Unit 17 - Leases

Most leases include clauses relating to rights and obligations of the landlord and tenant, such as:

- appropriate use of the premises - subletting - judgments - maintenance of the premises - termination of the lease period

A lease may be terminated by:

- the expiration of the lease period - the mutual agreement of the parties - breach of lease by either landlord or tenant *in most cases, neither death of the tenant nor the landlord's sale of the rental property terminates a lease.

The Frauds Act (740 ILCS 80/) requires that leases for more than one year or those that cannot be performed in one year be:

... in writing to be enforceable.

__________ and __________ protect the rights of tenants.

1. Fair housing 2. Civil rights

If a tenant defaults on the payment of rent, the landlord has which options?

1. Sue for money judgement 2. Evict 3. Both

Memorandum of Lease

A document that references the basic terms of a lease but typically does not include all of the details of the agreement. A memorandum of lease is acceptable for recordation of the tenant's interest. Only the names of the parties and a description of the property are included.

Holdover Tenancy

A holdover tenancy is created if a landlord accepts rent from but does not create a new lease contract with a tenant. The acceptance of rent is usually considered conclusive proof of acceptance of the holdover tenancy. Some leases stipulate that in the absence of a renewal agreement, a tenant who holds over does so month-to-month.

Lease

A lease is a contract between an owner of real estate (lessor) and a tenant (lesee); it transfer's the lessor's rights to exclusive possession and use of the property to the tenant for a specified period of time. The lease establishes the length of time the contract is to run, the amount the lesee is to pay for use of the property, and other rights and obligations of the parties.

Options

A lease may contain an option that grants the lessee the privilege of renewing the lease (renewal option); the lessee must give notice of his intention. A purchase option (lease purchase agreement) normally allows the tenant the right to purchase the property at a predetermined price within a certain period. A right of first refusal clause allows the tenant the opportunity to buy the property before the owner accepts an offer from another party.

Variable Lease

A lease that allows for an increase in rent during the rental period. Graduated: specified increases at set future dates. Index: allows rent to be increased or decreased periodically, based on consumer price index or some other economic indicator.

Use of premises

A lessor may restrict a lessee's use of the premises through provisions included in the lease. Example: "the space can be used only as a real estate office and for no other purpose."

nondisturbance clause

A mortgage clause stating that in the event that the mortgagee forecloses on the mortgagor-lessor's building, the mortgagee agrees not to terminate the tenancies of lessees who pay their rent.

Referral Fees

A resident or tenant of a unit who refers a prospective tenant for a unit in the same building or complex may be paid a referral fee if he: - refers no more than three prospective lessees in any 12-month period; - receives compensation of no more than $1,500 or the equivalent of one month's rent, whichever is less, in any 12-month period; - limits activities to referring prospective lessees and does not show units, discuss lease terms, etc.

sale clause

A tenant must be given some period of notice before termination due to sale of the property. This needs to be in the lease agreement.

Sale-and-Leaseback Arrangement

A transaction in which an owner sells the property, terminating his freehold estate, and agrees to lease the property back from the purchaser for an agreed upon period; often used when extra capital is needed on a construction project. A freehold estate converted to a less-than-freehold estate (non-freehold).

Estate at Sufferance

A type of possession in which a tenant who lawfully possessed real property continues in possession of the premises w/ landlord's consent after the rights expire; tenancy at sufferance. Example: a tenant for years fails to surrender possession at the lease's expiration and continues until the landlord completes the eviction process. Example: occurs by operation of law when a borrower continues in possession after a foreclosure sale and beyond the redemption period's expiration. Under IL law, a tenancy at sufferance arises when a tenant remains in possession after the term of the lease expires, and the landlord has a choice to evict as a trespasser or treat the tenant as a holdover tenant. If treating the tenant as a holdover, the landlord is entitled to seek double rent through civil action.

The authority to carry out the eviction of a delinquent tenant from a rented property is held by the" A. court B. landlord C. sheriff D. property owner

A. court

Agricultural Lease

Agricultural landowners often lease their land to tenant farmers, who provide the labor to produce and bring in a crop. A landowner can be paid by a tenant in one of two ways: as an agreed-on rental amount in cash in advance (cash rent), or as a percentage of the profits or losses from the sale of the crop when it is sold (sharecropping).

