Property Management - Part 2 - Chapters 76-78

Question 1

Distinguish the various types of commercial lease agreements and use them to meet the objectives of the landlord and tenant

Answer 1

A lease agreement is a contract of conveyance entered into by a landlord and tenant addressing the tenants primary responsibilities:

• the payment of money and
• the care of the real estate.

The lease agreement also acts to convey a possessory interest in real estate to the tenant. By entering into a lease agreement and delivering possession to the tenant, the landlord conveys to the tenant the exclusive right to occupy a parcel of real estate, or space in a parcel, for a fixed period of time. On expiration of the term of the lease, the right of possession to the real estate reverts to the landlord.

In reference to commercial leases, the responsibility for the payment of operating costs is classified as either:

• a gross lease or
• a net lease

Variations and modifications exist for both types of commercial leases. They include:

• Gross Lease
• Full Service Gross Lease
• Modified Gross Lease also called a NET Lease
• Triple Net Lease, also called the Net Net Net Lease
• Pure-Net Lease

A lease agreement containing a term of occupancy exceeding 1 year is required to be written to be enforceable.

Question 2

Identify the three categories of activities the provisions contained in the written lease agreement fall into

Answer 2

The provisions contained in a written lease agreement fall into one of three categories of activities:

• CONVEYANCE of the leasehold interest
• RENT the money obligation/debt of the tenant
• CARE AND MAINTENANCE responsibilities of the tenant and the landlord of the leased premises and other property operating expenses.

A commercial lease agreement form has 5 main parts:

• IDENTIFICATION OF THE PARTIES and the premises, and the conveyance and terms of the lease
• RENT PROVISIONS setting the terms for payments of rent and other amount owed, collectively called
• USE MAINTENANCE PROVISIONS setting for the responsibility for care and maintenance of the lease property
• MISCELLANEOUS PROVISIONS for circumstances specific to the transaction
• SIGNATURES of the parties

Question 3

ad valorem taxes

Answer 3

AD VALOREM TAXES are real estate taxes imposed on property based on its assessed value.

Typically, the longer the term of the commercial lease, the more extensive the shift of ownership costs and responsibilities to the tenant including:

• property operating expenses
• all or future increase in real estate taxes, called ad valorem taxes
• Hazard insurance premium
• repair and maintenance
• the risk of increased interest payments due to arm mortgages encumbering the property

Question 4

attorney fee provisions

Answer 4

AN ATTORNEY FEE PROVISION enables the landlord to recover costs incurred to enforce payment of rent or evict the tenant. Regardless of how an attorney fee provision is written, it is a provision in an agreement permitting the prevailing party in a dispute to receive attorney fees when litigation arises due to the agreement.

Question 5

choice-of-law provision

Answer 5

A CHOICE OF LAW PROVISION in a commercial lease agreement assures application of California law when a dispute arises between the tenant and the landlord. Choice-of-law provision is a clause which sets the state law applicable in the event of a dispute.

Application of California law in disputes over property located in California add stability to the legal expectations of the landlord and the Tenant it also produces greater commercial certainty in real estate transactions and stabilizes property values.

Question 6

full-service gross lease

Answer 6

A FULL SERVICE GROSS LEASE is a commercial lease when the landlord of an office building retains the responsibility for payment of all costs and care and maintenance, including the tenants utilities and janitorial services.
**landlord pays the tenants utilities and janitorial services.

Question 7

gross lease

Answer 7

A GROSS LEASE is a commercial lease specifying that the tenant pays for their utilities and janitorial fees, but unless modified, is not responsible for any other care, maintenance or carrying cost of the property.
***tenants pays for their own utilities and janitorial services

Question 8

net lease also called a modified gross lease

Answer 8

A MODIFIED GROSS LEASE is also called a NET LEASE. Conversely, to a full service gross lease, a commercial lease that transfers to the tenant the obligation to pay some or all of the costs and responsibilities of ownership, in addition to utilities and janitorial services, is referred to as a modified gross lease or net lease. A net lease is a commercial lease which transfers to the tenant the obligation, unless modified, to pay all the costs and ownership in addition to utilities and janitorial services.

**THE MODIFIED GROSS OR NET LEASE IS THE MOST COMMONLY USED COMMERICAL LEASE AGREEMENT. **

Note a lease becomes more net (and less gross) for the landlord as they shift more ownership responsibilities and operating cost to the tenant.

