Real Estate Leases
September 18, 2019
What Should be in the Lease?
When it comes to real estate leases, there are many clauses that should be included in a typical lease agreement. Clauses to include in the lease would be the lease term, or any options with the lease such as an option to renew the lease or maybe an option to buy. Also, the lease should state all of the rules and regulations to make sure both the landlord and the tenant are aware of all the terms of the lease agreement.
Once the lease expires, the landlord, or lessor, will get the property back due to the word reversion, which simply means the property goes back to our lessor once the lease expires. From the tenants, or lessee standpoint, the tenant does have the lease which is considered to be the tenant's personal property. Also, the tenant has the right of quiet enjoyment, which means no third-party claims against that same property.
Types of Leases
There are various types of leases.
- First is a gross lease, which is where the landlord pays all the expenses. If the costs go up such as taxes and insurance, then many landlords will have an escalation clause that allows the landlord to raise the rent and pass those extra costs along to a tenant.
- A net lease is where the tenant pays all of the expenses such as taxes and insurance. This is typical in commercial leasing. If a tenant is paying for the real estate taxes on the space, then the tenant should be able to deduct on their tax return as well.
- A percentage lease is yet a different type of lease whereby the rent is based on a percentage of sales. You would see this typically in a retail environment such as a shopping center, so the more sales the store racks up, the more rent that store would pay.
- A graduated lease is where the lease payments can go up or down, but it is predetermined. So, if we have a five-year lease, it could go up or down over the five years, but it is predetermined from the outset.
- Contrast that with an index lease where your lease payments can go up or down, but they are based upon some kind of an index such as the consumer price index. This is typically used once again in commercial leasing.
- A ground lease is simply leasing ground. Sometimes an owner will want to separate the buildings from the ground and so we separate that out with the grand lease specifically for people to lease and then they can build the buildings.
Many times a tenant will want to transfer their lease to another tenant before the time expires. There are two ways to do this. One way is through an assignment of a lease to a different tenant. With an assignment, both the original tenant and the new tenant are still liable to the landlord for the remainder of the lease term. Contrast that with subleasing. If a tenant decides to sublease the property to a new tenant, then the new tenant is liable to the original tenant and the original tenant is solely liable to our landlord.
Terminating a Lease
Concerning the termination of a lease, there are many ways a lease can be terminated. It could be by mutual consent, or by destruction of the property, or it could be a breach of the contract by either landlord or tenant. These are typical ways that a lease can be terminated.
However, death of either the landlord or the tenant typically does not terminate the lease agreement. What if the owner decides to sell their property during the term of the lease? This has no effect on the lease agreement. The new owner, whoever bought their property, must honor the current leases that are in effect.
Finally, what if we have a breach of an agreement? What if the tenant does not pay the rent? Then the landlord will have to evict the tenant. We call this an actual eviction. Contrast the actual eviction with a constructive eviction, which is the tenant’s remedy. If the place is uninhabitable, such as no heat in the wintertime, then the tenant can actually leave and be released from the lease obligation due to what we call constructive eviction. Again, this is where the place must be so bad that it is uninhabitable.
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