Landlord and Tenant 320-353

What is a (tenant) finish-out allowance?

A (tenant) finish-out allowance is a provision in a lease for an office or retail space that provides a certain sum or amount per square foot to the tenant for customizing the space provided. For example, a retail tenant leases 10,000 square feet of space for five years at an annual rental rate of $10 per square foot. The lessor provides four concrete walls and a concrete floor, and will pay the tenant a finish-out allowance of up to $4 per square foot for costs to customize the space.

What is dispossess proceeding?

A dispossess proceeding is the legal process by a landlord to remove a tenant and regain possession of property. For example, after not having received rent for three months, the landlord began dispossess proceedings to eject the tenant.

What is a gross lease?

A gross lease is a lease of property whereby the landlord (lessor) is responsible for paying all property expenses, such as property taxes, insurance, utilities, and repairs. For example, in a certain apartment complex, the landlord pays for all utilities and property taxes. The lease is a gross lease, since the landlord receives rent as a gross amount and must pay operating expenses.

What is a holdover clause? A holdover tenant?

A holdover clause is a provision in a lease that determines what happens when the tenant remains beyond the expiration of the lease. A holdover tenant is a tenant who remains in possession of leased property after the expiration of the lease term. For example, Abel leases an apartment for one year. At the end of the year, Abel is still in the process of finding a new home, so he does not want to sign another on-year lease. As a holdover tenant, Abel may be evicted or allowed to remain on a month-to-month basis by continuing to pay rent as may be provided in the holdover clause in the lease or, if not stated, at the landlord's discretion. Abel is a tenant at sufferance.

What is a lease?

A lease is a contract in which a tenant pays rent for exclusive use of specified property for a specified period of time, under the terms of the contract. The owner transfers rights to use the property to the tenant. For example, Abel leases office space from Baker. Under the lease signed by the parties, Abel is allowed to conduct business activities within the office space for five years, subject to specified restrictions. Baker is entitled to receive $1,000 per month of rent, as provided in the contract.

What does leased fee mean? What is a leasehold or leasehold estate?

A leased fee is the landlord's ownership interest in a property that is under lease, that is, a property that is rented to a tenant. A leasehold or leasehold estate is the tenant's interest in the leased property. For example, if you buy a property and own it in fee simple (you hold all ownership rights) and then rent it to someone else, that person holds leasehold (estate) and your interest or estate is leased fee. You have transferred some of your ownership rights to the tenant for a specified period of time.

What is a lessee? What is a tenant?

A lessee is a person to whom property is rented under a lease. A tenant is someone who is given possession of real estate for a fixed period of time or at will. In the figure below (for diagram see #323), Baker is the lessee.

What is a lessor?

A lessor is a property owner who rents property for someone else to use under a lease; a landlord. In the figure below (for diagram see #322), Abel is the lessor.

What is a mineral lease?

A mineral lease is an agreement that provides the lessee the right to excavate and sell minerals on the property of the lessor or to remove and sell petroleum and natural gas from the pool underlying the property of the lessor. In return, the lessor receives a royalty payment based on a fraction (such as 1/8) of the price of the minerals removed. The lessee gains a working interest in the property, whereas the lessor has a royalty interest. Fracking is a technique drillers use to release oil or gas from within a rock formation (shale). Fracking combined with horizontal drilling has been a successful method of producing oil and gas, but opponents claim that fracking has negative environmental consequences. For example, the Minivers own a piece of land in Texas that is part of an area covering a large oil reserve. Big Frack Oil Company offers them a mineral lease that pays the Minivers a prorated share of oil revenues in exchange for the right to place a well at locations within the reserve area. The Minivers will receive royalties based on oil production and prices.

What is a net lease?

A net lease is a lease of property whereby, in addition to the base rent, the lessee (tenant) pays such things as taxes, insurance, and maintenance. The landlord's rent receipt is thereby "net" of those expenses. For example, Baker leases retail space from Abel on a net lease. Abel can expect to receive the base rent because Baker pays operating expenses. In practice, various levels of "net-ness" are often used to specify which expenses the lessee (tenant) pays, and which expenses the landlord pays.

