Leases

Question 1

Leasing Real Estate

Answer 1

A leasehold is when a person owns the right to use a property without owning the property. There are two general types of leaseholds, rentals and leases. Rentals are automatically renewed and are usually for periods of 30 days. Leases are usually not automatically renewed and last a much longer time (anywhere between three months and 100 years). Additionally, leases often convey more ownership than a simple rental.

Question 2

Eviction

Answer 2

One of the realities of leasing, and renting in general, is eviction. Eviction is the legal process used generally by a landlord or owner to expel a tenant or lessee from possession of the owner’s real property.

Question 3

Actual Eviction

Answer 3

Actual eviction is when a court order is used by a lessor to evict a lessee and the lessee is physically removed from the property. Once the tenant is evicted, they still could be on the hook for the back rent on the property.

Question 4

Constructive Eviction

Answer 4

Constructive eviction is when the tenant is forced to vacate the premises he or she has been leasing because of unfavorable circumstances on the part of the landlord towards the tenant. This means that the tenant’s right to enjoyment of the property is disturbed or impaired or worse. This can be an action that the landlord takes, or it can be an omission on the part of the landlord that adversely affects the tenants. (Mostly this covenant is used in residential leases, but even if the “covenant of quiet enjoyment” is not explicitly written into the lease, it is implied and if the landlord violates this covenant and causes the tenant to leave, that is constructive eviction.)

Question 5

Month to Month Tenancy

Answer 5

Month to month tenancies are created by a rental agreement (usually written but can be oral, though that is never recommended), that allows a lessee to rent from an owner for one month at a time. Generally these tenancies automatically renew every month without either party having to renew a contract. If there is no contract, written or oral, tenancies are considered to be month to month.

Question 6

Habitability Statute

Answer 6

This rule goes along with the covenant of quiet enjoyment (see more detail on this later in this section of the course), and is the implied covenant of habitability. This covenant requires that the landlord or owner make the leased properties habitable and ready for occupancy, and to maintain them in a good state of repair for the duration of the lease, even if the tenant him or herself could make the change.

Question 7

Forcible Detainer Suit

Answer 7

A forcible detainer suit is when a landlord or owner has to begin legal proceedings against a tenant who has overstayed his or her lease. This suit will request that the tenant and their belongings are removed from the landlord’s property. In Texas law, these are also referred to as “forcible entry and detainer” or “forcible detainer” suits. A landlord should start this process by terminating a tenant’s right to possession by giving a notice to the tenant.

Question 8

Leaseholds

Answer 8

There are two main features of leasehold estates: (1) there is possession of the land, but there is no ownership, and (2) the estate has a definite duration.

Question 9

Estate for Years

Answer 9

An estate for years is a leasehold that continues for a definite period of time, which can be anywhere from weeks, to months, to years at a time. There are definite time period terms, and these types of leases do not automatically renew at the end of the lease period.

Question 10

Periodic Estate

Answer 10

Periodic estates are leases that run from a ‘period of time to a period of time,’ indefinitely and these can be oral contracts. Generally, there is no expiration date on these types of leases, which also means that the agreement generally covers how notice will be given for termination of the lease and vacancy, on both sides.

Question 11

Holdover Tenancy

Answer 11

A holdover tenancy, also called a tenancy at sufferance, occurs when a tenant stays beyond his legal tenancy without the landlord/owner’s consent. The tenant wrongfully holds the property against the owner’s wishes. The person still living on the estate may be known as a holdover tenant, but they are no longer a tenant in the normal landlord-tenant sense.

Question 12

Tenancy at Will

Answer 12

A tenancy at will is a type of leasehold estate that exists as long as both the tenant and the landlord want it to last. Also known as an estate at will, a tenancy at will is a typical landlord-tenant relationship, except that the tenancy may be terminated by the landlord or tenant at any time.

Question 13

Full Service Lease

Answer 13

A full service lease is very similar to a gross lease. The tenant is charged a single base fee while the landlord covers all of the costs of ownership. There is one major difference, however, between the gross and the full service lease. A full service lease will often have an “expense stop” provision that may wind up increasing the tenant’s rent.

