate Education 2008
Chapter 7
Real Estate Leases
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3. © Dearborn Real Estate Education 2008
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
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4. 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.
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6. © 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
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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
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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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9. 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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10. 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”
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11. © 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
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12. 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 on the World Wide Web.
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