Principles – Unit 10 – Leases

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1 Leasehold Estates
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Leasehold estates are sometimes called “less than freehold estates.” Leasing or renting
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2 Types of Leasehold Estates
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The four main types of Leasehold Estates are: 1. An Estate for Years: It has a definite beginning and ending date. It is not necessary to give notice to the landlord to terminate an estate for years. Renewal is NOT automatic, when this type of lease is over, it’s over. Many commercial leases and some apartment leases are estates for years. Remember: This type of lease can be for any amount of time. A one-day lease to rent a hotel room has a definite beginning and ending so it would be considered an estate for years. 2. An Estate From Period to Period Also known as periodic tenancy, or a month-to-month lease. Proper notice is required to terminate (30 days – 60 days or whatever is agreed to in the lease). No definite ending date. (This type of lease renews itself for whatever period of time that was called for in the original lease or whatever is agreed upon in the actual lease.) Most apartment leases are estates from period to period if the tenant is required to give notice to terminate. 3. Estate at Will: Landlord lets you stay without a lease. Notice can be given by either party without warning. Death of either party immediately terminates an estate at will. 4. Estate at Sufferance: When a tenant stays past the term of his lease, he/she is known as a holdover tenant because he/she is unlawfully in possession of the property. The landlord must evict the tenant through the court. (He cannot lock the tenant out, turn off utilities, or forcibly remove the tenant.) Actual Eviction: The landlord’s remedy to regain possession of property. Constructive Eviction: This is the tenant’s remedy if property is not habitable. (The tenant must vacate the property, send notice to the landlord telling him/her of the problem, and put the rent money in escrow until the issue can be resolved.)
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Types of Leases
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Types of Leases Gross Lease – apartment Lesse Pays: flat fee Lessor Pays: all expenses Net Lease – Commercial Lesee Pays: flat fee and a % of expenses Lessor Pays: balance of expenses Percentage Lease- shopping mall Lesse Pays: flat fee and a % of gross sales Lessor Pays: all expenses Ground lease – Long-term lease, usually 99 years; tenant may build on a property with a ground lease, but property is still the landlord’s. Index lease – Lease is based on some type of index, such as Cost of Living, etc. Usually adjusts upward. Appraisal lease – A lease which states a date in the future for a new appraisal. (If the appraisal is higher than last appraisal, the rent will go up accordingly.) Graduated lease – Cost goes up at regular intervals. Net lease – The tenant has agreed to pay ownership expenses, usually utilities, property taxes, and special assessments. Net-Net lease – The tenant pays for the insurance as well. Net-Net-Net lease (AKA Triple Net Lease) – The tenant also pays for some agreed-upon items of repair and maintenance. Escalator clause – A clause in a lease in which the parties agree to an adjustment of rent based on set increases in taxes, insurance, maintenance, and other operating costs. Non-disturbance Clause – A mortgage clause which requires that tenants cannot be disturbed if the property is foreclosed upon. Economic Rent – Currently referred to as MARKET RENT, it is the rental income that real estate can command in an open, competitive market at any given time, in contrast with contract rent, or the income actually received under a lease agreement.
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Contract and Conveyance of Lease
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A lease is an oral or written agreement that creates and governs, by express or implied terms, a landlord-tenant relationship. A lease has two characteristics, each of which has its own set of rights and obligations: 1.A conveyance by the landlord to the tenant of an estate in real property covering the premises leased; AND 2.A contract between the landlord and tenant, which governs both the landlord’s delivery and maintenance of the premises and the tenant’s possession of, use of, and payments for the premises. These two factors are known as the dual legal nature of a lease.
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California Statute of Frauds
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The creation of a lease is not nearly as formal in nature as an ownership situation and its related contracts. A lease of one year or less can be either written or verbal, but remember that, under the Statute of Frauds, a lease for more than one year MUST be in writing. (However, it’s considered good business sense to put all real estate agreements or contracts in writing.) California’s Statute of Frauds requires a lease to be in writing if it either: Has a term longer than one year; or Has a term less than one year, which expires more than one year after the agreement is reached. Note that while a verbal lease of greater than one year IS valid, it is NOT ENFORCEABLE under the law. California courts have held that IF a lease is written, then it MUST be signed by the lessor. (The lessee is not required to sign the lease to make it valid, since the fact that the lessee is occupying the property is considered proof that he’s accepted the lease agreement.) Because a lease is a contract, remember that both the lessee and lessor must be legally capable of making a contract. (Each party must be of legal age and sound mind, and be making the contract of his or her own will.)
