Chapter 17 Real Estate Leases

1
Chapter 17Real Estate Leases

• _______________________________________

2
Leasehold Estates

• Leasehold estate the right to occupy and use
  the property of another for a limited period of
  time, usually in return for compensation
  (typically rent)
• A leasehold estate does not convey title to the
  property, and thus does not imply ownership.
• Leasehold estates are chattels real. Chattel is
  an article of personal property, and chattel real
  is personal property that is an interest in real
  property.

3
Types of Leasehold Estates

• Types of leasehold estates (refer to Chapter 3
  slides for more detail)
• Estate for years A lease for a definite fixed
  time period has a specific starting and ending
  date
• Periodic estate A lease that renews itself
  automatically for successive periods unless
  notice of termination is given by either party.
  The notice must be for the length of the rental
  period, but not less than 15 days. A periodic
  lease has no set termination.
• Estate at will - This tenancy extends for an
  indefinite time period. The tenant occupies the
  premises with the permission of the landlord but
  without a tenancy agreement that is, there is
  no definite agreement between the landlord and
  tenant as to termination date or rent payment. It
  can be terminated anytime by either party, but
  some notice is required.
• Tenancy at sufferance A tenant remains on the
  property without permission typically a holdover
  tenant from a previous lease.

4
Leasehold Estate Some Key Terms

• Lessee The tenant
• Lessor The property owner or landlord
• Leased fee A fee simple estate that is
  currently leased
• Reversion The right of the owner to retake the
  property at end of the lease period.
• Ground lease Lease of the land only. Ground
  rent, the rent for the ground lease, is paid on a
  net lease basis.

5
Requirements for a Valid Residential Lease in
Calif.

• Must be in writing if for longer than 1 year
  (Statute of Frauds)
• Lessor Lessee must be identified
• Contain a sufficient identification of the
  premises
• Indicate agreement to convey possession (lessee
  shows acceptance by possession or paying rent)
• Specify the amount and manner of rent payment
• State the lease duration (or in the case of a
  periodic tenancy, the periods involved)
• Provisions for extension and renewal Extension
  is continuation of old lease renewal is agreeing
  to a new lease
• The parties must be legally qualified to contract
  
• Signature of the lessor the tenant is not
  legally required to sign the tenants possession
  is considered acceptance. However, landlords
  generally require tenants to also sign to protect
  themselves against misunderstandings or
  misrepresentations

6
Other Possible Lease Terms

• Option clause gives the tenant the right to
  renew the lease for set periods at a
  predetermined rent, or the option to purchase the
  property at the end of the lease term for a
  predetermined price
• Provisions regarding responsibility for utilities
  and maintenance
• Provisions regarding security deposits
• Provisions regarding tenant improvements
• Provisions concerning tenant operations and the
  manner in which the space is to be used,
  including provisions concerning limitations on
  tenant use of the premises and requirements for
  tenant operations (e.g., business hours,
  inventory, personnel on hand, etc.).
• Provisions regarding the facilities and services
  to be provided to the tenants
• Provisions regarding tenant default
• Provisions regarding casualty events (such as
  fire, flood, windstorm, earthquake)
• Provisions regarding disruption of tenant
  business activity due to building "down time" due
  emergencies (fire, flood, earthquake, etc.),
  building repairs or renovation, etc.
• Provisions regarding assignment and subletting
• Provisions regarding lessors right of reentry

7
Lease Covenants

• Covenant An agreement (a promise) to do or not
  to do certain things
• Leases, particularly written ones, normally
  contain a number of express covenants (agreements
  or promises). Express covenants take the form of
  clauses explicitly written into the lease
  contract concerning agreements between the
  landlord and the tenant about the rights and
  duties of the tenant and landlord during the
  lease term.
• In addition to express covenants, the parties to
  the lease (the tenant and the landlord) are found
  by courts to have certain rights and duties
  arising from implied covenants. In Calif. and
  other states many of these implied covenants
  have been enacted into legislation dealing with
  housing and landlord-tenant relations.
• The items covered by the implied covenants
  recognized by law may be contained in the lease
  as express covenants, but even if they are not
  expressly contained they are nonetheless held to
  be enforceable.

8
Lease Covenants (continued)

• Two main types of implied covenants will be
  mentioned.
• The landlord is implied to give the tenant not
  only the right of possession but also right of
  quiet enjoyment, which means "the right of
  possession and use without undue interference" by
  the landlord, property manager, or third parties.
  
