Chapter 7 - Real Estate Leases Flashcards
One of the aims of the Uniform Residential Landlord and Tenant Act is to
discourage the use of unfair and overly complex leases
A primary theme of the Uniform Residential Landlord and Tenant Act is that both landlord and tenant
bargain with each other in good faith
In accordance with Statute of Frauds
a five-year lease must be in writing to be enforceable
What happens when a leased property is sold
the buyer acquires title subject to the lease
If a lease does not state a specific ending date, when does it terminate?
when either party gives proper notice
A lease is both
an instrument of conveyance and a contract between principal parties to uphold certain covenants and obligations
The four principal types of leasehold estate are:
estate for years: has a specific lease term
estate from period-to-period: the lease term automatically renews
estate at will: has no specified lease term
estate at sufferance: a tenancy without consent
The legal essence of a valid lease is that it
conveys an exclusive right to use and occupy a property for a limited period of time in exchange for rent and the return of the property after the lease term is over.
A lease conveys a leasehold interest or estate that grants the tenant the following rights during the lease term:
exclusive possession and occupancy
exclusive use
quiet enjoyment
profits from use
The lease defines the tenant’s obligations, which principally are to:
pay the rent on time
maintain the property’s condition
comply with the rules and regulations of the building
In conveying the leasehold estate, the landlord acquires a leased fee estate, which entails the rights to:
receive rent
re-possess the property following the lease term
monitor the tenant’s obligations to maintain the premises
The lease defines the landlord’s obligations, which principally are to:
provide the necessary building support and services
maintain the condition of the property
A valid lease creates obligations that survive the death of the landlord or tenant, with certain exceptions
A tenant’s estate remains liable for payment of rent if the tenant dies; the landlord’s estate remains bound to provide occupancy despite the landlord’s death
The landlord may sell, assign, or mortgage the leased fee interest. However,
transferring and encumbering the leased property do not extinguish the obligations and covenants of a lease. Buyers and creditors, therefore, must take their respective interests subject to the terms of the lease.
State contract laws determine the requirements for a valid lease. These laws generally require the following conditions.
-Parties
-property description
-exclusive possession
-legal and permitted use
-consideration
-offer and acceptance
-signatures
-oral us written from
Lease contract requirements: Parties
The principal parties must be legally able to enter into the agreement; i.e., meet certain age, sanity, and other requirements.
Lease contract requirements: property description
The lease must identify the property by legal description or other locally accepted reference.
Lease contract requirements: Exclusive possession.
The landlord must provide an irrevocable right to exclusive possession during the lease term, provided the tenant meets all obligations.
Lease contract requirements: Legal and permitted use.
The intended use of the property must be legal. A use that is legal but not permitted does not invalidate the lease but constitutes grounds for default.
Lease contract requirements: Consideration.
The lease contract must be accompanied by consideration to the landlord for the rights conveyed. How the consideration is paid does not affect the lease’s validity, so long as the parties comply with the terms of the lease.
Lease contract requirements: Offer and acceptance.
The parties must accept the lease, and communicate their acceptance to the other party, for the lease to take legal effect.
Lease contract requirements: Signatures.
The landlord must sign the lease to convey the leasehold interest. A tenant need not sign the lease, although it is prudent to do so in order to enforce the terms of the lease
Lease contract requirements: Oral versus written form.
Generally, a lease for a period exceeding one year cannot be oral but must be in writing to be enforceable because of the Statute of Frauds.
The clauses of a lease define
he contractual relationship between landlord and tenant
The most important and basic clauses in a lease are
-Rent and security deposit.
-Lease term.
-Repairs and maintenance.
-Subletting and assignment.
-Rules and regulations.
-Improvements and alterations.
-Options
-Damage and destruction.
A rent clause stipulates
the time, place, manner and amount of rent payment. It defines any grace period that is allowed, and states the penalties for delinquency.
In the absence of an explicit term with beginning and ending date, a court will
generally construe the lease to be a tenancy at will, cancelable upon proper notice.
Repairs and maintenance provisions define
the landlord’s and tenant’s respective responsibilities for property repairs and maintenance.
A tenant must abide by all usage
restrictions imposed by the lease’s rules and regulations for the property. These rules aim to protect the property’s condition as well as the rights of other tenants.
An improvements and alterations clause therefore identifies
necessary permissions and procedures, and who owns improvements
An option clause offers a tenant
the opportunity to choose a course of action at some time in the future under certain terms. Typical options are the right to renew the lease, buy the property, and lease additional adjacent space
A damage and destruction provision defines
the rights and obligations of the parties in the event the leased premises are damaged or destroyed.
A gross lease
or full service lease, requires the landlord to pay the property’s operating expenses, including utilities, repairs, and maintenance, while the tenant pays only rent.
A net lease requires a tenant to
pay for utilities, internal repairs, and a proportionate share of taxes, insurance, and operating expenses in addition to rent.
A percentage lease allows the landlord
to share in the income generated from the use of the property. A tenant pays percentage rent, or an amount of rent equal to a percentage of the tenant’s periodic gross sales
The percentage rent may be:
a fixed percent of gross revenue without a minimum rent
a fixed minimum rent plus an additional percent of gross sales
a percentage rent or minimum rent, whichever is greater
Percentage leases are used only for retail properties.
