Chapter 3 Pt. 2 Leases, Listings & Real Estate Concepts

Contractual Nature of Leases

• A lease is a contract and therefore must contain all essential contractual elements (offer, acceptance, consideration, legal capacity, lawful purpose, etc.).

Common Lease Clauses

• Restriction-on-use clauses
  • Examples: “No pets,” “No business use.”
• Lease term clause
  • Must state beginning and ending dates explicitly.
  • Can span any length (e.g.
  • 1 week
  • 2 years
  • 20 years
  • 99\text{ years}, etc.).
• Security-deposit clause
  • Protects lessor from damages caused by tenant’s breach.
• Destruction-of-premises clause
  • Specifies obligations after casualty events (tornado, flood, hurricane, etc.).
• Option clauses (optional)
  • Purchase option: tenant may buy property at lease end.
  • Renewal option: tenant can extend term for predefined period.

Rights & Responsibilities

Lessor (Landlord)

• Retains legal title.
• Must maintain premises.
• Receives rent (distinction: “economic rent” = market rent rate).
• Receives possession at term end (reversion).

Lessee (Tenant)

• Holds a leasehold estate (personal property right, not real property ownership).
• Entitled to quiet enjoyment (freedom from third-party claims).
• Must pay rent and avoid waste (no damage, no impairment of value).

Major Lease Types

1. Gross Lease

   • Landlord pays taxes, insurance, operating costs.
   • Tenant pays a fixed rent.
   • Problem for landlord: rising expenses.
   • Escalation (escalator) clause allows landlord to pass specified cost increases to tenant (must spell out costs & triggers in advance).

2. Net Lease

   • Tenant pays taxes and insurance (memory aid: “NET → TEN”).
   • Common in commercial property.
   • Tenant can deduct real-estate taxes paid.

3. Percentage Lease (retail/commercial)

   • Rent = base amount + a percent of tenant’s gross sales.
   • Shares risk/reward between landlord & tenant; prevalent in malls.

4. Graduated (Step-Up/Step-Down) Lease

   • Rent changes predetermined at set dates (e.g.
     • \$500 \rightarrow \$600 \rightarrow \$700).
   • Can step up, down, or alternate.

5. Index Lease

   • Rent shifts with an external index (usually CPI).
   • Not predetermined amounts; tied to inflation/deflation.

6. Ground Lease

   • Tenant leases land only, typically long-term (farms, gas stations).

Transfer of Lease Rights

• General rule: Contracts (incl. leases) are freely assignable unless prohibited.
• Landlords often insert “no assignment/sublease without consent” clauses.

Assignment

• Original tenant (assignor) transfers all rights to assignee.
• Both assignor & assignee remain liable to landlord.

Sublease

• Original tenant becomes sublessor, new occupant = sublessee.
• Only original tenant remains liable to landlord.
• Sublessee usually pays rent to original tenant, who pays landlord.

Termination Possibilities (Non-Exhaustive)

• Expiration of time.
• Breach by either party.
• Mutual agreement.
• Condemnation (eminent domain).
• Foreclosure.
• Bankruptcy.
• NOT automatic on death of landlord or tenant (heirs/heir’s estate bound).

Nondisturbance Clause

• Inserted in both mortgage & lease.
• Ensures that if landlord’s loan is foreclosed, tenant’s lease remains valid.
• Lender becomes new landlord; protects tenant continuity.

Sale of Leased Property

• New owner must honor existing leases until expiration; may renegotiate only afterward.

Breach & Remedies

• Actual Eviction (Landlord vs. Tenant)
  • Suit for possession; sheriff carries out removal.
• Constructive Eviction (Tenant