LEASES

CHAPTER 5 MEMBERS:

CANARECIO, AYESSA
CHUA, GILBERT
GECERA, EDUARDO

The lease sets up the rights and obligations of the landlord (owner/manager) and
the tenant. This chapter discusses the estates and tenancies created by the lease
as well as ways that rents are determined. As a lease is a contract, it must have
certain essential elements, and additional common provisions are discussed.

01
 LEASEHOLD ESTATES
Is of limited duration and is created when an owner or a property manager
(acting as the owner's agent) grants a tenant the right to occupy the owner's
property for a specified period of time in exchange for some form of
consideration. The leasehold estate established a relationship that creates
enforceable rights and duties for both parties.

ESTATE FOR YEARS

An estate ( or tenancy) for years is actually a misnomer. This tenancy is
characterized as having a definite beginning and a definite end which can be as
little as a week or as long as 99 years ---- or even longer. No notice is required
to terminate such an estate; the termination date was established in the lease.
So when the period of time expires, the tenant (lessee) is required to vacate the
premise and surrender possession to the landlord (lessor). This type of estate
is not terminated by the sale of the property or the death of the owner or the
tenant.
02
ESTATE FROM PERIOD TO PERIOD/PERIODIC LEASE

An estate from period to period, is one that automatically renews unless

either party gives notice of termination. These leases run week to week, or
month to month, or year or year. Notice is often equal to the period, but the
time of notice may vary from a minimum of one week to a maximum of six
months prior to termination. This type of estate is not terminated by the
sale of the property or the death of the owner or the tenant.

TENANCY AT WILL
Tenancy at will is for an indefinite period of time. It exists only as long as
both parties wish the estate to continue. An estate at will can be
terminated by the party who wishes to terminate the tenancy at will to give
some advance written notice. Unlike the first two estates, an estate at will
is terminated by the death of either party.

03
 TENANCY AT SUFFERANCE

Tenancy at sufferance occurs when a tenant obtains

possession of the premises legally but then remains on
the property after the expiration of the leasehold interest
without the consent of the owner. This tenancy
continues until the owner brings legal action or the
tenant voluntarily leaves.

04
types of lease payments

GROSS LEASE
Also called a straight lease. The tenant pays a fixed rental
amount and the owner pays all other expenses for the property.
Utility charges are generally paid by the tenant but may be
negotiated between the parties.
NET LEASE
The tenant pays some or all of the expenses of the property in
addition to the stated rent.
Three variations of the net lease:
A SINGLE NET (NET) LEASE REQUIRES THE TENANT TO PAY ONLY THE
PROPERTY TAXES IN ADDITION TO RENT. WITH A DOUBLE NET LEASE (NET-
NET), THE TENANT PAYS RENT PLUS THE PROPERTY TAXES AS WELL AS
INSURANCE PREMIUMS. A TRIPLE NET LEASE, ALSO KNOWN AS A NET-NET-
NET LEASE, REQUIRES THE TENANT TO PAY RENT PLUS ALL THE EXPENSES OF
THE PROPERTY, INCLUDING REAL ESTATE TAXES, BUILDING INSURANCE, AND
MAINTENANCE. THESE EXPENSES ARE IN ADDITION TO THE COST OF RENT
AND UTILITIES.
PERCENTAGE LEASE
Sometimes called overage lease, is commonly used for
retail property. It usually provides for the payment of a
fixed base rental fee plus a percentage of the tenant's gross
income in excess of a predetermined minimum amount of
sales. Percentage leases are used quite commonly in malls.
If the minimum amount is not generated, the landlord
may repossess, or "recapture," the premises.
PROVISIONS OF A VALID LEASE
Statute of Frauds
To prevent fraud or disputes over oral agreements.
Written, oral, and implied leases are all covered by the
statute of frauds of the state in which the property is
located.
Essential Elements
The basic elements of a lease include:
complete and legal name and signatures of both parties;
description of the property;
term of the lease;
consideration or amount of rent;
time and method of payment;
use of premises;
rights and obligations of both parties; and
possession of the premises.
Basic elements of a lease
NAMES AND SIGNATURE
A lease is both a contract and a conveyance of an interest in real estate. It must
contain the names of both the lessor and the lessee and must be signed by the
property owner or a legal representative of the owner. All parties should receive
a copy of the agreed upon terms.
DESCRIPTION OF THE PREMISES
A lease for a portion of space in a particular building, like office or apartment,
must be accurately describe the bounds of the space itself. It is imperative that a
ground lease contains an accurate legal description of the land. In addition, the
lease should also include a statement of the tenant's right to use such common
elements as elevators, halls, driveways, etc. And any alteration are to be made, it
should specify what improvements are to be made, how the expenses are to be
divided, and who will arrange the work.
TERM OF THE LEASE
The lease should specify the beginning and termination dates, as well as a
statement of the total period it covers.
Options to renew favor the tenant, so an owner often will insist on higher rental
rates if the option is exercised
VALUABLE CONSIDERATION
All lease contracts must contain some type of
valid and valuable consideration. Consideration
consists of the exchanges of promises: the
owner promises possession and the tenant
promises to pay rent.