Question 9

triple-net lease or net net net lease

Answer 9

A TRIPLE NET LEASE or NET NET NET LEASE is a commercial lease that passes responsibility for all cost and maintenance of the property to the tenant either directly or through Common Area Maintenance Charges - CAMs.

**Under a triple net lease, THE LANDLORD IS ONLY RESPONSIBLE for capital Improvements, such as replacement of structural components.

Question 10

pure-net lease

Answer 10

A PURE NET LEASE is a commercial lease in which a tenant assume absolutely all the obligations of ownership. In this case the landlord merely collects rent payments without concern for their management of the property.

Question 11

reasonable certainty

Answer 11

REASONABLE CERTAINTY is the degree of certainty expected from a reasonable person. Regarding the commercial lease agreement it needs to describe the premises to be released so the premises can be located with reasonable certainty.

Question 12

reversionary interest

Answer 12

A REVERSIONARY INTEREST is a future interest a person retains on the grant of property which reverts to the person on the occurrence of an event. In the case of commercial lease agreements on expiration of the lease term, the right of possession to the real estate reverts to the landlord.

During the lease term when the tenant holds the right to possession, the landlord, as the owner of the fee simple, holds a reversionary interest in the leased parcel or space. Note once the landlord and tenant have entered into a lease agreement, the right of possession of the leased real estate is controlled by landlord/tenant law, not contract law.

Question 13

heirs, assigns and successors clause

Answer 13

THE HEIRS, ASSIGNS and SUCCESSORS CLAUSE is a clause in a lease agreement which binds those who later take the position of the landlord or tenant to the existing lease or rental agreement through a:

• Grant
• Assignment
• Assumption

Question 14

leasehold estate

Answer 14

A LEASEHOLD ESTATE is also simply known as A LEASE

Question 15

Apply the rules a landlord adheres to when changing the terms of a month2month tenancy

Answer 15

A residential or commercial landlord or property manager may serve a Notice Of Change In Rental Terms on any day during the rental period.

For rent increases of 10% or less, a 30-day notice is required.

For rent increases greater than 10%, a 60-day notice is required.

The new rental terms stated in the notice do not take effect until expiration of the notice.

Question 16

Observe the proper procedure for serving the tenant with notice of change in rental terms

Answer 16

All conditions in a residential or commercial month-to-month rental agreement may be changed on written notice by the landlord, but not the tenant. This notice is commonly referred to as a Notice Of Change In Rental Terms. To be enforceable, the notice needs to be served on the tenant in the same manner as a three day notice to pay rent or quit.

Question 17

notice of change in rental terms

Answer 17

A NOTICE OF CHANGE IN RENTAL TERMS is a written notice served on the tenant noting changes in the terms or conditions of a month-to-month also called a Periodic rental agreement.

Question 18

notice of intent to vacate

Answer 18

A NOTICE OF INTENT TO VACATE is a tenants notice to the landlord signifying their intent to vacate the leased property.

Question 19

Notify a residential tenant of their right to request a joint pre-expiration inspection of their unit prior to vacating

Answer 19

A residential landlord is to notify a tenant in writing of the tenants right to request a joint pre expiration inspection of their unit prior to the tenant vacating the unit. The Joint pre expiration rules require residential landlords to advise tenants of the repairs or conditions the tenant needs to perform or maintain to avoid deductions from the security deposit

When a residential tenant request the pre expiration inspection in response to the notice, the joint pre expiration inspection is to be completed no earlier then 2 WEEKS before the expiration date of:

• the lease term
• a notice to vacate initiated by either the landlord or the tenant.

Question 20

Apply the differing residential and commercial security deposit refund requirements

Answer 20

Within 21 days after a residential tenant vacates the property, the residential landlord is to:

• complete a final inspection of the premises
• refund the security deposit, less reasonable deductions
• provide the tenant with an itemized statement of deductions taken from the security deposit.

Also, the residential landlord is to attach copies of receipts, invoices and or bills to the itemized statement showing charges incurred by the landlord that were deducted from the security deposit.

Then, within 14 days after completion of repairs or final receipt of bills, invoices or receipts for the repairs and materials, the landlord is to deliver the tenant with a final itemized security deposit refund statement with attached receipts and invoices. it is not necessary for the landlord to provide copies of receipts bills or invoices for repair work or cleaning to the tenant if

• the total deductions from the security deposit to cover the cost of repairs and cleaning is equal to or less than $125
• the tenant signs a waiver of their right to receive bills when or after notice to terminate their tenancy is given.