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Lease Requirements
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A California lease has the following MINIMUM requirements: 1. It must state the length or duration of the lease. (Under the law, agricultural lands have a maximum lease time of 51 years; while urban property leases and mineral, oil, or gas leases have maximum durations of 99 years.) 2. It must include the amount of rent and the date on which it is to be paid. 3. It must contain the names of the parties (lessee and lessor). 4. It must include a sufficient description of the property. (This could be simply the street address or, in some cases, it could mean the street address AND the legal description.) 5. It must give evidence of both the landlord’s and the tenant’s intent to create a landlord-tenant relationship. In addition to these minimum requirements, there are other contractual issues that should be addressed before a lease is drawn up between the parties: 6. It must have ANY RENEWAL OR EXTENSION provisions in at least 8-POINT BOLDFACE TYPE to be valid. (A renewal or extension provision is a clause that would allow for the lease to automatically renew or be extended if the lessee remained in possession of the property once the lease had expired.) 7. The security deposit. 8. Any assignment and subleasing options. 9. Liabilities for injuries and repairs. 10. The conditions and provisions of a lease. 11. The termination of the lease.
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In Addition
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In the case of a periodic tenancy, the lease agreement must state the periods involved. By law, unless a lease agreement states otherwise, rent becomes due only at the end of the term. However, preprinted lease forms usually specify that rent is due on the first day of each month. Regarding an “estate for years” situation, if there is no due date given in the lease agreement, then the rent is due on the LAST BUSINESS DAY OF THE CALENDAR YEAR. Contract Rent is the term given to the actual amount of rent to be paid; this is the payment that is specified in a lease contract when the lease is signed, as the amount due for use of the property. Economic Rent, on the other hand, is not the same as contract rent. Economic rent is the amount of rent that a property could yield, were it available for lease, and taking into account the current market. There could be a dollar amount difference if the landlord is charging (as contract rent) higher or lower than the economic rent would be. Note that any amount of rent paid in advance (such as first and last month’s rent) to the landlord must be claimed on the landlord’s income taxes for that year. Rent control is a government regulation of the amount of rent a landlord may charge a tenant. Rent control is a highly controversial topic, and not one we will cover in detail within this course. You might want to read about the topic and how it relates to California real estate on your own. What you DO need to know is that under California law, NO GOVERNMENT AGENCY MAY ADOPT ANY RENT CONTROL RESTRICTIONS ON NON-RESIDENTIAL PROPERTY.
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Assignment and Subleasing
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An assignment is the transfer of a tenant’s remaining rental rights in a property to a third party. The tenant is allowed to transfer rights, but not his responsibilities, unless the landlord is in agreement. The person to whom the interest in the property is assigned is known as the assignee. Subletting, or subleasing, is the partial transfer of a tenant’s right in a rental property to a third party. Under a sublease, the lessee becomes a landlord and leases to her own tenant. The person who is the original lessee becomes the sub-lessor, while the new lessee is known as the sub-lessee. A sandwich lease is a leasehold interest in a property that lies between the primary, or ownership, interest, and the operating, or tenancy, interest. This means that a lessee or sublessee who holds a sandwich lease is BOTH a tenant AND a landlord to the same property. A lease renewal creates a new and distinct tenancy; therefore, the parties should execute an entirely new instrument. A lease extension, on the other hand, is a continuation in possession under the original lease. A lease extension may also occur if the tenant holds over with permission from the landlord.
