Real Estate Leases

Leasehold Interest - Essential Elements

• Explain essential elements of leasehold interest.
• Describe essential terms of a lease agreement.
• Differentiate between types of leases.
• Explain lease termination, discharge, and remedies for breach.

Key Terms

• Actual Eviction: Legal process to remove a tenant.
• Assignment: Transfer of lease rights by tenant to another party.
• Constructive Eviction: Tenant terminates lease due to landlord's actions making property uninhabitable.
• Estate at Sufferance: Tenant remains after lease expiration without consent.
• Estate at Will: Tenancy with landlord's consent, unspecified term.
• Estate for Years: Lease for a definite period.
• Estate from Period to Period: Lease for indefinite time, automatically renewable.
• Gross Lease: Tenant pays rent, landlord pays property expenses.
• Ground Lease: Lease of land, often long-term, tenant may construct improvements.
• Holdover Tenancy: Tenant remains after lease expiration.
• Lease: Contract transferring property possession for a specified time.
• Lease Purchase: Lease with an option to buy.
• Leasehold Estate: Tenant's right to possess property for lease term, considered personal property.
• Lessee: Tenant.
• Lessor: Landlord.
• Month-to-Month Tenancy: Periodic tenancy, paying monthly rent.
• Net Lease: Tenant pays rent plus property expenses (taxes, insurance, maintenance).
• Nondisturbance Clause: Protects tenant's rights in case of mortgage foreclosure.
• Percentage Lease: Rent based on fixed amount plus percentage of business income.
• Purchase Option: Tenant's right to buy property at a specified price.
• Renewal Option: Tenant's right to extend lease term.
• Rent: Payment for property possession and use.
• Reversionary Right: Landlord's right to regain possession after lease term.
• Right of First Refusal: Opportunity to match an offer before property is sold to someone else.
• Sale and Leaseback: Owner sells property and leases it back from the buyer.
• Security Deposit: Money held by landlord for lease compliance.
• Sublease: Tenant leases property to another party.

Importance of Lease Knowledge

• Real estate professionals should understand the rental market to assist buyers, renters, and investors.
• Anyone involved with rental properties should know basic lease provisions and landlord-tenant issues.

Rise in Rental Properties

• Increase in residential rental properties due to foreclosures and investors buying properties at lower market values.
• Drop in homeownership rate from 69.2% in 2004 to 64.1% in 2019, leading to more households renting.

Lease: Foundation of Landlord-Tenant Relationship

• A lease is a contract between the property owner (landlord/lessor) and the tenant/lessee.
• The lease transfers the right to exclusive possession and use of the property for a specific period.
• The lease establishes the rent amount and other rights/obligations of both parties.
• Rent is a fixed, periodic payment for property use, determined by agreement.
• The landlord retains reversionary right to possession when the lease expires.

Statute of Frauds

• Most states require lease agreements longer than one year to be written to be enforceable.
• Oral leases for one year or less are enforceable if they can be performed within one year of making the agreement.
• Written leases should be signed by both the landlord and the tenant.
• Maryland law: Leases for a year or less do not have to be in writing to be enforceable.
• Maryland Real Estate Commission requires licensees to use written agreements for all leases, regardless of length, for documentation purposes.

Leasehold Estate

• A tenant's right to possess real estate for the lease term is a leasehold estate, which is less than freehold.
• A leasehold estate is considered personal property, not ownership.
• Freehold estate = ownership.
  • Freehold estate can be a fee simple estate that continues for an indefinite period and may be passed along to the heirs.
  • A freehold estate can also be a life estate that's held only for the lifetime of a person who may or not be the holder of the life estate, and it will end when that person dies.
• Types of Leasehold Estates:
  • Estate for Years
  • Estate from Period to Period
  • Estate at Will
  • Estate at Sufferance

Estate for Years

• Leasehold estate for a definite period (years, months, weeks, days).
• Has a start and end date.
• Tenant must vacate upon expiration.
• No notice required to terminate.
• May be terminated early if both parties agree.
• Extending the lease requires a new contract.
• Tenant has the right to occupy and use the property for the entire term, unaffected by landlord's death or property sale unless stated otherwise in the lease.
• If the lease includes a renewal option, no further negotiations are needed; the tenant simply exercises the option.

