Leases and Property Management

Question 1

elements required of a lease

Answer 1

• Both parties must be legally capable of entering into a contractual relationship.
• There must be a mutual agreement (also called a meeting of the minds).
• There must be consideration.
• It must have a legal purpose.

Question 2

A gross lease

Answer 2

is the type of lease used for apartments and other residences. The rent paid by the tenant or lessee to the landlord or lessor is gross income to the landlord out of which the landlord will pay the operating expenses of the property (repairs, maintenance, and other operating expenses), as well as property insurance premiums and taxes from the rent.

Question 3

A net lease

Answer 3

provides for the tenant to pay a rent amount that is net income to the landlord. In addition to the rent, the tenant also would pay some or all of the property expenses, property taxes, and property insurance premiums separately. The property expenses would not include the debt service (the mortgage payments) of the lessor.

Question 4

a single-net lease

Answer 4

Under a single-net lease, the tenant pays operating expenses.

Question 5

a double-net lease

Answer 5

Under a double-net lease, the tenant pays operating expenses and property taxes.

Question 6

a triple-net lease

Answer 6

Under a triple-net lease, the tenant pays operating expenses, property taxes, and property insurance.

Question 7

A flat lease (or fixed lease or straight lease)

Answer 7

A flat lease (or fixed lease or straight lease) provides for a fixed rental amount to be paid periodically throughout the term of the lease (e.g., $1,000 per month).

Question 8

A graduated rental lease

Answer 8

A graduated rental lease provides for rent to gradually step up at regular specified intervals (e.g., $1,000 per month for the first six months, $1,250 per month for the next six months, and $1,350 per month for the remainder of the three-year term).

Question 9

Index leases (or escalation leases)

Answer 9

contain an escalator clause that is used to compensate for inflation and rising operating costs.
For example, it may provide that the rent amount is to be adjusted every six months according to percentage changes in the cost-of-living index, or it may allow for adjustments of rental payments to cover such contingencies as property taxes, insurance, or maintenance.

Question 10

A percentage lease

Answer 10

is a lease in which the rent depends on the volume of the tenant’s gross business. It most often is used with retail space. It provides that some or all of the rent will be a percentage of the lessee’s gross sales or income. The result is that the landlord will have an interest in the tenant’s business. Therefore, the lease may require landlord approval of certain aspects of the operation of the business, such as hours of operation.

Question 11

a recapture clause

Answer 11

The lease also may include a recapture clause, providing for termination if the tenant does not realize a specified minimum level of business.

Question 12

a covenant of quiet enjoyment

Answer 12

This is a promise that the lessee will enjoy possession free from any interference from the lessor during the term of the lease. The lessor cannot evict the lessee unless the eviction is performed by legal process as a remedy for breach of conditions or default (not performing a legal duty) by the lessee.

Question 13

Eviction

Answer 13

is a process by which a tenant is deprived of the possession, use, and enjoyment of the premises.

Question 14

Actual eviction

Answer 14

is a court-enforced order removing a lessee from the property. It results in physical ouster of the lessee.
The landlord, however, has no right to physically remove the tenant on their own.

Question 15

Constructive eviction

Answer 15

occurs whenever any act or omission of the landlord deprives the tenant of the use and enjoyment of the premises.
Constructive eviction would result when leased premises reach such a physical condition because of lack of attention by the landlord that the tenant is unable to occupy them for the purpose intended.
It would be justification for the tenant abandoning the premises and terminating the rental agreement.

Question 16

An option to renew

Answer 16

in a lease gives the tenant the option to renew the lease at a preset rent amount at the expiration of the term.

Question 17

an automatic extension clause

Answer 17

provides that the lease automatically renews at the same terms as the original lease unless one party notifies the other.
Only the tenant can decide whether to renew under the option to renew; either party can decide not to renew under the automatic extension clause.

Question 18

An expansion option

Answer 18

would give the lessee the option to expand the amount of space leased. This may pose a problem for the landlord, particularly if the property is fully tenanted and established.

Question 19

A lease with option to purchase (lease-option)

Answer 19

gives the tenant the right to buy the property they are leasing at preset terms before the end of the term of the lease. If the tenant exercises the option, the landlord must sell.

Question 20

A right of first refusal

Answer 20

gives the lessee the first opportunity to lease additional space or to purchase the property if the landlord decides to offer additional space for lease or the property for purchase.
It is a contract that should be in writing if dealing with land and should be supported by consideration.

Question 21

An assignment

Answer 21

is a transfer by the tenant of their entire interest in the property to a third party. That third party is an assignee and would become the tenant, with the same rights and obligations as the original lessee, including the right to exercise an option held by the assignor.

Question 22

A surrender

Answer 22

A surrender is an agreement by which the tenant terminates the lease and surrenders possession of the premises to the landlord, who accepts the surrender. A surrender clause spells out the surrender terms.

Question 23

Fixed expenses

Answer 23

are expenses that do not vary based on the level of occupancy, such as property taxes and insurance.

Question 24

Variable operating expenses

Answer 24

are expenses that management generally has some ability to control and that are influenced by occupancy levels:

• Recurring expenses are those that occur on a regular basis, such as the management fee, decorating costs, and employee wages.
• Nonrecurring expenses are those, such as fire damage repair, that might occur only once.

Question 25

Reserves

Answer 25

cover the cost of structural parts that require periodic replacement (e.g., roof, appliances, carpets) or unforeseen contingencies.

Question 26

General Liability Insurance

Answer 26

This insurance provides coverage for damages if the property manager or owner or their employees cause bodily damage or property damage to a third party.

Question 27

Property Insurance

Answer 27

The owner needs insurance (property) on the building they own and that should include any personal property of the owner, such as coin-operated washers and dryers. The property manager will need this coverage in the form of a business renter’s policy to cover office equipment, computers, and so on.

Question 28

Business Owners Policy

Answer 28

This policy often covers such items as business interruption insurance, vehicle insurance, and crime insurance.
Workers’ Compensation: Many states require businesses to carry this insurance, which provides wage replacement and medical insurance for on the job injuries.

Question 29

Errors and Omissions Insurance

Answer 29

The type of coverage is especially important for the property manager if they find themselves with a legal problem.

Question 30

Renters Insurance

Answer 30

Many rental contracts require the tenant to carry renters insurance in case the property is damaged by such things as fire or water damage.