POSSESSION OF THE PREMISES

Property owners in most states are obligated by
contract to give the tenant actual occupancy of
the premises described in the lease.
 Payment Options
Step-up clause Escalation clause
Leases with step-up clauses are also called An escalation clause can be tied to outside factors
graduated or escalation leases. This clause can be other then economic indexes. Union pay scales,
found in both gross and net leases. Step-up clause taxes, utility rates, and overall operating costs for
provide for specific increases at specific times. the premises are common controlling factors.
Percentage lease Reappraisal lease
The percentage lease provides for a rise in the It is another method of rental rate adjustment. The
rental rate as the tenant's gross or net income parties agrees to accept a market rent that will be
increases. determined by independent appraisers.
Index lease Tax and insurance participation
Because the income from professional offices,
The longer the lease, the more likely problems can
financial institutions, and similar businesses
arise from sudden and unanticipated increases in
cannot be reasonably and effectively adapted to
property taxes. These clauses require the tenant to
the percentage lease pattern of rental payments,
pay, in addition to the monthly rental, a pro rata
an increase or decrease in rent from such sources
share of any increase in taxes in excess of those
is often ties to a selected index of economic
expenses ofr an established base year. A similar
conditions. The most frequently used indexes are
provision for insurance is becong more common.
the consumer price index (cost-of-living index)
and the wholes sale price index.
Use of Premises
The property owner may restrict the use of the
leases premises by including a special provision in
the agreement.

The wording of restrictive clauses must be clear

and unambiguous, for the courts will resolve any
doubt as to the meaning of a restrictive clause in
favor of the party who is restricted by it.
 Rights and Obligations
Building rules Condemnation Compliance Assignment and Fire and casualty
These rules are usually Most lease forms also clause subletting damage
All leases should include
made part of the lease include a clause provisions When drafting a lease,
agreement by providing for equitable a compliance clause that the manager should
identifies which party is Assignment of a lease
reference and provide cancellation of the keep in mind the types
responsible for transfers all of the tenant's
a more detailed agreement in the event and amounts of
complying with any remaining right in the
treatment of day-to- that the tenant is denied insurance to be carried
local, state, or federal property to a third party,
day matters, such as use of the property on the property. It is
regulations. whereas subletting
the tenants' use of because it has been very important to
transfers only some of the
common areas, either appropriated or remember that
tenant's interest (transfer
parking spaces, and condemned by a landlords can only
of part of the premises,
hours of building government agency. insure what they own
transfer of the premises
operations. They are and cannot insure the
for part of the remaining
designed to protect the tenants' property.
term, or a combination of
condition, reputation, Tenants must acquire
both).
and safety of the their own renter's
property and to insurance.
promote compatibility
among the occupants.
 Other clauses may be added to

the lease, provided that both the

Other
landlord and the tenant agree to

the provisions.

Clauses
Some owners may include a

termination on sale clause when

they intend to sell the property

before the end of the lease.

 Tenant's Obligation
Tenant Security Deposit Personal Property
Improvements The contract of lease should IT is in best interests of the
state the amount and kind owner to include a clause
Should not be allowed
of security deposit due from in the contract which states
to make improvements
the tenant, as well as the to remove any personal
w/o consent from
conditions under which it property from the premises
owner
will be refunded. and to clean the rented are
However, a commercial at the termination of the
If the owner, chooses to
or industrial tenant may lease.
retain any or all of the
be given the right to
security deposit, he must Any property left behind
install trade or chattel
document the causes is considered abandoned
fixtures for business
(usually for unpaid rent and may be removed
use
and/or damages to the from the premises at the
property tenant's expense
 Disclosure and billing
on or before the start of a tenancy, the owner
should disclose in writing the name and
address of the property manager.

Property

the lease should provide that rent bills and

other notices can be sent to the tenant

Owner's
Quiet enjoyment
the right to use / the right to possession

Obligations
the tenant is thereby given the exclusive use
and possession of the space
Most leases allow owners to enter said premises
in case of emergencies and for necessary
repairs

Maintaining the premises

Most leases hold the owner responsible for all
repairs necessary to keep the premises fit for
use
The owner/tenant must comply with local
building and housing codes
 Tenant's Remedies for

Noncompliance
Failure to
Noncompliance Failure to
supply essential
with rental deliver premises
services
agreement If the right to

Constructive eviction

possession is not
If the property owner
occurs when the

conveyed, the tenant

or manager fails to
tenant must abandon

does not have to pay

perform the required

the premises due to

rent. The tenant can

duties, the tenant

the owner's

terminate the rental

may sue for damages

negligence in

contract or sue for

or terminate the lease

supplying essential

specific performance.

by giving the owner

services. (failure to

In order to avoid

specified notice for

supply heat or water,

suing, the owner may

breach of contract failure to repair

include a clause that

premises, etc.)
tackles this.
 Noncompliance with rental agreement

Owner's
the owner may deliver written notice to the tenant w/in a specified period, stating
the nature of the contract breach

Remedies for
Suit for eviction
cause: nonpayment of rent, illegal possession of the premises after termination of

Noncompliance
lease, unlawful use of the premises, etc.

Default
Statutes regarding a tenant's default under the terms of a lease vary from state to
state, the lease should include a clause to the effect that if the tenant defaults on
rent payments, the owner/manager can terminate the tenancy

Bankruptcy
Property managers should review bankruptcy default clauses in leases w/an
attorney. Advice should be sought to determine proper procedures to follow if a
tenant declares bankruptcy

Illegal activities
the lease should be very clear in prohibiting illegal activities in the premises such
as drug trafficking, felony crimes, or threatening the owner/manager.

Using Software management

Tracking rental payments and generating late notices is much simpler using
software management
Lease

Formats
Lease formats usually are available
through the internet or local real
estate organizations.

One advantage in having a

standard form of lease is that the
owner/manager can be familiar
with its clauses and legal
ramifications in the contract.