Note if the residential landlord is not required to provide copies of receipts to the tenant the tenant may still request copies of receipts for repair work for cleaning within 14 days after receipt of the itemized security deposit refund statement. The landlord is then to provide copies of the documents within 14 days after the receipt of the tenants request.

A COMMERCIAL lease does not need to set forth:

• the circumstances under which a tenant security deposit will be refunded
• a time period within which a landlord will refund a tenant security deposit

However a commercial landlord is to refund the security deposit within 30 days after the transfer of possession of the property from the tenant to the landlord if:

• a refund period is not agreed to and
• the commercial landlord takes no deductions from the security deposit

The commercial landlord is not required to provide tenants with an itemized statement of deductions when the security deposit is refunded. However, a prudent commercial landlord provides tenants with an itemized statement when they vacate, unless a full refund is made.

Question 21

final inspection

Answer 21

A FINAL INSPECTION is an inspection of the premises conducted by the landlord within 21 days after a residential tenant vacate the property. Sometime within a period of 21 days after a residential tenant vacates, the residential landlord is to:

• complete a final inspection of the premises
• refund the security deposit, less reasonable deductions
• provide the tenant with an itemized statement of deductions taken from the security deposit.

Question 22

joint pre expiration inspection

Answer 22

The purpose for the JOINT PRE-EXPIRATION INSPECTION, also called an INITIAL INSPECTION, is to require residential landlords to advise tenants of the repairs or conditions the tenant needs to perform or maintain to avoid deductions from the security deposit. The Joint pre expiration inspection is an inspection conducted by a residential landlord or the property manager.

Ideally the notice advising the tenant of their right to a joint pre expiration inspection is given to the tenant at least 30 days prior to the end of the lease term. In the case of a rental agreement, the inspection rights notice is provided immediately upon receiving or serving a 30-day notice to vacate. A period of 30 days allows the tenant time to request and prepare for the inspection. After the inspection, the tenant has time to remedy any repairs or uncleanliness the landlord observe during this inspection. Thus the tenant is provided time to avoid security deposit deduction.

Question 23

security deposit

Answer 23

The SECURITY DEPOSIT provides a source of recovery for money losses incurred due to a tenants default on obligations agreed to in the rental or lease agreement.

The amount of security deposit the RESIDENTIAL landlord may demand and receive is controlled by code. Residential security deposits are limited to:

• 2 months rent for unfurnished units
• 3 months rent for furnished units

The amount of security deposit the COMMERCIAL landlord may demand and receive may vary at the landlord’s discretion. Different from residential security deposits, a commercial landlord has the discretion to set security deposit amounts under a rental or lease agreement without limitations. Amount set for commercial deposits are generally based on the tenants type of operations and their accompanying risks of damage they posed to the lease property

Question 24

statement of deficiencies

Answer 24

A STATEMENT OF DEFICIENCIES is a document a residential landlord presents to a vacating tenant specifying any repairs or cleaning to be completed by the tenant to avoid deductions from the security deposit.

On completion of the joint pre expiration inspection, the landlord needs to give the tenant an itemized statement of deficiencies. The landlord’s pre expiration inspection statement needs to be prepared at the time of the inspection and delivered to the tenant by either handing the statement directly to them or leaving the statement inside their house if a tenant was not present.

Question 25

Timeline of Residential Vacating and Security Deposit Refund

Answer 25

30 Days prior to lease being up a Joint Pre-Expiration Inspection Notice is given to tenant by landlord

30 days Notice to Vacate is given to landlord by tenant in a month to month rental:

14 Days prior to vacating:

• Pre-expiration Inspection takes place
• Land lord delivers a Statement of Deficiencies

Person vacates

Within 21 days after the tenant vacates:

• Landlord Completes final inspection
• Landlord Refunds security deposit
• Landlord Provides tenant w/ Itemized Statement of Deductions
• Landlord Attaches any bills, receipts invoices, etc

If repairs by the landlord are not completed and the costs are unknown within 21 days after the tenant vacates, the landlord May deduct a good faith estimated amount of the cost of repairs from the tenant security deposit.

This estimate is stated on the itemized security deposit refund statement. This statement is to disclose the name address telephone number of any person providing repair work for the incomplete repairs.

Then, within 14 days after completion of repairs or final receipt of bills, the landlord is to deliver to the tenant a final itemized security deposit refund statement with attached receipts and invoices.