Estate for Years

Also called tenancy for years, or fixed-term tenancy. This leasehold estate continues for a definite period of time (years, months, weeks, even days) and always a specific beginning and end date. No notice is required to terminate the estate for years because the lease agreement states a specific expiration date. When the exp. date comes, the lease expires and the tenant's rights are extinguished. If both parties agree, the estate for years may be terminated before the expiration date. Otherwise, neither party may terminate without showing the lease agreement has bee breached. The lessees right to occupy exists for the entire term and is unaffected by the original lessor's death or sale of the property unless the lease says otherwise.

Ground Lease

An agreement for the tenant to lease the land only and erect a building on the land. - generally involve separate ownership of the land and buildings; often run for terms of 50 to 99 years. These are generally net leases.

Escalator clause

An escalation clause is a real estate contract, sometimes called an escalator, that lets a home buyer say: "I will pay x price for this home, but if the seller receives another offer that's higher than mine, I'm willing to increase my offer to y price." In theory, an escalation clause is fairly simple.

Estate at will

An estate where the landlord gives the lessee the right to possession until the estate is terminated by either party; the term of this estate is indefinite, unspecified and uncertain; tenancy at will. - may be created by express agreement or by operation of law and is terminated by the death of either the landlord or tenant. Generally interpreted as an estate from period to period by the courts.

rental-finding service

Any business that finds, attempts to find, or offers to find for any person for consideration a unit of rental real estate or a lessee for a unit of rental real estate not owned or leased by the business. - often required to enter into written contracts with the parties for whom their services are to be performed. - any rental-finding service may not list or advertise any unit without the express written authority of the unit's owner or agent.

A lessee is in possession of property under a tenancy at will. Which of the following is TRUE? A) The lessee has not received the consent of the landlord to possess the property. B) The tenancy will terminate if the lessee dies. C) The tenancy was created by the death of the lessor. D) The tenancy has a definite termination date.

B. the tenancy will terminate if the lessee dies.

In which of the following would you most likely find an escalator clause? A. ground lease B. lease option C. index lease D. Percentage lease

C. Index lease

The requirements of a valid lease include:

Capacity to contract, a legal objective, offer and acceptance, and consideration (CLOAC). Re: consideration, the payment of rent is not essential as long as consideration was granted in creating the lease itself. Sometimes, for example, the consideration is "labor is performed on the property." Because a lease is a contract, it is not subject to subsequent changes in terms unless these changes are executed in the same manner as the original lease.

Estate from Period to Period

Created when the landlord and tenant enter into an agreement for an indefinite time - that is, the lease does not contain a specific expiration date; month-to-month, week-to-week, year-to-year. Continues indefinitely until proper notice of termination is given, and rent is payable at definitive intervals. Automatically renewable under the original terms until one of the parties gives notice to terminate. *may be created when a tenant with an estate for years remains in possession (estate at sufferance) after the lease term expires.

The principal difference between an estate for yeard and estate from year to year is that: A. an estate for years is a life estate B. an estate for years cannot be terminated C. an estate from year to year must be in writing D. an estate from year to year has no expiration date

D. an estate from year to year has no expiration date An estate from period-to-period has an indefinite term.

Violations of Implied warranty of habitability

Failing to: - provide access to drinkable water and hot water, heat during cold weather, working electricity, a smoke detector, and a working bathroom and toilet - remediate rodent or insect infestations - correct building code violations A tenant must give the landlord notice of a defect and reasonable time to cure it. As a remedy, the tenant may choose to: - move out and terminate the lease if repairs are not made within a reasonable time (constructive eviction) - stay and repair the problem and deduct the repair costs from the next month's rent (repair costs cannot exceed one month's rent) - sue for damages

Recording a Lease

Generally unnecessary to record, although most states allow a lease to be recorded in the county in which the property is located. Leases of three years or longer often are recorded as a matter of course.