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Security Deposits
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The regulations vary depending on whether a property is furnished or not furnished. Keep in mind that security deposits CANNOT be labeled as “nonrefundable.” The maximum allowed security deposits for residential properties (in addition to first month’s rent) are as follows: For an unfurnished rental, 2 months’ rent For a furnished rental, 3 months’ rent A security deposit is made up of the funds provided from the tenant to the landlord, in advance of possession, which are held by the landlord to use for any damages or unpaid rent when the tenant leaves the property. It’s advisable that BEFORE the tenant takes possession, AND again BEFORE the tenant vacates the premises, an inspection of the premises is conducted. This is important to protect BOTH the landlord and the tenant, as it greatly reduces the chances of disputes arising, especially when it is completed together. These regulations are covered in detail under the California Civil Code Section 1950.5. This inspection report, filled out by the landlord (but within the presence of the tenant), states the condition of the property upon the tenant’s moving in and moving out of the property. This is known as a statement of property condition. IF there is NO damage or cleaning required to the vacated property, then the landlord has a maximum of 21 days from the date of the tenant vacating the property to refund the security (and “cleaning”) deposits. However, if either all or a portion of the deposit is to be withheld from the tenant, then the landlord must give that tenant – again, within 21 days – an itemized, written statement of the items and their charges, under Section 1950.5 (g) 1-3 of the California Civil Code. Note that if the landlord retains any portion of the deposit in bad faith, the landlord is liable for actual damages, a statutory penalty not exceeding $600.00, AND interest thereon at the rate of 2% per month from the due date until paid. The landlord might also be held liable for punitive damages.
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Lease Conditions and Provisions
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In addition to the other provisions discussed in this unit, leases usually dictate which party is responsible for utilities and maintenance. Specific regulations regarding the following items might also be set forth: The intended use of the property Parking Pets Guests Noise Maximum number of tenants in the property (as mandated by the law)
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Landlords Rights and Responsibilities
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In a lease, each party owes certain duties to the other, and has certain rights within the lease or rental agreement. The lessee, or tenant, pays rent in exchange for the right to live in and use the landlord’s property. First, let’s discuss the landlord’s duties in a residential lease. In general, the landlord’s rights and responsibilities are as follows: 1. The landlord, by renting the property, is guaranteeing that the property meets the minimum health and housing codes. This is known as the implied right of habitability. 2. The landlord has the responsibility of ensuring that the property’s common areas are safe. In a residential lease situation, the landlord is usually considered liable for injuries that result from defective or dangerous areas in the common areas, such as stairs, elevators, hallways, and the property’s grounds. Landlords should carry a large amount of liability insurance, since building defects have the potential to cause serious injury, possibly leading to a lawsuit by the injured party against the landlord. (However, keep in mind that if the TENANT is responsible for the unsafe conditions through his own negligence, then the liability can easily shift TO that tenant, and away from the landlord.) Note that with non-residential properties, it is usually the TENANT who is responsible for keeping the premises safe. This is achieved by using triple-net lease terms. 3. A landlord MUST respect the tenant’s use and quiet enjoyment of the property, as long as the tenant is following the terms of the lease. A landlord who harasses the tenant without valid cause may face a lawsuit. 4. A landlord must live by federal and state fair housing laws. This means he must not refuse to rent to someone based on that person’s race, color, or national origin; religion; sex, sexual orientation, or marital status; familial status; or physical handicap. (However, if it’s proven that the dwelling could be dangerous to a handicapped person, then a rental refusal might be allowed.) 5. Since January of 2003, a landlord has been allowed to terminate a month-to-month rental agreement by serving the tenant with a 30-day notice; or, if the tenant has lived in the dwelling for more than one year, the landlord can terminate the agreement by serving the tenant with a 60-day notice. It is not required that a landlord provide the tenant with a reason for this termination; nor does the tenant have to be in violation of the terms of the rental agreement. 6. The landlord does have the right to inspect a property periodically, but must follow specific guidelines when doing so (except in the case of an emergency). We will cover these on the following screen
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Landlord’s Right of Entry
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Under a residential lease, the landlord may ONLY enter the rental property under certain circumstances and at certain times (between “normal business hours”), and the landlord must always give, or attempt to give, the tenant advance notice (24-hour notice is generally deemed appropriate.), EXCEPT in the case of an emergency. A landlord may enter a dwelling unit only: in case of emergency; to make necessary or agreed repairs, decorations, alterations, or improvements; to supply necessary or agreed services; to show the dwelling to prospective or actual purchasers, mortgagees, tenants, workmen, or contractors; where the tenant has abandoned or surrendered the premises; or under a court order. A landlord must NOT either abuse this right of entry OR use it to harass the tenant, or he could face legal action by the tenant.
