Welcome to the RealTown Real Estate Network!
Member Login | Join RealTown
The Real Estate Network

RealTown Words

Sounds Like: laches, lessee
An agreement, written or unwritten, transferring the right to exclusive possession and use of real estate for a definite period of time. The lessor (landlord) grants the right of possession to the lessee (tenant) but retains the right to retake possession after the lease term has expired (reversionary right).
In effect, the lease is a combination of both a conveyance (to transfer the right of occupancy) and a contract (to pay rent and assume other obligations). It is an exchange of the possession and profits of the land in return for rent. The lessor’s interest is called the leased fee estate and consists of the right to recover the contract rent plus the reversion. The lessee’s interest is called the leasehold estate and consists of the right to the exclusive use and occupancy of the leased estate. An “agreement for a lease” contemplates the execution of a lease at a later time.
Historically, landlord-tenant relations developed from early agricultural leases, under which the landlord’s obligation was limited to providing the tenant with peaceful possession; in return the tenant agreed to pay rent. The landlord was not expected to assist in the operation of the land and leased lands were under the exclusive control of the tenant without interference from the landlord. In the simplest terms, the tenant-landlord relationship was a strict possession-rent relationship. If a tenant defaulted in rent payment, eviction would be forthcoming. In a rural setting, this was a workable arrangement.
Today, contract law determines the validity of a lease. Although no special wording is necessary to create the relationship of landlord and tenant, a lease should be in writing. If it is not, the law will write it for the parties involved. Although—depending on the circumstances—the lease may be written, oral, or implied, the provision of the statutes of the state in which the real estate is located must be followed. The lessor, being the owner of the real estate, is usually bound by an implied covenant of quiet enjoyment for the benefit of the lessee. By this covenant, the lessor asserts that the lessee will not be evicted by a person who successfully claims to be the real owner of the premises with a title that is paramount to the lessor’s. The requirements for a valid lease are similar to those of a contract and are generally as follows:
Capacity to contract:
The parties must be legally capable of entering into a contract. (Note, however, that a minor can generally enter into binding contracts for necessities, of which housing may be considered one of the most essential.)
Mutual agreement:
The parties must reach a mutual agreement and support it by valid consideration.
Legal objectives:
The lease objectives must be legal; that is, it would generally be illegal to lease a building to manufacture and sell methamphetamines, so a lease for such a purpose would be invalid.
Statute of frauds:
State fraud statutes generally apply to leases. They usually provide that leases for more than one year (one year plus one day) or leases that cannot be fully performed within one year from the date of making must be in writing. A lease for exactly one year could fall short of the requirements of the statute of frauds if the lease period commences after the date of entering into the agreement. Similarly, a lease for less than one year may fall under the statute of frauds if more than one year elapses between the signing of the lease and its termination date. Regardless of the term, any lease should be put into writing to avoid disputes and misunderstandings between the parties. A lease not in conformance with the statute of frauds is generally considered unenforceable.
Signatures:
The lease must be signed by the landlord (and wife, if a dower state) because the courts consider the lease as a conveyance of real estate. Although it is good practice for the lessee to do so, a lease need not be signed by the lessee because his or her taking possession and paying rent with knowledge of the lease terms constitutes an acceptance of the lease terms. When a lease is signed by two or more tenants, they become jointly and severally liable and can avoid this only by signing separate leases specifying their separate obligations.
Description of premises:
A description of the leased premises should be clearly stated and may only include a street address and/or apartment number for residential, apartment, and small commercial properties. Large commercial site leases, on the other hand, must be more detailed, including such things as a floor plan, total square footage, storage areas, parking, and the like. If the lease affects land, as with a ground lease, a legal description should be used.
Use of premises:
The lessor may restrict the use of the leased property through provisions included in the lease, particularly important with leases for stores or commercial space. For example, a lease may contain a provision that the property is “to be used for the purpose of a Big Beltbuster Burger Bonanza Bazaar drive-in restaurant, and no other.” If the lease does not state a specified purpose, the tenant may use the premises for any lawful purpose.
Term of lease:
The term of lease is the period the lease will run and should be stated precisely preferably with the beginning and ending term dates stated together with a statement of the total period of the lease—for example, “for a term of 30 years beginning June 1, 1968, and ending May 31, 1998.” Courts do not favor leases with an indefinite term and will hold that such perpetual leases are not valid unless the language of the lease and the surrounding circumstances clearly indicate that such is the intention of the parties. Leases are controlled by and must be in accord with the statutes of the various states. Some state statutes limit terms of agricultural leases and leases for 100 years or more. Generally the lease term is unaffected by the death of either landlord or tenant.
