The Lease: What to Consider
There are ways to generate income from real estate, other than by selling it. For example, you can lease or license it to another person or business for a certain use. Whether you have a lease or license is important in determining your rights as the property owner. As with any contract, if there is a dispute regarding a lease, Courts will look to the "four corners" of the lease to determine the intent of the parties, so you should never rely on oral representations made to or by another party.
A lease is an agreement between the party owning the property (the "lessor" or "landlord") and the party seeking to use the property (the "lessee" or "tenant"). A lease typically gives the lessee an exclusive right to use the property for a defined period of time in exchange for some sort of value or "consideration". The lease itself conveys an actual interest in the property to the lessee (known as a "leasehold interest"). Depending on the terms of the lease, the leasehold interest can be transferred by the lessee to another party. A common example of a lease is a rental agreement for an office building.
A license occurs when the party owning the property (the "licensor") gives the party seeking to use the property (the "licensee") permission to use the property for a specific purpose. In contrast with a lease, a license can be exclusive or non-exclusive; can be terminated by the licensor at any time; does not convey any interest in the property; and cannot be transferred by the licensee to another party. A common example of a license is permission to use land to hunt deer or other game.
In the business context, it is important to make sure your commercial lease, for example, contains simple, all-inclusive, protective language. You should consider the following questions:
- What is the nature of the property? What is the purpose of the lease? How compatible are the two?
- What is the term of the lease? How and when can the lease be renewed?
- Are there any risks involved with the lessee operating his/her/its business on the property?
- How much will rent be? Will there be a security deposit? What if the lessee fails to pay timely?
- Who will be responsible for taxes, insurance, and maintenance?
- Will the lessee be permitted to make changes to the property? To what extent?
- What happens if the property is damaged by the lessee? By other persons? By weather or natural forces?
- Will the lessee be permitted to assign or sublease his/her/its leasehold interest?
- What constitutes a "default or "breach" of the lease? Will the lessee have an opportunity to fix or "cure" that default?
Leases often contain certain "boilerplate" language, which is language that is found standard in most contracts. It is important not to overlook or discount boilerplate language. For example, a lease should contain an indemnification provision to protect you, as the owner of the property, against claims or suits that result from the lessee's conduct or breach of the lease.
Leases, like any other contract, can and should be tailored to your specific needs and situation. It is highly advised that you consult legal counsel before entering into any lease, whether it be for commercial, residential, or other purposes. If you would like to set up an appointment and get started on renting out your office space or apartment building, for example, contact Stubbins, Watson, & Bryan Co., L.P.A. today!