• The landlord does retain a limited right of
  entry. The landlord has the right to show the
  property when the lease approaches expiration, to
  make necessary repairs, and to prevent waste
  where the landlord has reasonable grounds to
  expect the tenant is or intends to commit acts of
  waste against the property.

9
Lease Covenants (concluded)

• In most states today the landlord is also deemed
  to be bound by a covenant of fitness for use
  (also referred to as a covenant of habitability),
  which means that the premises leased to the
  tenant are fit for the use to which it is
  intended.
• This is reinforced in California by legislation
  that requires all rental units to meet minimum
  standards.
• The California law also permits a tenant to use
  rent payments to offset repair bills when a
  landlord fails to make obligated repairs.
• The tenant, in turn, is bound by implied
  covenants to pay rent and not to damage or
  "waste" the premises.

10
Entry by the Landlord

• A written lease will generally stipulate the
  conditions when a landlord is permitted to enter
  the premises.
• If there is no agreement as to landlord entry,
  the law permits the landlord to enter if
• The tenant consents to entry
• A emergency exists requiring immediate attention
• The landlord has given reasonable notice to enter
  to make repairs
• The landlord has given reasonable notice to enter
  to show the property to prospective tenants, or
  to contractors or lenders

11
Eviction

• Eviction A legal procedure by which a tenant is
  removed from a property.
• Actual eviction legally evicting a tenant
• Constructive eviction If the landlord deprives
  the tenant of quiet enjoyment or fails to
  maintain the property in a state of fitness for
  habitation, the landlord has created constructive
  eviction.
• Retaliatory eviction This exists when a
  landlord evicts a tenant as retaliation for
  making a complaint with the public authorities or
  for organizing tenants. Such retaliatory eviction
  is not legal.

12
Sample Lease (See pp. 296-298)
13
Sample Lease (continued)

14
Transferring a Leasehold Estate

• Unless restricted by the lease contract, a tenant
  has full rights to assign or sublet the leasehold
  to another.
• Subletting (subleasing) The original lease
  remains in effect between lessee and lessor. A
  new estate is created called subleasehold. The
  sublessee pays rent to the lessee, who in turn
  pays rent to the lessor. The terms of the
  contract between lessor and lessee remain in
  effect.
• Assignment of lease The interests of the lessee
  are transferred to another party. The assignee
  replaces the original lessee.
• Sandwich leasehold Refers to the lessees
  estate when the leasehold is subleased. The
  lessee holds the sandwich lease. This may refer
  to the estate of any sublessor in a chain of
  subleases.

15
Rent

• Gross lease All operating expenses are included
  in the rent, except possibly utilities. Thus the
  landlord pays for property maintenance, taxes,
  and hazard insurance. Typically used in
  apartment and office building rentals. Office
  lease often contain stop clauses.
• Net lease Tenant is responsible for property
  operating expenses. Tenant either pays expenses
  directly or reimburses landlord for expenses.
  Used extensively in long-term leasing of many
  types of commercial and industrial properties.
• Escalator clause Allows landlord to raise rent
  during the term of the lease, usually based on
  some specified occurances, such as increases in
  property taxes, property operating expenses,
  insurance, or inflation.

16
Rent (continued)

• Graduated (or step) rent Rent payments are
  increased in specified steps over the lease term.
• Percentage lease Rent includes some percentage
  of a tenants sales revenue. Typically
  combines a flat (or base) rent with a certain
  percentage of gross sales.
• Index lease Rent is tied to an economic
  indicator reflecting changes in prices or costs,
  typically a price index such as the CPI.
• Contract vs. Market (Economic) Rent Contract
  rent is the rent specified in the lease contract.
  The market, or economic, rent is the rent the
  property could obtain if it were presently leased
  in the open market. When market rent exceeds
  contract rent the lease becomes valuable.

17
Property Management

• Tenant selection
• Security deposit
• Tenant relations and retention
• Rent collection
• On-site management
• Off-site management

18
Property Management Professional Associations

• Institute of Real Estate Management (IREM)
  Affiliated with NAR. The largest and oldest
  property management organization
• CPM Certified Property Manager a designation
  granted by IREM
• ARM Accredited Resident Manager another
  designation granted by IREM
• Building Owners and Managers Institute (BOMI)
  An organization primarily for commercial property
  management
• RPM Real Property Administrator a designation
  granted by BOMI
• SMA Systems Maintenance Administrator another
  BOMI designation