What is a percentage lease?

A percentage lease is a lease of property in which the rental is based on a percentage of the volume of sales of the tenant from the property. It usually provides for minimum rental and is regularly used for retailers who are tenants. For example, the Genuine Gems jewelry store is located in a shopping mall. Its base rent is $6,000 a year, but a percentage lease requires the store to pay additional rent in the amount of 6% of annual sales in excess of $100,000. If its sales in a year are $150,000, its rent would be $9,000, comprising $6,000 base rent plus $3,000 percentage rent (6% of $50,000, which is the amount of sales that is above $100,000).

What is a stop clause?

A stop clause in a gross lease states an amount of operating expense above which the tenant must bear the excess. Often the base amount is the amount of expense for the first full year of operation under the lease. For example, a stop clause requires the tenant to pay all utilities in excess of $2,500 per year. The landlord pays the utilities cost up to $2.500.

What is a sublease?

A sublease is a lease from a lessee to another lessee. The new lessee is a sublessee or subtenant. The sublease can be for all or part of the property, and the rent can be for more or less than the primary lease. Leases often prohibit assignment or subletting without the landlord's permission. For example, Acme, Inc., leases office space under a ten-year lease. Acme wishes to relocate but cannot break the lease. With the landlord's permission, Acme finds a subtenant, Medcorp, to sign a sublease for the space. Medcorp pays rent to Acme, which, in turn, continues to pay rent to the landlord.

What is a triple-net lease?

A triple-net lease is one in which the tenant must pay all operating expenses of the property; and the landlord receives a net rent. Operating expenses do not include financing expenses (interest and principal payments) or income taxes, which are the landlord's burden. For example, Big Buy Supermarkets enters into a triple-net lease. Big Buy will pay for all the property taxes, utilities, insurance, repairs, janitorial services, and license fees. Any debt service and the landlord's income taxes are the responsibility of the landlord.

What is an anchor tenant?

An anchor tenant is the main tenant or one of the main tenants in a shopping center. This may be a department store in a shopping mall, or a grocery store in a strip shopping center. Big Buy Food is the anchor tenant in the figure to the right (for diagram see #344). The anchor tenant, because it has drawing power to bring customers to the center and a strong credit rating, normally pays less rent per square foot than an ancillary tenant. Large shopping centers may have more than one anchor tenant. Many lenders require that an anchor tenant be committed to a lease before they will finance a shopping center.

What is an assignment of a lease?

An assignment of lease occurs when a tenant assigns the exact entire lease to another party. This does not relieve the original tenant of obligations under the lease.

What is an escalation clause?

An escalation clause, often found in a gross lease, allows the landlord to pas along expense increases, such as increases in taxes or utilities, above a base year amount.

What is assignment of rent?

Assignment of rent is an arrangement whereby the landlord of mortgaged property gives the mortgage lender the right to collect rent directly from the tenant(s) under certain conditions.

What is base rent?

Base rent is the minimum rent due under a lease that has a percentage or participation requirement. For example, Spinning Records leases retail space in Majestic Mall. Under the lease, Spinning Records must pay a base rent of $30,000 per year, plus 5% of all sales revenues over $600,000 per year.

What are demised premises?

Demised premises refers to property subject to a lease. For example, an apartment is rented under a written lease. In the lease, the apartment is referred to as the demised premises.

What is meant by distraint?

Distraint is the legal right of a landlord to seize a tenant's personal property to satisfy payment of back rent. For example, Abel is six months in arrears on rent. Landlord Baker obtains a court order to seize Abel's furniture to satisfy the rent due. Baker is exercising his right of distraint.

What is ejectment?

Ejectment is action to regain possession of real property when there is no lease. For example, the seller in a conditional sales contract, through an action in ejectment, regains possession when the buyer defaults. Contrast this with eviction and dispossess proceedings, both of which are used to regain possession of leased property.

What is meant by evicition?

