Unit 18 - part 2 Flashcards
Types of Lease
There are three basic forms of lease payments:
- the gross lease
- the net lease
- the percentage lease.
Gross Lease
In a gross lease, the tenant pays a fixed rent and some or all of the utility expenses, while the landlord pays all taxes, insurance, repairs, any other utility expenses, and maintenance connected with the property.
Residential and commercial office leases are most often gross leases.
Net Lease
ln a net lease, the tenant pays all or most of the property expenses, such as hazard insurance, property taxes, and/or common area maintenance (CAM) charges, in addition to the rent.
The monthly rental is net income for the landlord after operating costs have been paid.
Leases for entire commercial and industrial buildings and the land on which they are located, ground leases, and long-term leases are usually net leases.
Percentage Lease
This type of lease is generally used for retail business leases.
The rent is based on a minimum fixed rental fee plus a percentage of the gross income received by the tenant doing business on the leased property. The percentage charged is negotiable and varies depending on the nature of the business, location of the property, and general economic conditions.
Either a gross lease or a net lease may be a percentage lease.
Variable Lease
A lease may allow for increases in the rental charges during the lease term.
A graduated lease provides for specified rent increases at set future dates. An index lease allows rent to be increased or decreased periodically based on changes in the consumer price index or some other indicator.
Ground Lease
When a landowner leases unimproved land to a tenant who agrees to erect a building on the land, the lease is usually called a ground lease.
It is most often used in commercial and industrial property development. Ground leases typically involve separate ownership of the land and the buildings.
They often run for terms of 50 to 99 years.
Ground leases are generally net leases: the lessee must pay rent on the ground, as well as real estate taxes, insurance, utilities, and repairs.
At the end of the lease term, any tenant-built structures on the property usually become the property of the landlord.
Oil and Gas Lease
When an oil company leases land to explore for oil and gas, a special lease agreement must be negotiated. Except for enough surface space to conduct extraction operations, the lease covers subsurface rights.
If oil or gas is found, the landowner usually receives a percentage of its value as a royalty. As long as oil or gas is obtained in significant quantities, the lease continues indefinitely.
Oil and gas leases, even after they have expired, are often listed as exclusions in title insurance policies.
Lease Purchase
A lease purchase is used when a tenant wants to purchase the property but is not yet able to do so.
Sale-and-leaseback
In a sale-and-leaseback, the property owners sell the property and then lease it back for an agreed period and rental.
The original owners pull out their equity to use on other projects and are also able to reduce their taxable income when they pay rent to the new owner. The new owner has a reliable source of rental income for an extended time.
Discharge of a Lease
A lease is discharged when the contract terminates. Termination can occur either when all parties have fully performed their obligations under the agreement, or when the parties agree to cancel the lease.
The clause, known as a sale clause, requires that the tenant be given some period of notice before the termination. Because the new owner takes title subject to the rights of the tenant, the sale clause enables the new landlord to claim possession and negotiate a new lease under new terms and conditions.
A tenancy may also be terminated by operation of law, as in a bankruptcy, foreclosure, or condemnation proceeding in an eminent domain action.
