Ch 24: Leasehold Estates

Question 1

A lease may be verbal and NOT written if the lease term is:

a. Two years or less
b. Four years or less
c. One year or less
d. Three years or less

Answer 1

c. One year or less

The Statute of Frauds states that a verbal lease can be enforced in a court of law if the period of performance is for one year or less.

Question 2

Upon the expiration of the lease, the lessor received the complete Bundle of Rights by:

a. Remainder
b. Redemption
c. Recovery
d. Reversion

Answer 2

d. Reversion

During the lease period the landlord has given up the right to occupy the leased property to the tenant. At the end of the lease period the right to occupancy reverts to the landlord. Reversion means to come back.

Question 3

An estate at will is a/an:

a. form of co-ownership
b. life estate.
c. tenancy of uncertain duration
d. inheritance of property by will

Answer 3

c. tenancy of uncertain duration

An estate at will is a tenancy of uncertain duration. Even though it is with the permission of the landlord, the tenancy can be terminated by verbal notice with reasonable time given to vacate.

Question 4

Which of the following CANNOT be owned in fee simple?

a. A condominium
b. Property owned as tenants in common
c. Property owned as a joint tenant
d. A leasehold right

Answer 4

d. A leasehold right

A fee simple estate is a freehold estate. Leasehold rights would be a leasehold estate.

Question 5

A woman verbally agreed to a six-month lease, but prior to occupancy she changed her mind. Her verbal agreement is:

a. Illegal
b. Voidable by her
c. Enforceable
d. Unenforceable because of the Statute of Frauds

Answer 5

c. Enforceable

A lease for one year or less is not covered by the Statute of Frauds and can therefore be an oral agreement that is enforceable.

Question 6

If you hold a freehold estate, you hold all of the following EXCEPT:

a. life estate
b. fee simple estate
c. an estate of inheritance
d. an estate for years

Answer 6

d. an estate for years

An estate for years is a leasehold estate.

Question 7

A verbal lease for nine months starting in six months would be:

a. unenforceable
b. a unilateral contract
c. valid
d. illegal

Answer 7

a. unenforceable

The verbal lease described is unenforceable because the period of performance exceeds one year.

Question 8

Which of the following contracts does NOT have to be in writing to be enforceable?

a. Promise to pay a debt of another person.
b. Contract for sale of real property valued at less than $500
c. Six months lease starting in seven months
d. One year lease starting immediately

Answer 8

d. One year lease starting immediately

According to the Statute of Frauds, a lease can be written or, if for a period of one year or less, oral.

Question 9

The landlord under a lease:

a. Subrogates his or her interest
b. Subordinates his or her interest
c. Assigns his or her interest
d. Alienates his or her interest

Answer 9

b. Subordinates his or her interest

The landlord lowers his/her right of occupancy to the tenant who now has the primary occupancy right. Subordination is the lowering of ones existing right for the benefit of another.

Question 10

Bill occupies an apartment under written lease for one-year which expired May 1. He has paid his rent each month since then. In order to cancel this tenancy, the landlord MUST serve the tenant with:

a. Notice by May 1st
b. No notice required
c. Ten day notice
d. One month notice

Answer 10

d. One month notice

The actions of the landlord and the tenant since the expiration of the estate for years have created an estate from year to year. Since the rental payments have been paid for monthly periods, each party is required to give one month notice of their intent to cancel the tenancy.

Question 11

Definite duration refers to a/an:

a. Periodic tenancy
b. Estate at will
c. Estate for years
d. Life estate

Answer 11

c. Estate for years

In this question based on the answer choices definite duration means an estate for years, since such a lease extends for a definite term or a set ending date.

Question 12

Tenant Andrew’s lease has expired and his landlord has indicated that Andrew may remain until the sale of the building is closed. Andrew will be charged rent for the time he occupies the building. Andrew’s tenancy is called a:

a. Tenancy at sufferance
b. Tenancy for years
c. Month to month tenancy
d. Tenancy at will

Answer 12

d. Tenancy at will

A tenancy at will is created when the lessor agrees to allow a lessee to retain possession of a property for a short period of time after the more formal agreement has expired.

Question 13

In a net lease the lessee may pay all of the following EXCEPT:

a. real property taxes
b. utilities
c. insurance
d. mortgage principal and interest

Answer 13

d. mortgage principal and interest

In a net lease the landlord generally pays the mortgage payment.

Question 14

The lessee MOST likely pays fire insurance under a:

a. Commercial lease
b. Gross lease
c. Percentage lease
d. Triple net lease

Answer 14

d. Triple net lease

Operating expenses, such as fire insurance, are generally paid by the tenant or lessee under the terms of a net lease or a triple net lease.