Possession of leased premises:
In most states, the landlord must give the tenant actual occupancy or possession of the leased premises. Thus, if the premises are occupied by a holdover tenant or adverse claimant at the date of a new lease, the landlord owes a duty to the new tenant to bring whatever action is necessary to recover possession and to bear the expense of this action. However, in a few states, the landlord is bound to give the tenant only the right of possession, and then it is the tenant’s obligation to bring any necessary court action to secure actual possession. It is this right to exclusive possession that distinguishes a lease from a mere license to use property.
Consideration:
Although payment of rent is not essential as long as consideration was granted in the creation of the lease itself, some courts have construed rent as being any consideration that supports the lease, not limiting its definition to the monthly payment of a specified amount. Most courts will not enforce an agreement to reduce or increase the rent during the term for which the lease was originally drawn once the lease is in force. Generally, courts consider the lease a contract and therefore not subject to change unless the changes are in writing and agreed to by both parties. Most modern leases provide for rent to be paid in advance. In addition to the payment of rent, most land leases and long-term leases require that the tenant pay all property charges, such as real estate taxes, special assessments, water and sewer taxes, and all necessary insurance premiums to protect the property. Most leases provide for some form of security, such as contracting for a lien on the tenant’s property, by requiring the tenant to pay a portion of the rent in advance, by requiring the tenant to post security, and/or by requiring the tenant to have a third person guarantee the payment of the rent.
There are three main classifications of leases:
1. Leases based on the type of realty involved, such as office leases, ground leases, proprietary leases, residential leases
2. Leases classed according to the term of the lease, such as short-term and long-term leases—Most short-term leases are gross leases requiring the landlord to pay all taxes, assessments, and operating costs (such as most apartment leases). Long-term leases (generally ten years and longer) are often net leases that give the tenant greater rights and responsibilities. Particularly in long-term leases, attention should be given to the rights of both parties in the event of condemnation of the leased premises.
3. Leases classed according to the method of rent payment (such as fixed-rental, graduated, percentage, gross, and net leases)
Generally, leases can be filed for record in the county in which the leased property is located although most leases are not recorded unless they are for a relatively long term (three years or more) or are security for a mortgage.
Unless prohibited in the lease, a lessee may assign his or her lease or sublet the premises. A tenant transferring the entire remaining lease term assigns the lease as opposed to transferring most but not all of the term sublets. Most leases prohibit a lessee from assigning or subletting without the landlord’s permission. When a lease is assigned, the assignee becomes the principal obligor, and the lessee assumes the position of a surety.
If the landlord sells the property, the grantee takes title subject to the lease and becomes liable for all lease covenants. Tenants who make improvements to a landlord’s property usually do so for the benefit of the landlord. If classified as fixtures, such improvements become part of the real estate. However, a tenant may be given the right to install trade fixtures or chattel fixtures by the terms of the lease. It is customary to provide that such trade fixtures may be removed by the tenant before the expiration of the lease provided the tenant returns the building to the condition it was at the time of possession.
In leases involving agricultural land, the courts have held that damage or destruction of the improvements does not relieve the tenant from the obligation to pay rent to the end of the term. This ruling has been extended in most states to include leases of land on which the tenant has constructed a building or leases that give possession of an entire building to the tenant. Because the tenant is leasing an entire building, the courts have held that he or she is also leasing the land on which that building is located. In those cases where the leased premises are only a part of the building (such as office or commercial space or an apartment in an apartment building) upon destruction of the leased premises the tenant is not required to continue to pay rent. Furthermore, in some states if the property was destroyed as a result of landlord negligence, the tenant can recover damages from the landlord. Under most commercial and industrial leases, the tenant must maintain and repair the interior and often the exterior of the premises as well.
A lease may be terminated by:
* expiration of the term;
* merger of the leasehold and fee estates;
* destruction or condemnation of the premises;
* abandonment;
* agreement of the parties (surrender);
* forfeiture due to default or breach of the leasing terms and conditions (note that under the federal Bankruptcy Act, tenant bankruptcy is no longer a permitted ground for default); and
* commercial frustration of purpose, such as if the proposed use is made illegal (but not if the tenant cannot obtain a needed business license).
Dearborn Real Estate Education
This "Word of the day" is excerpted from The Language of Real Estate, 6th Edition by John Reilly (published by Dearborn Real Estate Education, 2006 copyright). To purchase the complete book, with over 2800 key terms and definitions, or to browse through Dearborn's hundreds of other professional real estate titles, including Real Estate Technology Guide by Klein, Barnett, Reilly, click here.