Unit 18 - part 1 Flashcards
Lease
The foundation of the relationship between a property owner and tenant is the lease. A lease is a contract between a lessor (the owner of real estate, or landlord)
and a lessee (the tenant).
The landlord retains a reversionary right to possession after the lease term expires.
The statute of frauds in most states requires lease agreements for more than one year to be in writing to be enforceable. In general, oral leases for one year or less that can be performed within a year of their making are enforceable. A written lease should be executed (signed) by both the lessor and the lessee.
Leasehold Estates
A tenant’s right to possess real estate for the term of the lease is called a leasehold (less-than-freehold) estate. A leasehold is generally considered personal property.
Just as there are several types of freehold (ownership) estates, there are different kinds of leasehold estates.
- Estate for Years
- Estate From Period to Period
- Estate at Will
- Estate at Sufferance
Estate for Years
sometimes called an estate for term
An estate (tenancy) for years is a leasehold estate that continues for a definite period. That period may be years, months, weeks, or even days.
An estate for years (sometimes called an estate for term) always has specific starting and ending dates. When the estate expires, the lessee is required to vacate the premises and surrender possession to the lessor. No notice is required to terminate the estate for years because the lease agreement states a specific expiration date.
If both parties agree, the lease for years may be terminated before the expiration date. Otherwise, neither party may terminate without showing that the lease agreement has been breached. Any extension of the tenancy requires that a new contract be negotiated.
A lessee has the right to use the premises for the entire lease term and that right is unaffected by the original lessor’s death or the sale of the property, unless the lease states otherwise. If the original lease provides for an option to renew, no further negotiation is required; the tenant merely exercises the option.
Estate From Period to Period
An estate (tenancy) from period to period, or periodic tenancy, is created when the landlord and tenant enter into an agreement for an indefinite time - the lease does not contain a specific expiration date.
Such a tenancy is created initially to run for a definite amount of time - for instance, month to month, week to week, or year to year - but the tenancy continues indefinitely until proper notice of termination is given.
A periodic tenancy is characterized by continuity because it is automatically renewable under the original terms of the agreement until one of the parties gives notice to terminate. In effect, the payment and acceptance of rent extend the lease for another period.
An estate from period to period also might be created when a tenant with an estate for years remains in possession, or holds over, after the lease term expires. If no new lease agreement has been made, a holdover tenancy is created. The landlord may evict the tenant or treat the holdover tenant as one who holds a periodic tenancy. The landlord’s acceptance of rent usually is considered conclusive proof of acceptance of the periodic tenancy. The courts customarily rule that a tenant who holds over can do so for a term equal to the term of the original lease, provided the period is for one year or less.
For example, a tenant with a lease for six months would be entitled to a new six-month tenancy, but if the original lease were for five years, the holdover tenancy could not exceed one year.
To terminate a periodic estate, either the landlord or the tenant must give proper notice. The form and timing of the notice may be established by state statute. Normally, the notice must be given at least one period in advance.
Estate at Will
An estate (tenancy) at will gives the tenant the right to possess property with the landlord’s consent for an unspecified or uncertain term.
- continues until terminated by either party’s proper notice
- automatically terminated by the death of either the landlord or the tenant
- exist without contract or lease
- duration or exchange of payment is unspecific
- parties have flexibility to change rental situations easily, without breaking a contract
- tenancy at will is rarely used in a written agreement and is viewed skeptically by the courts.
Estate at Sufferance
An estate (tenancy) at sufferance arises when a tenant who lawfully took possession of real property continues in possession of the premises without the landlord’s consent after the right of possession has expired.
When a tenant fails to surrender possession, or holds over, the tenant is responsible for the payment of monthly rent at the existing terms and rate.
Requirements of a Valid Lease
A lease is a contract between the lessor (landlord) and the lessee (tenant).
To be valid, a lease must meet the following requirements:
- Capacity to contract ( be of legal age and sound mind)
- Offer and acceptance
- Consideration
Improvements
Neither the landlord nor the tenant is required to make any improvements to the leased property.
The tenant may, however, make improvements with the landlord’s permission or as required to make the rented premises accessible. In most residential properties, any alterations become the property of the landlord.
Accessibility
The federal Fair Housing Act makes it illegal to discriminate against a prospective tenant on the basis of the tenant’s disability. A tenant with a disability must be permitted to make reasonable modifications to a property at the tenant’s own expense.
If the modifications would interfere with a future tenant’s use, the landlord may require that the premises be restored to their original condition at the end of the lease term.
Assignment and Subleasing
In an assignment of a lease, a tenant transfers the entire leasehold interest to another person. The new tenant is legally obligated to comply with all of the promises the original tenant made in the lease.
Under a sublease, a tenant transfers less than the entire leasehold interest by subletting the premises to a new tenant. The original tenant remains responsible for rent being paid by the new tenant and for any damage done to the rental during the lease term. The new tenant is responsible only to the original tenant to pay the rent due. The sublessor’s (original lessee’s) interest in the real estate is known as a sandwich lease.
Assignment and subleasing are allowed only when a lease specifically permits them.
In most cases, the sublease or assignment of a lease does not relieve the original lessee of the obligation to pay rent. The landlord may, however, agree to waive the former tenant’s liability.
Most leases prohibit a lessee from assigning or subletting without the lessor’s consent.
Nondisturbance Clause
A nondisturbance clause is included in the financing instrument used to mortgage leased premises.
By accepting this provision, the mortgagee agrees not to terminate the tenancy of the lessee(s), so long as the lessee is current in payment of the required rent, should the mortgagee foreclose on the mortgagor’s building.
A lease will typically run with the land; a change in the ownership of the leased fee estate doesn’t affect the leasehold unless there is a provision in the lease.
Existing tenants usually have the right to remain in possession until the lease expires. A prospective buyer of property, especially an occupied single-family home, should inquire about the status of the occupants. The title records are searched for any recorded leases as part of the purchase transaction.
Options
- renewal (a lease may contain a clause that grants the lessee the privilege of renewing the lease . The lessee must give notice of intent to exercise the option)
- purchase (this option normally gives the tenant the right to purchase the property at a predetermined price within a certain period)
- right to first refusal (allows the tenant the opportunity to buy the property before the owner accepts an offer from another party)