A residential lease may be
a net lease or a gross lease. Usually, it is a form of gross lease in which the landlord pays all property expenses except the tenant’s utilities and water
Residential leases differ from commercial and other types of lease in that
lease terms are shorter, typically one or two years
lease clauses are fairly standard from one property to the next, in order to reflect compliance with local landlord-tenant relations laws
lease clauses are generally not negotiable, particularly in larger apartment complexes where owners want uniform leases for all residents
A commercial lease may be
a net, gross, or percentage lease, if the tenant is a retail business. As a rule, a commercial lease is a significant and complex business proposition. It may involve hundreds of thousands of dollars for improving the property to the tenant’s specifications.
Some important features of commercial leases are:
long term, ranging up to 25 years
require tenant improvements to meet particular usage needs
virtually all lease clauses are negotiable due to the financial magnitude of the transaction
default can have serious financial consequences; therefore, lease clauses must express all points of agreement and be very precise
A ground lease, or land lease, concerns
the land portion of a real property. The owner grants the tenant a leasehold interest in the land only, in exchange for rent.
Ground leases are primarily used in three circumstances:
an owner wishes to lease raw land to an agricultural or mining interest
unimproved property is to be developed and either the owner wants to retain ownership of the land, or the developer or future users of the property do not want to own the land
the owner of an improved property wishes to sell an interest in the improvements while retaining ownership of the underlying land
A proprietary lease conveys
a leasehold interest to an owner of a cooperative. The proprietary lease does not stipulate rent, as the rent is equal to the owner’s share of the periodic expenses of the entire cooperative
The practice of leasing property rights other than the rights to exclusive occupancy and possession occurs
most commonly in the leasing of water rights, air rights, and mineral rights
A landlord or tenant who violates any of the terms and covenants of the lease has
breached the contract and is in default
In the event of a default, the damaged party may pursue court action, including suing for
damages
cancellation of the lease
specific performance
A successful suit for specific performance compels
the defaulting party to perform the contract obligation that was breached
Tenant default occurs most commonly from
failure to pay rent or maintain the premises
The most common form of landlord default is
failure to provide services and maintain the property condition.
In an instance where the landlord’s negligence or disruptive action has rendered the property unoccupiable, a tenant may vacate the premises and declare that the lease is cancelled by default is called
constructive eviction
A lease may terminate for any of the following causes.
-Breach or default
-term expiration
-notice
-voluntary agreement
-property destruction
-condemnation
-foreclosure
-death of tenant, or landlord, with qualifications
-abandonmnent
Causes for lease termination: Breach or default.
Breach of contract or default, as previously discussed, may terminate a lease.
Causes for lease termination: Term expiration.
In a tenancy for years, the lease automatically terminates at the end of the lease term.
Causes for lease termination: Notice
Proper notice by either party may terminate a periodic leasehold, or a tenancy at will
Causes for lease termination: Voluntary agreement.
Both parties can agree to terminate a lease at any time.
Causes for lease termination: Property destruction.
Destruction of the property is grounds for terminating lease obligations.
Causes for lease termination: Condemnation.
A taking by eminent domain proceedings generally terminates a lease.
Causes for lease termination: Foreclosure.
A foreclosure extinguishes all prior interests in a property, including a leasehold.
Causes for lease termination: Death of tenant or landlord, with qualifications.
A lease for tenancy at will terminates on the death of either landlord or tenant. A lease also terminates on the death of the landlord if the landlord held a life estate interest in the property, since the landlord could not have conveyed an interest that extended beyond his or her own interest.
Causes for lease termination: Abandonment.
If a tenant abandons a leased property and demonstrates no intention of fulfilling the obligations of the lease, the landlord may re-take possession and pursue legal recourses for default.
It is important to note that vacating leased premises does not
in itself constitute abandonment, and certainly not if the tenant continues to abide by the lease obligations.
Uniform Residential Landlord and Tenant Act (URLTA) is a
model law enacted as a blueprint for state laws to regulate leasing and management practices of landlords with residential properties.
Uniform Residential Landlord and Tenant Act (URLTA) aims to:
equalize and standardize rights of landlord and tenant
protect tenants from unethical practices
prevent unfair, complex leases and their enforceability
One important effect of URLTA is that it prompted legislation
at the state level that empowered the courts to nullify residential leases that violated URLTA guidelines, particularly where a lease gave unfair advantage to the landlord
URLTA legislation primarily addresses
the lease contract, deposits and advances, obligations of landlord and tenant, the landlord’s rights of access, and standards for eviction
Lease agreements. URLTA sets standards for improving oral, vague, or unbalanced lease agreements. The law’s positions on these issues are
unclear lease term: becomes a periodic tenancy
rent amount: fair market value or court’s opinion
waiving of rights: certain rights cannot be waived
Deposit and advance. URLTA requires leases to be clear about:
maximum deposit amount
the tenant’s right to earn interest on the deposit
commingling deposit or advance with other monies
deadline for returning deposits
procedures and criteria for return of the deposit to the tenant
Landlord’s obligations. Under URLTA, a landlord must:
bargain in good faith with the tenant
provide required maintenance
make repairs
comply with local building codes
provide access and safety services: elevator; fire escapes, etc.
provide a procedure for delivery of official notices
Tenant’s obligations. A tenant must
bargain in good faith
maintain the condition of the leased premises
abide by (legitimate) rules and regulations of the building
refrain from abusing or causing destruction to the property
limit uses to those approved
avoid unduly disturbing other tenants
Access. URLTA attempts to balance
the landlord’s right to access the premises with the tenant’s right of quiet enjoyment
Default and eviction. URLTA attempts to establish
equitable procedures for dealing with lease defaults.
Exemptions. State laws based on URLTA generally do not apply to
transient occupancies, such as hotel and motel rentals, proprietary leases in cooperatives, or to occupancy in a residence that is under a contract for deed.