Three basic types of leases

Gross: tenant pays a fixed rent and landlord pays all taxes, assessments, insurance, maintenance and utilities connect with the property (property charges or operating expenses); most typical. Net: tenant pays for all or some of the operating expenses in addition to the rent. In a triple-net-lease (net-net-net lease), the tenant pays all operating expenses and other expenses in addition to rent. Percentage: A gross lease or a net lease may be a percentage lease, whereas the rent is based on a minimum fixed rental fee plus a percentage of the gross income generated by the tenant doing business (exceeding a stated annual amount) on the leased property. May also pay property charges.

Breach of Lease

If the tenant breaches the lease, the landlord may sue for overdue rent, damages to the premises, or other defaults. - if the tenant defaults on rent, the landlord can: 1. landlord can serve the tenant with 5 days' notice and demand payment within 5 days of notice received. If no payment received, landlord can terminate the lease and sue. 2. landlord can serve the tenant with 10 days' notice and terminate the tenancy and include a demand for possession. After the 10-day period expires, the landlord may sue for possession without further notice (this can also happen in cases in which the tenant's breach is other than by nonpayment of rent). If the landlord breaches any lease provision, the tenant is entitled to certain remedies.

The __________ defines fair housing as including freedom from discrimination against an individual because of race, color, religion, sex, national origin ... (etc.)

Illinois Human Rights Act

Assignment and Subleasing

Lease assignment occurs when a tenant transfers all of his leasehold interest to another person. The new tenant is legally obligated for all the promises the original tenant made in the lease. Lessor > Lease > Lesee (secondarily liable) > Assignment > Assignee (primarily liable) > Rent > Lessor When a tenant transfers less than all the leasehold interests by leasing them to a new tenant, the original tenant has subleased (or sublet) the property. A sublessor's (original lesee) interest in the real estate is called a sandwich lease. The original tenant remains responsible for rent being paid by the new tenant and for any damage done to the rental during the lease term. Lessor > Lease > Lessee/Sublessor (primarily liable) > New Lease > Sublessee (not liable to lessor) > Rent > Lessor Most leases prohibit the tenant to assign or sublease w/out the landlord's consent, although the lessor must not unreasonably withhold consent.

What is a lessor's interest in real estate called?

Leased fee estate plus reversionary right.

security deposit

Money paid to a landlord to cover potential cleaning costs at the end of the lease, as well as any damages the property suffered during occupancy. - if tenant defaults on rent, the lessor may keep all or part of the deposit to compensate. - landlords who receive deposits on residential leases of units in properties containing five or more units may not withhold any part of a deposit as compensation for damage unless they give an itemized statement listing the alleged damage. The statement must be delivered w/in 30 days of the date on which the premises are vacated, and if the statement is not furnished, the landlord must return the entire deposit w/in 45 days on which the premises is vacated. A landlord must pay the tenant double the deposit due plus court costs if he fails to comply. Lessee's are entitled to receive annual interest of 0.01%.

Improvements

Neither the landlord nor the tenant is required to make any improvements to the leased property. The tenant may make improvements with the landlord's permission, however.

If premises become inhabitable because of the landlord's negligence or failure to correct conditions within a reasonable time, the tenant may have:

Remedy of constructive eviction; the right to abandon the premises and refuse to pay rent until the premises are repaired.

Residential and Commercial lease drafting

Residential: pre-printed leases are usually better suited. Commercial: letters of intent are often prepared in advance of a commercial lease by the licensees representing the respective parties.

Reversionary Right

States that the rights of property possession revert to the lessor at the expiration of a lease.

Notices required by IL statute:

Tenancy from year to year: at least 60 days' written at any time within the four-month period before the last 60 days of the lease period. Tenancy from month to month: In any periodic estate having a term of less than year to year but greater than week to week, 30 days' written notice is required. Tenancy from week to week: seven days written notice. Fam tenancies from year to year: parties must give at least four months' written notice to terminate and may do so only at the end of the period. To vacate 3/1, notice must be given by 11/1.

Accessibility

Tenants with disabilities must be permitted to make reasonable modifications to a property at their own expense. - if the modifications would interfere with a future tenant's use, the landlord may require that the premises be restored to their original condition at the end of the term.

