There are two main types of arrangements allowing a person, company or other entity to occupy real estate for a limited period of time without acquiring a fee title interest.
The first is a lease, which can grant 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 (including subleases, by which a tenant holding a leasehold interest can transfer its right of possession to a subtenant) but commercial leases broadly fall into one of two categories: (1) ‘Gross Leases’, where the tenant’s financial responsibility is primarily limited to the payment of base rent and the landlord is responsible for the operating costs (including insurance and taxes) of the property, except for a variation of Gross Lease known as a “Full-Service Gross Lease”, where the tenant may be responsible, either directly or for amounts in excess of a base year, for such operating costs on a percentage basis with other tenants of the property; and (2) ‘net leases’ where, in their purest form, the tenant is responsible for the payment of base rent and is also responsible for the cost of operating, insuring and paying taxes on the real property based on the percentage of the leasable square footage of the property that consists of the tenant’s premises. 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. Similarly, it is typically far easier for a licensor to remove a defaulting licensee from a licensed premises than it is for a landlord to remove a defaulting tenant from a leased premises.
Last modified 22 Mar 2024
The duration of commercial leases vary on a case by case basis and can be any length of time, but typically range from three to ten years. Longer term leases tend only to be encountered in the context of ‘ground leases’ and ‘net leases’. In ‘net leases’, the tenant is responsible for the cost of operating, insuring and paying taxes on the real property. 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.
Last modified 22 Mar 2024
Real estate laws and regulations vary from state to state (and among local jurisdictions within each state) and advice from local counsel should be sought as to local laws affecting leases for specific property types. Residential tenants in particular are often accorded additional statutory rights.
Last modified 22 Mar 2024
Generally speaking, a tenant’s right to occupy the leased premises ends when the term of its lease expires. However, under the common law ‘holdover rule’, a tenant remaining in possession after lease expiration without the landlord’s agreement may be treated by the landlord either as a trespasser subject to eviction or as a tenant under a lease for a new term, which term is generally equal to the rent payment periods set forth in the lease. For example, if rent is paid monthly, the new term cwould be month to month and subject to 30 days’ notice by either party to terminate. Most states have enacted legislation abolishing this rule – the terms of those statutes vary widely in how they govern the relationship between the landlord and the holdover tenant. Consequently, guidance with respect to the actions to be taken by a landlord to ensure timely vacation of the premises should be sought from a qualified local lawyer. That said, a well-drafted lease will typically clearly state how a holdover situation will be handled; for example, it may give the landlord broad rights to immediately evict the holdover tenant while charging the holdover tenant a much higher rate of rent during the period of holdover. It is fairly typical to see landlords and tenants agree in their commercial leases to holdover rent at a rate of 150% –-- 200% of the immediately preceding rent during the period of holdover. Another variation could be for a lower amount (such as 125%) for a limited period, such as 30 days, followed by an escalation to a higher amount such as the aforementioned 150% –-- 200%. However, landlords should be careful not to charge too high a rate, as it could constitute an unenforceable ‘penalty’. U.S. law typically disfavours penalties in contracts, and the more a holdover rental escalation strays from the foregoing 200% increase, the more likely it could be successfully struck down by a tenant as an unenforceable ‘penalty’.
Last modified 22 Mar 2024
Under the common law ‘holdover rule’, a tenant remaining in possession after lease expiration without the landlord’s agreement may be treated by the landlord either as a trespasser subject to eviction or as a tenant under a lease for a new term, typically for a month-to-month term. Most states have enacted legislation abolishing this rule – the terms of those statutes vary widely in how they govern the relationship between the landlord and the holdover tenant. Consequently, guidance with respect to the actions to be taken by a landlord to ensure timely vacation of the premises should be sought from a qualified local lawyer. That said, a well-drafted lease will typically clearly state how a holdover situation will be handled; for example, it may give the landlord broad rights to immediately evict the holdover tenant while charging the holdover tenant a much higher rate of rent during the period of holdover.
Last modified 22 Mar 2024
A well drafted lease will always grant the landlord the right to recover possession of the premises if the tenant defaults under its lease obligations. However, leases will generally grant the tenant a grace period in which to cure most instances of default before the lease can be terminated and possession recovered by the landlord. State law will govern the process for recovering possession and certain States grant tenants additional statutory rights affording the tenant an opportunity to cure the default. Please consult a lawyer qualified in the state in question for details of how long the process typically takes in a particular locality.
In addition, sometimes leases explicitly grant the landlord a right to terminate the lease prior to expiration of the term. Such special termination rights are not common to any particular locality or property type – their inclusion is entirely dependent upon the deal negotiated between the parties.
It is also important to note that some leases, particularly for smaller office spaces in multi-tenant buildings, will give a landlord the right to recapture any portion of a leased premises that a tenant proposes to assign or sublease. In effect, this recapture right serves as a lease termination right. In addition, some leases (again, particularly for smaller office spaces in multi-tenant buildings) will give a landlord the right to relocate a leased premises elsewhere on the property. In effect, this relocation right serves as a lease termination right for the premises being relocated (while keeping the lease in effect for the new premises).
