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Residential and Commercial Leases:

a contract that transfers the right to possess a property from the owner, the lessor, to
another party, the tenant or lessee
stipulates other aspects of the agreement:
o such as the length of time that the lease will be in efect, and
o the amount of payment that the lessor expects from the lessee for the right of
lessor has a reversionary right to possession after the lease expires
leased fee or a leased fee estate plus reversionary right
o owners interest in the leased real estate
leasehold estate
o tenants right to possession (in contrast to the freehold estate of the owner)
****A leasehold estate is legally considered to be personal property rather than real property
four diferent types of leasehold estates:
o difer primarily in how the term of the leasehold estate is determined
! estate in years (a"a estate in term)
- a lease for a de#nite length of time, which may be, in spite of the name, for less
than ! year, with a stipulated start and end date
- At the end of the term, the leaseholder is expected to $acate the premises
- %o notice is re&uired since the end of the lease is stipulated in the contract
- 'f the parties to the lease want to extend it, they must agree to a new contract
unless the original contract had a renewal clause, in which case the leaseholder
has the right to renew
( estate from period to period (a"a periodic tenancy)
- a lease for a de#ned initial period that is automatically renewable at the end of the
initial period and after each renewed period unless either the lessor or lessee
wishes to terminate it by gi$ing due notice, which in most cases is ! period in
ad$ance, although it may be less if the period is a year or longer
- )his tenancy does not ha$e a speci#ed expiration date
- )his is the estate possessed by most renters of residential housing, such as
apartments, which, in most cases, is a month-to-month tenancy, where the
tenant pays a monthly rent
3. estate at will
- similar to a periodic tenancy, but no initial period is speci#ed, and terminates when
proper notice is gi$en by either lessor or tenant, or if either one dies

* estate at suferance (a"a tenancy at suferance)
- when a tenant retains possession of the leased property after the expiration of the
lease, but without the owners appro$al
- 'f the original lease contains a holdover clause, then this clause determines the
estate at suferance+ otherwise, state law determines the rights and duties of
landlord and tenant
- 'f the tenant continues to pay rent and the landlord accepts it, then a holdover
tenancy is created, where the terms and conditions of the original lease still apply
- 'f the landlord ob,ects to the holdo$er tenancy, but still accepts rent, then a month-
to-month tenancy is created, where either party will be re&uired to gi$e due notice
to terminate the tenancy
- )he landlord may also choose to treat the tenant as a trespasser, and begin
e$iction proceedings, but the landlord must comply with the notice to quit
re&uirements of the lease and state law in which the property is located
Lease Agreements
- .i"e all contracts, a $alid lease must ha$e legal purpose,
the parties must ha$e legal capacity to contract,
there must be an ofer and acceptance, and
there must be consideration, which is usually rent, but could also be in the form of
- generally ha$e a description of the property,
- the term of the lease,
- the amount of rent to be paid,
- when it should be paid, and
- the amount of a security deposit
the security deposit is used to co$er nonpayment of rent or
destruction of the property by the renter+ otherwise, the security
deposit must be returned to the tenant after the expiration of the
- 'mplicit in all lease agreements is the covenant of quiet enoyment, which allows the
tenant to possess the property free of any interference from the landlord ()he landlord may
enter the premises for maintenance or repairs, but only with the consent of the tenant)
- %either the tenant nor landlord is re&uired to ma"e improvements to the property, but if the
tenant ma"es some impro$ements, it usually becomes the property of the landlord
- /owe$er, a commercial tenant does ma"e alterations for its business, and generally restores
the property to its pre$ious condition after the lease expires, less normal wear and tear
- )he landlord does, howe$er, ha$e to maintain the premises in a wor"ing and safe order, and
must also maintain common areas, such as hallways and wal"ways, and some safety features
may be re&uired, such as smo"e detectors
Assignments and !u"leases
- 0ometimes a tenant wants to $acate a property before the termination of the lease and not
ha$e to pay for the remaining term )o do this without breaching the lease, the tenant may be
able to either assign his leasehold estate, or sublease it
o assignment - when a tenant transfers all of his leasehold rights to another
party+ the new tenant then pays rent directly to the landlord /owe$er, the
original tenant still is liable for rent if the assignee does not pay, unless the
landlord speci#cally relie$es him of the original liability