Discharge of Lease

Termination can occur when the contract ends or both parties mutually agree to terminate. - a tenant who abandons remains liable for compliance with the terms of the lease, including payment of rent; if the landlord sues, he's required by most states to mitigate the damages by re-renting the property in order to limit the amount owed by the defaulting tenant A lease generally does not terminate if the parties die or if the property is sold, although there are two exceptions: 1. a lease from the owner of a life estate ends when the tenant's life ends 2. the death of either party terminates a tenancy at will.

Implied warranty of habitability

The Illinois Supreme Court first confirmed the concept of an implied warranty of habitability in residential tenancies in 1972. Since then, Illinois courts have repeatedly confirmed and amplified the warranty. A landlord must deliver and maintain throughout the duration of the lease any residential leasehold free from defects that would render the use of the dwelling "unsafe or unsanitary" and unfit for human occupancy. Nothing may be present on the premises that could seriously endanger the life, health, or safety of the tenant.

Possession of Premises

The landlord is usually bound by the covenant of quiet enjoyment and further guarantees that he will not interfere in the tenant's possession or use of the property.

Actual Eviction

The legal process that results in the tenant's being physically removed from the leased premises; the landlord must serve notice on the tenant before commencing the lawsuit. In IL, the landlord must file an action called a forcible entry and detainer. If the court rules in favor of the landlord, a judgment for possession (money damages) will be entered, and an order of possession will be issued by the clerk of the court. Until a judgment is issued, the landlord must be careful not to harass the tenant in any manner. In IL, landlord's do not have the right to forcibly remove a tenant (self-help) without following proper legal procedures.

Destruction of Premises

The obligation to pay rent for damaged or destroyed premises differs depending on the type of property and the lease. Usually, residential tenants are permitted to reduce their rent payments in proportion to the amount of space they are unable to use. Likewise, tenants who lease only part of a building, such as office or commercial space, generally are not required to continue to pay rent after the leased premises are destroyed. In fact, in some states, if the property was destroyed as a result of the landlord's negligence, the tenant can recover damages.

term of lease

The period for which the lease will run.

T or F: in IL, property management requires a real estate license.

True

__________ leases for one year or less that can be performed within a year of their making are enforceable.

Verbal

Leases for one year or less that will not be performed within one year of the contract date must be in writing to be:

enforceable in court.

Federal lead-based-paint laws are strictly __________ in Illinois.

enforced

A(n) __________ is possession without the consent of the landlord.

estate at sufferance

A(n) __________ runs as long as the landlord permits.

estate at will

A leasehold estate that runs for a specific length of time creates a(n):

estate for years; also tenancy for years, or fixed-term tenancy.

A leasehold estate that runs for an indefinite period creates a(n):

estate from period to period.

A(n) __________ is generally classified as a personal property interest

leasehold estate

A tenant's rights to possess real estate for the term of the lease is called a:

leasehold estate; less-than-freehold estate.

Landlords who receive security deposits on residential leases of units in properties of 25 or more units, on deposits held for more than six months, are required to pay interest from the date of the deposit at a rate equal to the interest paid on a __________ of the state's largest commercial bank (measured by total assets) with its main banking facilities located in IL.

minimum deposit passbook savings account

Freehold is also known as:

ownership

D leases a barber shop from K. The lease does not specifically indicate who is responsible for making repairs to the premises; the expense of making such repairs is generally:

paid by the lessee (D).

An individual real estate licensee must perform property management services under the supervision of the __________.

sponsoring broker.

If a tenant moved out of a rented store building because access to the building was blocked as a result of the landlord's negligence, the tenant would be entitled to:

sue and recover damages from the landlord.

When a tenant voluntarily gives up possession of leased premises prior to the lease's expiration, it's called:

surrender; if a tenant surrenders prior to the expiration or termination of the lease, the landlord must accept the tenant's offer to surrender, thus terminating the lease.

When a tenant holds possession of a property without a definite lease term but WITH consent of the landlord is called:

tenancy at sufferance.

For a written lease to be enforceable, it should contain:

the signature of the lessor.

Lease Purchase

when a tenant wants to purchase the property but is not yet able to do so. - in this agreement, the purchase is the primary consideration and the lease is secondary. - part of the periodic rent is applied toward the purchase price of the property until the price is reduced to an amount for which the tenant can obtain financing or purchase the property outright.