Finally, it is common for leases to give landlords (and, in many cases, tenants) a right to terminate the lease in the event of extensive damage caused by casualty (eg fire, flood, etc.) or if the government exercises a right of eminent domain/condemnation (eg to acquire the leased premises and/or the property on which the leased premises is situated).
Last modified 22 Mar 2024
The federal and state governments’ inherent power to take land for public purposes so long as compensation is paid to the land owner is commonly known as the power of ‘eminent domain’ or ‘condemnation’ in the United States. Upon complete condemnation, any leases affecting the land will automatically terminate and, subject to the provisions of the lease, the affected tenant may have a claim for a portion of the compensation award to cover the value of the unexpired lease, the tenant’s fixtures and relocation expenses. Whether a condemnation of only part of the land will result in terminating a lease will depend upon the materiality of the land taken and the provisions of the lease governing this circumstance.
Last modified 22 Mar 2024
The most common types of security are cash security deposits, letters of credit issued by a bank, and guaranties (which are typically given by either a parent company of the tenant or key individual(s)).
Last modified 22 Mar 2024
A lease will commonly limit the purposes for which a tenant can use the leased premises. Typically, the lease will specify certain permitted uses (e.g., office use) and will expressly prohibit other uses. In addition, localities commonly impose zoning laws which limit the lawful uses of property within a given area. In addition, the underlying real estate of a leased premises may be subject to covenants, conditions and restrictions (so-called “CC&Rs”), which are recorded documentation that may limit how a leased premises can be used. Zoning laws and CC&Rs vary in each local jurisdiction and advice from local counsel should be obtained regarding the applicable zoning laws and CC&Rs affecting the permitted uses for any particular lease.
Last modified 22 Mar 2024
The provisions of the lease will govern to what extent, if any, the tenant is permitted to perform alterations at the premises and under what conditions. Additionally, local and other laws will often regulate the conduct of alteration work performed at the premises, including requirements for ensuring the safety of construction work and the adequacy of fire protection systems and affording access to disabled persons. Depending on the type of alteration and the local jurisdiction rules, the tenant may need to comply with governmental requirements prior to commencing the work, such as obtaining a building permit from a local building or planning department. Many commercial leases will also include a work letter setting forth improvements that are to be performed as part of the tenant’s initial occupancy of the leased premises. Depending on the deal, the landlord or the tenant may be responsible for performing such work, and the landlord may or may not provide an allowance for such work. If an allowance for such work is not applicable, then the landlord may be responsible for performing the work on a so-called “turnkey” basis (i.e., at the landlord’s cost), subject to exceptions intended to ensure that actual costs do not exceed the landlord’s budget for such costs. In any event, how much of an allowance or “turnkey” work is contemplated as part of a lease, if at all, will often be taken into account by the parties in deciding what the base rent should be, any applicable base rent abatement and any other economic terms.
Last modified 22 Mar 2024
Generally speaking, a lease can prohibit the tenant from assigning its leasehold interest in the lease for the remainder of its term, subleasing all or a portion of the leased premises, mortgaging its leasehold interest or otherwise granting rights in the leased premises to a third party.. Even if not absolutely prohibited, the tenant’s ability to assign or sublet will usually be conditional upon obtaining the landlord’s prior consent. The standard for the landlord’s consent will typically vary on a lease-by-lease basis. For example, some leases may require a landlord to not act unreasonably in withholding consent, and other leases may allow a landlord to withhold consent in its sole discretion. To minimize the potential for dispute, a lease may include specific examples of when a landlord may withhold its consent to a transfer. If the lease is silent as to whether transfers are prohibited, the law of most states will allow the tenant to transfer its lease.
Last modified 22 Mar 2024
Whether the base rent will vary is entirely dependent upon the negotiated terms of the lease.
Last modified 22 Mar 2024
If the lease provides for the base rent to be changed or increased, it will either specify the amount of such change or increase (for example, a typical base rent increase may be 3% of the then-applicable amount on an annual and cumulative basis) or will provide a mechanism, such as a procedure for appraisal by an independent expert, for its determination or increases tied to a specific metric, such as the Consumer Price Index (CPI), which is a US government published statistic mirroring the cost of living increases in a region.
Last modified 22 Mar 2024
There is no value added tax on base rents in the US. However, some city and other local governmental authorities do impose sales or occupancy taxes on base rents. In some instances, such taxes are only levied against particular types of property. For example, some local governmental authorities may impose a tax if the lease term for a particular lease exceeds a certain length of time. Please consult with a local lawyer for details of the taxation applicable in any given locality.
Last modified 22 Mar 2024
The costs payable upon lease commencement are governed by the terms of the lease. Most leases provide for the first fixed rent payment to be made upon signing the lease, together with the delivery of any required security.