Estate from Period to Period (Periodic Tenancy)

• Agreement for an indefinite time, without an expiration date.
• Continues until proper notice of termination is given.
• Rent payable at definite intervals (month-to-month, week-to-week, year-to-year).
• Automatically renewable under original terms until notice is given.
• Payment and acceptance of rent extends the lease for another period.
• Month-to-month tenancy is common in residential leases (tenant takes possession with no definite termination date and pays monthly rent).
• Conversion from estate for years to periodic tenancy requires exercising the option without further negotiation.
• A holdover tenancy is created when a tenant remains after the lease term expires without a new agreement.
• Landlord may evict tenant or treat them as holding a periodic tenancy.
• Landlord accepting rent is conclusive proof of accepting a periodic tenancy.
• Tenant holding over can do so for a term equal to the original lease, provided it was one year or less.
• Terminating requires proper notice (form and timing set by state law).
• Notice must be given at least one period in advance.
• In Maryland:
  • Termination Requirements for Periodic Tenancy (Outside Baltimore City and Montgomery County):
    • One week for week-to-week tenancy.
    • One month for month-to-month tenancy.
    • Three months for year-to-year tenancy.
  • Tenant's oral notice is sufficient if landlord can prove it.
  • Holding Over:
    • If landlord consents, tenant becomes week-to-week if original lease was week-to-week.
    • Otherwise, tenant becomes month-to-month unless lease states otherwise.
    • Tenant unlawfully holding over is liable for actual damages caused by holding over.

Estate at Will

• Tenant possesses property with landlord's consent, for an unspecified or uncertain term.
• Tenancy of indefinite duration, terminated by either party with proper notice.
• No initial period of occupancy is specified.
• Automatically terminated by the death of either landlord or tenant.
• May be created by express agreement or by operation of law.
• Tenant has full landlord-tenant rights and obligations, including paying rent at regular intervals.
• Rarely used in written agreements, courts are skeptical.

Estate at Sufferance

• Tenant lawfully took possession but remains without the landlord's consent after the right of possession expired.
• Tenant remains responsible for rent at existing terms and rate.
• When a tenant fails to surrender possession or holds over, highlight this, the tenant is still responsible for the payment of the rent at the existing terms and rate.
• Lease may contain holdover clause.
• If no clause, state law governs (three options for the landlord):
  • Accept rent: Creates new tenancy under original conditions (holdover tenancy, one year limit if original lease was longer).
  • Treat tenant as suffering: Object to holding over, creating a month-to-month or periodic tenancy.
  • Treat tenant as trespasser: Proceed with eviction and damages action.
• Landlord must comply with notice-to-quit requirements and state laws.

Valid Contract Requirements (applies to leases)

• Legal capacity to sign (legal age, sound mind).
• Offer and acceptance.
• Consideration (rent amount, L.O.C).
• Consent between parties.