Question 15

What is the advantage to the lessee in a commercial sale/leaseback?

a. Appreciation
b. Easier financing of improvements
c. Deductibility of rent
d. Depreciation

Answer 15

c. Deductibility of rent

The lessee in a sale/leaseback transaction no longer owns the property so depreciation for tax purposes is not available and any appreciation will not benefit the former owner. The financing of leasehold improvements is generally more difficult than financing owned property. The rent paid under the leaseback is generally an income tax deduction, which is an advantage.

Question 16

To provide protection against inflation a lessor most likely would want the inclusion of a lease clause relating to:

a. CPI
b. Holdover rights
c. Subordination
d. GNP

Answer 16

a. CPI

In a gross lease the property owner receives a set rental amount and pays the operating expenses out of the rent collected. When there is a long-term gross lease the landlord will request an Index Clause to protect against the effects of inflation and other increases in operating costs. An index clause allows for periodic increases in base rental fees based on a predetermined gauge such as the Consumer Price Index (CPI).

Question 17

Mr. Smith is a tenant under a percentage net lease on commercial property. When the owner sells the real estate to a new buyer who plans to occupy the property, what happens to Mr. Smith’s lease?

a. The new owner may restructure the lease terms unilaterally.
b. It is still binding and Smith continues to pay his rent to the original owner
c. It is canceled
d. It is still binding and smith pays his rent to the new owner under the terms of the original lease

Answer 17

d. It is still binding and smith pays his rent to the new owner under the terms of the original lease.

A lease obligation of the owner of the property to allow the occupancy of the subject property does not terminate on the sale of the property by the landlord. The lease obligation remains an encumbrance that the new owner must honor.

Question 18

A tenant who pays rent and some or all of the ownership charges has a lease called:

a. a net lease
b. a percentage lease
c. a holdover lease
d. a gross lease

Answer 18

a. a net lease

A net lease, often used in commercial, industrial and retail properties, requires the tenant to pay its proportionate share of various operating and maintenance expenses.

Question 19

What type of lease is best for a commercial tenant during an inflationary period?

a. A net lease
b. A percentage lease
c. An index lease
d. A gross lease

Answer 19

d. A gross lease

During an inflationary period the operating expenses would be increasing and paid by the landlord while under a gross lease the rent would not change. This benefit to the tenant would be somewhat reduced if the gross lease had an index clause.

Question 20

The relationship of the assignee to the original lessor is one of:

a. secondary liability
b. tenancy
c. sub-tenancy
d. agency

Answer 20

b. tenancy

The original tenant has assigned all of the rights and obligations to the assignee. The assignee becomes the tenant, so the relationship between the landlord (the original lessor) and the assignee is one of tenancy. The assignor, the original tenant, has secondary liability meaning if the assignee does not pay the rent or meet its assumed obligations the original tenant can be held liable.

Question 21

Gail leased a commercial building to Sam for ten years. After six months, Sam moved out without notice. Gail advertised for a tenant. Gail’s actions most likely relate to:

a. liquidated damages
b. mitigation of damages
c. severance damages
d. punitive damages

Answer 21

b. mitigation of damages

A landlord has an obligation to reduce the damages when a tenant defaults on the terms of the lease. Mitigation means to reduce.

Question 22

Under an assignment of a lease, the assignor becomes:

a. the lessor
b. the sub-lessee
c. secondarily responsible for payment of rent
d. responsible for payment of rent

Answer 22

c. secondarily responsible for payment of rent

Under an assignment of a lease the new lessee (the assignee) pays the rent directly to the lessor; however, the assignor is responsible for the payment of the rent if the assignee defaults in its payment. The assignor’s potential liability is known as contingent liability or secondary liability.

Question 23

A lease for a definite period of time is LEAST likely to be terminated by:

a. Expiration of its term
b. A surrender of the premises
c. The foreclosure of a prior recorded mortgage
d. The death of the lessor

Answer 23

d. The death of the lessor

The death of the lessor, the landlord, would not terminate an estate for years and the heirs of the landlord would be required to honor the lease.

Question 24

When economic rent exceeds contract rent, an economic decision of the lessee would be to:

a. Sublet
b. Assign the lease
c. Renegotiate the lease
d. Surrender the lease

Answer 24

a. Sublet

If economic rent exceeds the contract rent the tenant can generally rent the leased premises for more than the rental obligation to the landlord. Often in that situation, when the tenant no longer needs the space the tenant will sublet the space to a sub-tenant.