Question 14

Gross Lease

Answer 14

A gross lease is when the landlord pays all of the costs associated with owning property and the tenant pays a base rent each month. For residential leases, this is the standard. For commercial leases, this is relatively rare. Due to rising costs of ownership, gross leases will generally have shorter terms than other types of leases. These terms are usually around a year.

Question 15

Gross Lease

Answer 15

A gross lease is when the landlord pays all of the costs associated with owning property and the tenant pays a base rent each month. For residential leases, this is the standard. For commercial leases, this is relatively rare. Due to rising costs of ownership, gross leases will generally have shorter terms than other types of leases. These terms are usually around a year.

Question 16

Expense Stop Lease

Answer 16

There are a lot of costs associated with property maintenance. Taxes, utilities, common area maintenance, and insurance are all some of the costs associated with owning property. An expense stop provision is a provision that limits how much a landlord will pay for these expenses.

For instance, if the expense stop provision sets the maximum number at $15,000 and the expenses are $18,000 for a year, then the tenant will be responsible for paying the $3,000 that exceeded the expense stop provision. The limit for the expense stop is usually determined by the “base year.”

Question 17

Net Lease

Answer 17

A net lease is the opposite of a gross lease and is the most common type. Whereas a gross lease has the landlord absorb the costs of property ownership, a net lease has the tenant absorb this cost. The base rent in this kind of arrangement is less and usually the tenant is given more rights to use the property.

A net lease gets its name from the fact that the rent is the “net” amount that the landlord receives, i.e., after expenses. This is in contrast to a gross lease where the rent is the “gross” amount and the landlord needs to deduct property expenses from the rent before arriving at the net profit.

Question 18

Triple Net Lease

Answer 18

The triple net lease is so called because the tenant is required to cover all three net costs. In a triple net lease the tenant is responsible for all property costs. In any property with more than one tenant (common in commercial real estate) the landlord will, in actuality, pay these fees and then charge the tenants for these costs.

Question 19

Modified Net/Modified Gross Lease

Answer 19

A modified net lease, sometimes also called a modified gross lease, is when the landlord pays some of the net costs while the tenant pays others. Other than the fact that the tenant isn’t covering all of the expenses, this kind of lease operates just like a triple net lease. Sometimes modified net leases will also be called single or double net leases depending on whether the tenant is responsible for one or two of the three net expenses.

Question 20

Percentage Lease

Answer 20

There is another common way in which rents are charged for commercial properties. In residential properties, most people feel relatively certain how much money they make. This makes it easy for residential tenants to budget for rent. Businesses, on the other hand, have variable cash flows that can vary by hundreds or even thousands of dollars between months. This makes it harder for these businesses to budget rent payments.

One way that commercial leases get around this issue is to charge a percentage of the profits from the business. The percentage is usually between 5% and 10% of the gross sales of the business. For very small businesses, this could be a low number. The landlord still has to pay for their investment and so the landlord will often set a base rent as the minimum amount that the tenant will pay.

Let us imagine Craig’s Coffee which has a lease that costs 5% of sales and has a base rent of $5,000 a month. If Craig only makes $80,000 in sales, then he pays $5,000 that month even though 5% of his sales is $4,000.

Question 21

Breakpoints

Answer 21

These kinds of leases will have a “breakpoint” at which they will begin paying the percentage. In general the lease goes with the “natural breakpoint.” The natural breakpoint is when the percentage of income equals the base rent.

Question 22

Ground Lease

Answer 22

A ground lease has nothing to do with the amount of the rent and so it is a different classification from the other types of leases.

In most leases, the landlord is responsible for any property improvements. If the tenant requires or desires some form of change to the property then they must negotiate with the landlord to get this change made. A ground lease is designed to work in an entirely different way.

Ground leases are most often done on undeveloped land (all that is being leased is ground). The landlord gives the tenant the right to build upon the land and improve it. At the end of the lease, the property is returned to the landlord with all of the developments, or as otherwise agreed by the parties.

A ground lease is often set up for an extended period of time, often as much as 50 years but usually no less than 10 years. This extended time gives the tenant the ability to profit from the improvements they make to the property.