Eviction is a legal proceeding by a lessor (landlord) to recover possession of leased property. When a tenant fails to comply with the lease agreement (skipping rent payments, unauthorized use of the property, etc.), the landlord will seek eviction of the tenant. If successful, this action will terminate the rights of the tenant to use the property, called an actual eviction. A constructive eviction occurs when the landlord disturbs a tenant to the extent that the tenant moves out.

What are leasehold improvements?

Leasehold improvements are fixtures attached to real estate that are generally acquired or installed by the tenant. Upon expiration of the lease, the tenant can generally remove them, provided such action does not damage the property or conflict with the lease. For example, cabinets, light fixtures, and window treatments of a retail store in a leased building are leasehold improvements.

How are lease durations classfied?

Leases are categorized according to duration as follows: - Estate for years; has a fixed period of time. - Estate from year to year (or month to month); can be renewed each year or month. - Tenancy at will: either party may terminate the lease at any time. - Tenancy at sufferance; a formerly lawful tenant remains on the premises after the lease expires; often results when a tenant refuses to move because his or her proposed new location is not yet available.

What is leasing?

Leasing is a method of temporarily transferring the right to use property. The property owner (landlord) surrenders this right to a tenant for a specific period of time in exchange for a specified payment. For diagram see #320

What is market rent? Contract or lease rent?

Market rent is the rent that a property or a comparable unit would command if currently offered in the competitive market. Contract or lease rent is the actual amount required by a lease. Leases often begin by charging rent at market rates. Over time, the market rate may change, but the lease rent remains fixed by the lease. When market rents rise in an inflationary environment, while contract rents are fixed, the value of the leasehold estate will rise.

What is month-to-month tenancy?

Month-to-month tenancy is temporary possession of property by means of a lease agreement that may be extended or canceled each month. For example, Abel rents an apartment from Baker on a month-to-month tenancy basis. Abel may remain as long as he pays rent and Baker does not give notice to cancel the lease. Abel may also cancel the lease upon giving one month's notice.

What is percentage rent or overage rent?

Percentage rent (overage rent) is rent payable under a percentage lease. Typically the percentage applies to sales in excess of a pre-established base amount of the dollar sales volume. Percentage rents in a typical neighborhood shopping center are shown in the table below: - Card and gift shop 5.0-8.0% - Drugstore 2.5-4.0% - Liquor and wine shop 1.5-5.0% - Pet shop 5.0-8.0% - Restaurant 4.0-7.0% - Supermarket 1.0-2.0%

What is rent? What is rental income?

Rent is money or other property paid for the use of space. Rental income is the money collected from tenants for the use of space. For diagram see #321

What are tenant improvements?

Tenant improvements (TIs) are those changes, typically to office, retail, or industrial property, to accommodate specific needs of a tenant. They may include moving interior walls or partitions, carpeting or other floor covering, shelves, windows, toilets etc. The cost of these is negotiated in the lease; often the lessor provides an allowance. For example, in negotiation with Pag Stores for a new five-year lease on space in a regional mall at an annual rent of $30 per square foot,Crosins Properties agrees to pay up to $20 per square foot for tenant improvements. Pag Stores needs to put in new carpets, light fixtures, doors, and windows, which will cost considerably more than the allowance, but it will bear the excess cost.

What is meant by net leasable (rentable) area?

The net leasable area (NLA) or net rentable area (NRA) in a building or project is floor space that may be rented to tenants, the area on which rental payments are based. With important exceptions, this generally excludes common areas and space devoted to the heating, cooling, and other equipment of a building. For example, a building with ten floors, each floor containing 3,000 square feet of space, may have a net leasable area of 25,000 square feet. Elevators, hallways, and the like absorb the remaining 5,000 square feet. In many office buildings, however, the NRA includes everything except vertical shafts. This would be especially true in a building in which tenants rent an entire floor, so that the hallways would be included in the rented space.

What are three major types of lease categorized by the rental required?

Three types of lease categorized by rental required are: - Net lease. - Gross lease - Percentage lease

What are three ways to end a lease?

Three ways to end a lease are: - Performance: both parties perform to the end of the term as stated. - Breach: one or both parties violate a lease provision in a manner that terminates the lease. - Agreement: both parties agree to terminate the lease.