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Tenant’s Rights and Responsibilities
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Now it’s time to look at the rights and responsibilities of the tenant in a residential lease agreement. The following duties are considered reasonable care and habitability, and are owed by the tenant TO the landlord. They are as follows: 1.Tenants must pay the rent when it is due. 2.Tenants must NOT damage the property, beyond normal wear, while it is in their possession. 3.Tenants in a month-to-month lease situation must give at LEAST 30 days’ notice prior to vacating the property. The tenant who does not give this notice can be sued for 30 days’ rent by his landlord. 4.Tenants must not interfere with the rights of other tenants. 5.As we noted above, all California properties must meet certain health and housing codes. Generally, the responsibility for this lies with the landlord. HOWEVER, if the property falls below these regulations due to either an act on the tenant’s part (damage to the property, for example) OR due to negligence by the tenant, then the landlord may file action against the tenant. 6.Tenants must keep the premises clean and sanitary, and properly utilize any fixtures or other facilities on the property. (This also means that tenants may not allow OTHERS to willfully destroy, damage, or remove any part of the property.) 7.Tenants have the right to use and enjoy the property.
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Making Required Repairs
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As we noted earlier, it is the landlord’s responsibility to maintain a residential property in a condition fit for human occupancy. The tenant has the right to give the landlord notice to repair the premises. After the landlord has received the tenant’s notice, the landlord must repair the dangers or other problems on the premises. But, if the landlord receives this notice and fails to make the repairs necessary within a reasonable amount of time, the tenant has the right, as outlined under the California Civil Code Section 1942, to either: 1.Spend up to one month’s rent in repairs (This is permitted only twice in any twelve-month period.), known as rental offset; OR 2.Abandon the premises, in which case the tenant is relieved from the requirement of paying additional rent and the performance of other conditions of the lease. The current law in California FORBIDS any retaliatory action, such as raising the rent or serving an eviction notice, for a period of 180 DAYS after the tenant’s use of this rental offset.
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Terminating a Lease
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A lease can be terminated in a number of ways, but most frequently, a lease or rental agreement is terminated by expiration of the lease’s term OR by mutual consent. Generally, a rental agreement is terminated, by either the landlord or the tenant, with a 30-day written notice (unless the parties have agreed to a longer notice period); this is known as a Tenancy at Will. A 60-day notice is required by the landlord IF the tenant has lived in the property for more than one year. Other means of termination are as follows: 1.Destruction of the property; 2.Condemnation or other government action; 3.Death of one of the parties; 4.Illegal use of the premises; 5.Insolvency or bankruptcy of either party; 6.Abandonment or surrender of the premises (Surrender is the giving up of a lease or other estate, thereby ending any further obligations. Leases are surrendered through mutual agreement or by an operation of the law); 7.Breach of the lease contract by either the landlord or the tenant. 8.Eviction Eviction is the legal procedure of removing a tenant from a property because there is a breach of the lease or rental agreement. Remember that it is ILLEGAL for a landlord to forcibly remove the tenant himself, or to otherwise take matters into the landlord’s own hands, by shutting off the utilities, changing the locks, removing the doors, tossing the tenant’s possessions out of the property, or trespassing.
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Eviction
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If a tenant refuses to give up possession of the property, but refuses to pay rent, then the landlord usually serves a three-day notice to cure a breach or quit. In situations in which a breach of a lease cannot be cured, the three-day notice need not give the tenant the option to cure the breach. The steps to legally remove a tenant from a rental property are as follows: 1.The landlord will serve the tenant with either a 3-day or a 30-day notice. (A 3-day notice is served if the tenant has defaulted on rent or violated another term of the rental agreement; a 30-day notice is served when the tenant hasn’t violated the agreement, but the landlord wants the tenant to leave.) 2.If the tenant refuses to leave, then the unlawful detainer is filed. An unlawful detainer is the legal action in which a complaint, asserting charges against the tenant, is filed with the court. 3.If the landlord wins, the court will award the landlord a judgment, and the landlord will ask for a writ of possession to authorize the sheriff to evict that tenant; and, finally, 4.The sheriff will send the eviction notice to the tenant. If the tenant STILL refuses to leave, then the SHERIFF will physically remove the tenant. Should the landlord wish to recover unpaid rent or be compensated for damages to the property, etc., that must be handled in a separate legal action.

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