Econ 156 Real Estate Economics

Foldvary; text R.E. Principles, 9^th ed.

Chapter 7, p. 150, Leases

A lease transfers rights of possession

and possibly the right to some of the rent if the property is subleased,

in exchange for a rental payment.

A lease divides the estate into a leased fee estate and a leasehold estate.

Classification of Leases

Duration of term

The duration of the term of a leasehold estate determines whether it is a tenancy for a stated period, a tenancy from period to period, a tenancy at will, or a tenancy at sufferance.

A tenancy for a stated period limits the term of the leasehold, the period of time.

In most states, the term can be up to 99 years; for a longer time, it becomes a fee simple transfer.

A tenancy from period to period does not terminate until proper notice is given

so long as the tenant pays the rental.

A tenancy at will may be terminated at any time, with notice such as 30 days as required by law.

A tenancy at sufferance is created when a tenant continues to occupy the property after the lease has expired; as the tenant is there at the sufferance of the landlord, who may give notice to quit the premises or be evicted.

Type of use

In some cases, the landlord only owns the land, and the tenant has a ground lease

and owns the buildings. This is typical with land trusts, such as Arden, Delaware.

In Manhattan, many buildings have been built on leased land.

The owner of the building does not have to lock up money in buying the land,

and land cannot be depreciated.

When the lease expires, the land owner gets the improvements,

but the contract can specify a payment..

Methods of Rental Payment

A lease can specify various types and ways of payment.

In a gross lease, the tenant pays the gross costs of occupancy, including real property taxes, utilities, insurance, and operating expenses.

In a net lease, the tenant pays the operating expenses in addition to rent.

In a net-net lease, the lessee pays operating expenses and insurance.

In a net-net-net lease, the lessee pays operating expenses and insurance and real estate taxes.

For residential leases, the landlord usually does the maintenance and pays the taxes and insurance.

Tenants are responsible for damages.

Utilities are typically the responsibility of the tenant,

but some apartments have centrally controlled utilities such as heating,

in which case the landlord provides it and the cost is included in the rental.

Also, in homeowner associations, the association fee is paid by the owner

and passed on to the tenant in the rental.

Under a fixed-rent lease, the amount of the rental payment is fixed for the term of the lease.

Under a graduated rent or step-up rent lease, the rental rises by specified amounts at intervals.

In a reappraisal lease, the level of rental increase is determined by an appraisal of the property.

They are used for long-term rentals of entire buildings.

These are often used for long-term leases, to protect the tenant.

Some farm rentals use sharecropping, where the tenant’s rent depends on the value of his crop.

Likewise, some shopping centers practice sharecropping with a percentage lease,

where the rental is based in part on the gross sales.

The percentage lease for commercial property is a minimum rental plus a percentage of sales.

Such leases are used in shopping centers.

The percentage depends on the general profitability of the stores.

This spreads the risks between tenant and owner.

In a bad year, the rental is lower.

However, the rental acts like a tax, with a deadweight loss.

In the index lease, the rental is tied to some price-level index.

The landlord-tenant relationship

A lease should include the term, rental amount, how the rental is changed, rules for use, maintenance responsibility, and renewal.

A lease can have a renewal option that specifies what the rental is upon renewal.

It protects the tenant from a very large increase in the rental.

A tenant may be able to move out and transfer the lease to a new tenant,

but after this assignment, the first lessee may be liable unless released by the landlord.

A lease might allow the tenant to sublease the premises to another tenant.

Some of the rights are transferred to the tenant.

Assignment means that all of a tenant’s rights are transferred to the new tenant,

but the lessee is still liable.

Landlords usually require security and cleaning deposits.

Both parties should carefully inspect the property and note any existing damage.

Fixtures and improvements made by tenants become are the property of the owner.

A tenant has the right of exclusive possession, a covenant of quiet enjoyment.

In law, “quiet” does not mean silence.

Quiet refers to peace of mind.

Quiet means unmolested, tranquil, free from interference or disturbance.

A covenant of quiet enjoyment in leases promise that the tenant shall be able to use the premises in peace, without disturbance from the landlord.

There is an implied warranty of habitability,

in which the landlord must maintain the premises in a reasonably safe condition.

Often this is explicit in local laws.