o su"lease or su"let - when only some of those rights are transferred )he new
tenant pays rent to the sublessor, who then pays the landlord
**** 1ost leases do not permit assignments or subleases, and if they do, they
generally re&uire the appro$al of the landlord /owe$er, if there is nothing in the lease
agreement about assignments or subleases, then they are allowed
Lease #ptions
- .eases may also ha$e options
o renewal option - most common option+ which allows the tenant to renew the
lease by gi$ing due notice
o lease option (a"a right to purchase option) - gi$es the tenant the right to
purchase the property at a speci#ed price within a speci#ed time 2hen the
time elapses, the option expires
o right of $rst refusal option - $ariation of the lease option+ which gi$es the
tenant the right to purchase the property for the same price and conditions as
that ofered by another party
%ypes of Leases
- .eases are generally classi#ed by
what the tenant has to pay or
the options a$ailable to the tenant
! gross lease
3 eg residential leases
3 where the landlord pays most of the expenses, such as insurance, taxes, water, and
sewage, associated with the property while the tenant pays rent and those expenses that
$ary signi#cantly by how much the tenant uses them, such as electricity and heat
&. net lease
3 the type that most commercial tenants ha$e
3 the tenant pays most of the expenses of the property, including taxes and insurance
2ith most net leases, the interior of the buildings are un#nished, so that the commercial
tenant can customi4e the interior to the needs of the business
3. percentage lease
3 often used in retail properties
3 the tenant pays a speci#ed minimum amount of rent plus a percentage of the tenants
monthly income that is o$er a speci#ed amount
3 )he percentage lease is often used for retail space that has a signi#cantly seasonal
$ariation in business )his helps retailers to reduce their expenses when their income is
* varia"le leases 5
3 lead to $ariable amounts of rent
3 include the graduated lease - has stipulated dates of rent increases
the inde' lease - the amount of rent is determined by an index (eg
consumer price index)
6 ground lease
3 net lease of unimpro$ed land upon which the tenant will erect buildings and install
#xtures to conduct its business
3 )hese leases are long in duration, typically 67 to !77 years, which enables the tenant to
ma"e enough money to ,ustify the expense of building
8 oil and gas lease
3 special type of lease where an oil company will pay the landlord for the right to explore
the land for oil and gas for a speci#ed period that can be renewed annually
3 'f oil or gas is found, then the landowner will recei$e a percentage of the income as a
royalty, and the lease will continue until the wells are depleted
9 lease purchase
3 an agreement that allows the tenant to purchase the land after renting it for a time
3 )he right to purchase is the primary concern, while the rental is a secondary
3 )he lease purchase allows the tenant to apply some of the rent toward the purchase
price of the property, thereby building up e&uity while lowering the amount that needs to
be borrowed
: sale and lease"ac( (a"a sale-lease"ac()
) an agreement where an owner sells the land, then leases the property bac" for a
commercial pro,ect for a speci#ed amount of rent and time
3)he sale of the land gi$es the tenant capital to #nance the pro,ect
3 ;r a company may sell its real estate for a leasebac" deal to increase its li&uidity, to pay
down debt, or to pro#t from in<ated real estate prices
***;wners of agricultural land will often rent out their land to tenant farmers to grow
crops on the land )he tenant farmer may pay a speci#c cash rent or there may be a
sharecropping arrangement, where the tenant pays the landlord a certain
percentage of the crop sales
Lease %ermination
- A lease can be terminated li"e most other contracts
by mutual agreement
by performance
by the ban"ruptcy of either party
by a condemnation proceeding or other operation of law
- /owe$er, leases are not terminated if the property is sold, unless there is a speci#c
sales clause that allows the new owner to terminate the lease by gi$ing due
notice to the tenants
- .eases also do not terminate if either party dies, unless it is a life estate or a
tenancy at will
*reach of a Lease
- 0ometimes a lease agreement is breached by either the tenant or the landlord
- 2hen a tenant breaches a lease, most often by the nonpayment of rent, the landlord can sue
for actual eviction, which is a court order to $acate the premises
- 'f the landlord neglects the property or breaches the lease in some other way that ma"es the
property unusable by the tenant for the purpose of the lease or that $iolates the terms of the
lease, then the tenant may abandon the property as a constructive eviction with no further
*** /owe$er, to pro$e the case for constructi$e e$iction, the tenant has to lea$e the
premises while the property is unsuitable for the purpose of the lease and may ha$e to
pro$e that the property became unsuitable because of the neglect of the landlord