Lease Provisions

• Description of Premises: Clearly describe the property. Street address is sufficient for residential; legal description for land.
• Possession of Premises: Landlord bound by covenant of quiet enjoyment (tenant can occupy without interference). Lease states conditions for landlord entry for maintenance and repairs.
• Use of Premises: Landlord can restrict tenant's use (e.g., residential use only). Restrictions are common in commercial properties.
• Term of Lease: Must state start and end dates and total period. Perpetual lease may be ruled invalid. Some states prohibit leases for 100 years.
• Security Deposit: Held by landlord during the term. Used if tenant defaults on rent or damages the property.
  • MD law: MD law states that landlords may not require security deposits of no more than two months' rental.
  • The Landlords liable to tenants for up to three times any security deposit taken in excess of the limit.
  • Within 30 days of receipt, must be placed in a Maryland-insured bank.
  • Tenants have the right to request a written report of property conditions inspections made in their presence.
  • Landlords who fail to provide reports can be liable for three times the security deposit.
  • Tenants can request to be present at the final inspection.
  • Landlords must return security deposits with interest within 45 days of lease termination.
  • Landlords must present written statements by the landlord with amount extened in repairs.
  • The tenant can modify the property if they are dissabled at their own expense
• Improvements: Neither party required to make improvements. Alterations by tenant become landlord's property.
• Accessibility: Persons with disabilities may modify premises at their expense.
• Maintenance of Premises: Landlord must ensure property is habitable and maintain it. Obligation to pay rent for damaged/destroyed premises depends on property type and lease.
• Subletting: Tenant rents property to someone else.
• Tenant is still responsible for paying the rent to the landlord.
• Recording of a Lease: Certain leases are recorded based on the length of time.
• Nondisturbance Clause: Protects tenancy if the building is mortgaged.

Options

• Lease options must be agreed to by both parties.

Types of Leases

• Gross Lease: Tenant pays rent and some/all utility expenses. Landlord pays property taxes, insurance, and upkeep (residential, commercial office leases).
• Net Lease: Tenant pays rent and most/all property expenses (insurance, taxes, maintenance) - (commercial/industrial buildings, ground leases).
• Percentage Lease: Fixed rent plus a percentage of income (typically for retail businesses).
• Oil and gas leases: A special lease agreement negotiated on the surface space.
• Variable Lease: Rent increases over the term.
  • Graduated Lease: Specified rent increases at future dates.
  • Index Lease: Rent adjusts based on changes/increases in the consumer price index.
• Ground Lease: Landowner leases unimproved land, tenant erects a building (commercial/industrial, also residential).

Discharge of a Lease

• Occurs when the contract terminates.
• Can occur when all parties have performed obligations/ both parties agree to cancel.
• Tenant Surrender: If tenant offers to surrender and landlord accepts, the lease terminates. Tenant abandoning remains liable for the lease terms.
• Property Sales/death:Lease does not terminate for the property sold unless in provision. But there are two exceptions to this rule, The lease from an owner of a life estate ends with the death of the person whose life the life estate is measured and second the death of either party terminates the tennacy at will

Breach of Lease

• Tenant Breach: Landlord can sue for past due rent and damages to the property.
• Landlord Breach: Landlord can be sued for certain remedies.
• Actual Eviction (Suit for Possession): Landlord regains possession through legal process when tenant breaches or retains premises unlawfully. The Landlord must first serve notice before beginning lawsuit.
• Constructive Eviction: Tenant terminates lease if the landlord's breach makes the premises unusable for stated purpose. Example of a broken furnace in winter.

Key Laws

• Fair Housing: Anybody has a right to live where they choose without regard to what they look like, what their color, nationality, religion, family size, disability, or their sex.
• Uniform Resident to Landlord Tenant Act

Maryland Ground Rents

• A number of ground leases exist in all areas of the state of Maryland. A ground tenant typically owns the improvements, located on rented ground.
• When developers might establish a ground rent to keep the selling price within financial reach of buyers.
• Legislature is ending most ground leases between four or fewer units, That is residential.
• Registered ground rent leases become deeded on registration date with Department of Assessments and Taxation.
• You are not necessarily required to register, but you must pay a fee; otherwise, ownership reverts to the homeowner.
• If selling property under ground rent you must warn the buyer upfront that nonpayment of the ground rent will result in loss of the property.

Miscellaneous Provisions from Maryland Law

• If the property was built before 1978, the EPA booklet and Disclosure must be given to tenants. Also, Maryland requirements must be kept with Maryland Department of Enviroment.
  Rental Dwelling units must have carbon monoxide/smoke detectors installed on each level and each bedroom. The landlord cannot pass the costs of the carbon monoxide/smoke detectors.