REALWorld Law

Commercial leases

Types of lease

What types of arrangement does the law recognize which allow occupation and use of real property for a limited period of time?

United States

United States

There are two main types of arrangement allowing a person, company or other entity to occupy real estate for a limited period of time without acquiring the fee title interest.

The first is a lease, which grants the right of exclusive possession of the property for an agreed period of time. A lease confers on the tenant contractual rights and a leasehold interest in the property, which interest can in most States be transferred to a third party except to the extent restricted by the terms of the lease. There are many different variants of leases but commercial leases broadly fall into one of two categories: ‘Gross Leases’ where the tenant’s financial responsibility is primarily limited to the payment of rent and the landlord is responsible for the operating costs of the property; and ‘net leases’ where, in their purest form, the tenant is responsible for the payment and rent and is also responsible for the cost of operating, insuring and paying taxes on the real property. Net leases tend to be longer in duration than other leases. A ‘ground lease’ is a sub-specie of net lease where the tenant is given rights to develop a parcel of land leased to it. Typically in a ground lease, the improvements are owned by the tenant for the duration of the ground lease term and at the expiration or termination of the lease, revert to the ownership of the landlord or are removed by the tenant.

The second main type of arrangement is a license, which grants permission to occupy or use the property. Unlike a lease, a license is a personal contractual arrangement between the original parties conferring no transferrable interest in the real estate and often is not binding upon future owners of the land. The remedies of a licensee against a defaulting licensor are in many cases severely circumscribed when compared to the rights of a tenant against a defaulting landlord.