Last modified 22 Mar 2024
Leases of premises within multi-tenanted properties generally provide an operating expense clause detailing a mechanism for the tenants to proportionately share the cost of maintaining and operating the common facilities. Some leases (called “full-service gross” leases) require tenants only to pay increases above those operating expenses that the landlord incurred in a set ‘Base Year’.
Last modified 22 Mar 2024
In the typical commercial lease, a tenant will be directly responsible for maintaining and repairing non-structural, non-building system portions of the leased premises at its own cost, and the landlord will be responsible for repairing and maintaining the property exterior, structure, systemse and common areas, subject to reimbursement, typically with some limitations (such as for certain capital expenses), by tenants through the shared operating expense mechanism whereby all of the tenants proportionately share the cost of maintaining and operating the common facilities. Some leases (called “full-service gross” leases) require tenants only to pay increases above those operating expenses that the landlord incurreds in a set ‘Base Year’ (which will often either be the calendar year during which the lease commences, or the ensuing calendar year if the lease commences closer to such ensuing calendar year). With ‘ground leases’ and certain types of ‘net leases’, the tenant will be directly responsible for repairing and maintaining the entire leased premises at its own expense (which, for some leases, may include the legal parcel that is the subject of the leased space). In ‘net leases’, in principle, the tenant is responsible for the cost of operating, insuring and paying taxes on its proportionate share of the real property. 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.
Last modified 22 Mar 2024
Tenants of multi-tenanted properties will typically be charged for electricity either (a) directly by the electricity provider if the premises is separately metered, or (b) by the landlord based either upon their proportionate share of the landlord’s electricity bill as measured by sub-meter readings or upon a fixed electrical charge subject to adjustment if, for instance, the cost of electricity charged to the landlord or the tenant’s electrical consumption increases.
How water is paid for will generally depend upon how the water is to be used – in office and most retail leases, for instance, the landlord will often pay for the cost of water for drinking and lavatory purposes. In restaurant, industrial and other leases where there is frequently more significant water usage, the tenant will often be responsible for the cost of its actual use, measured by sub-meter where possible.
Payment of heating and air conditioning charges depends upon the type of property in question. For example, with retail leases the tenant will often be directly responsible for procuring heating and air-conditioning at its own expense. However, in the case of multi-tenanted office buildings landlords will often provide the equipment and pay for the heating and air conditioning of tenants’ premises during regular business hours (subject to reimbursement through the shared operating expenses mechanism whereby all of the tenants proportionately share the cost of maintaining and operating the common facilities) and tenants may be charged for such service provided outside of regular business hours.
Tenants are generally responsible for procuring telecommunications services at their own expense.
Last modified 22 Mar 2024
Except in the case of ‘ground leases’, it usually falls upon the landlord to insure the building against fire and other types of damage (subject to reimbursement of premiums through the shared operating expenses mechanism whereby all of the tenants in a building or development proportionately share the cost of maintaining and operating the common facilities). The tenant will be responsible for obtaining general liability insurance and property damage insurance with respect to the leased premises and tenant’s property, along with workers’ compensation insurance as required by law. Tenants are often required to procure business interruption insurance and insurance covering injury to employees and workers (the latter may even be required by applicable law). Insurance requirements for coverage related to employees and workers may vary from jurisdiction to jurisdiction. With ‘ground leases’ and certain types of ‘net lease’, the tenant will be directly responsible for insuring the entire leased premises at its own expense. In ‘net leases’, in principle, the tenant is responsible for the cost of operating, insuring and paying taxes on its proportionate share of the real property. 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.
The precise events which are covered by the insurance in question, and the extent of any exclusions, vary according to the insurance market in which the property is located, the type and use of the property, and the specific terms of the lease negotiated by the landlord and tenant. For example, if an industrial tenant anticipates using a leased premises for the handling of hazardous materials, then the parties may negotiate a requirement for the tenant to maintain insurance specific to such handling of hazardous materials. Similarly, if a restaurant tenant anticipates operating a bar, then the parties may negotiate liquor liability insurance requirements for such tenant.
Last modified 22 Mar 2024
Can a lease be terminated by any third party, eg the government or a municipal authority? If so, how long does this process take? Is compensation payable and, if so, who pays it?
The federal and state governments’ inherent power to take land for public purposes so long as compensation is paid to the land owner is commonly known as the power of ‘eminent domain’ or ‘condemnation’ in the United States. Upon complete condemnation, any leases affecting the land will automatically terminate and, subject to the provisions of the lease, the affected tenant may have a claim for a portion of the compensation award to cover the value of the unexpired lease, the tenant’s fixtures and relocation expenses. Whether a condemnation of only part of the land will result in terminating a lease will depend upon the materiality of the land taken and the provisions of the lease governing this circumstance.
Last modified 22 Mar 2024