Contracts Study Guide for the Real Estate License Exam

Property Management and Leases

Sometimes, real estate agents manage property and lease houses, apartments, or commercial property on behalf of a real estate investor. Leasing property to tenants generates income for the investor, so it is important the real estate agents understand the different types of leases.

Leasehold Estates

A leasehold estate is a temporary right granted from one party to another to use the property over a certain time. The landlord is the lessor and gives the right, the tenant is the lessee and receives the right. The four types of leasehold estates are:

Estate for Years
Estate from Year to Year
Estate or Tenancy at Will
Estate or Tenancy at Sufferance

Estate for Years

Also known as an estate for term, an estate for years is a leasehold estate for a certain period. There is a specific beginning and ending date. Contrary to the name, an estate for years can be for any length of time, not just year to year. At the ending date, the lessee or tenant must vacate the property.

Estate From Year to Year

This type of leasehold estate is for a year and automatically renews for another year—and another, and another—until either party gives notice as agreed to in the lease.

Tenancy at Will

Also known as an estate at will, a tenancy at will does not have a specific ending date. The tenancy can be terminated at any time by either the will of the landlord or the will of the tenant.

Tenancy at Sufferance

A tenancy at sufferance occurs when a leasehold has expired, neither the tenant or the landlord has renewed the lease, the landlord has not demanded that the tenant vacate the property, and the tenant is still using the property. During a tenancy at sufferance, the tenant is expected to pay rent and honor any other obligations of the original lease.

Lease Provisions

A lease is a written, legally binding contract between the landlord or lessor and the tenant or lessee. Provisions of the lease describe the responsibilities of both the lessor and the lessee. Lease provisions can also describe what happens if one or both parties do not do what they promise to do.

Rent

Rent is compensation that the landlord or lessor receives from the tenant or lessee in exchange for using or occupying the landlord’s property. Rent is usually paid in money, but it does not have to be money. For example, a landowner could lease its land to a farmer, in exchange for part of the crops being grown by the farmer.

Percentage Lease

A percentage lease is used in commercial real estate. With this type of lease, the tenant usually pays a fixed base rent, plus a percentage of the tenant’s sales if the sales exceed a certain monthly amount. The idea behind this lease is that if the landlord helps the tenant to increase sales, the landlord should receive some additional rent in exchange for the extra effort.

Gross and Net Leases

A gross lease is when a tenant pays the same amount of rent every month that includes everything such as utilities, and landlord expenses such as maintenance and property tax. A net lease is when a tenant pays a monthly rent plus its share of landlord expenses, plus utilities. With a net lease, the amount of rent a tenant pays can vary from month to month.

Escalation and Graduated Leases

Leases that have escalation or graduated provisions allow the landlord to periodically increase the rent that the tenant pays. The amount of the increase, and when it can occur, is described ahead of time in the lease.

Index Lease

An index lease is when the rent the tenant pays can be increased based on an established index or reference. Usually, the CPI—or consumer price index—that tracks inflation is used as the index. Index rent increases are usually made at the same time each year and are a provision of an index lease.

Assignment and Subletting

Assignment means that one party gives its rights in a leasehold to another party. A landlord can assign a lease to a new buyer, and a tenant can assign its lease to another tenant. Subletting is when a tenant rents—or sublets—its leasehold for the remaining term or a portion of the lease to another tenant.

Sale of the Property

If a landlord sells its property, the leaseholds transfer to the new owner. When this happens, both the new owner and the tenant are still obligated to abide by and must honor the terms of the original lease. As long as the tenant pays rent and follows the provisions of the lease, the new landlord must allow the tenant to stay.

Lease Termination

A lease is terminated when the ending date is reached and neither the landlord nor the tenant extends the existing lease or negotiates a new lease. Leases can also be terminated before the ending date by mutual agreement between the landlord and tenant, if the tenant stops paying rent and the landlord is forced to evict the tenant, or if the property is destroyed or significantly damaged before the ending date of the lease.

Ground Lease

Sometimes also called a 99-year lease, a ground lease is when a tenant has a long-term leasehold on a parcel of land, and builds and maintains their own building. At the end of a ground lease, the tenant is required to remove its building and return the land to the owner. A ground lease is also a type of net lease.

Sale and Leaseback

A sale and leaseback is when an owner sells its property to a buyer, then turns around and leases back—or rents back—the property. This is a good arrangement for real estate investors who want an immediate tenant, or for sellers who want to move, but not right away.

Landlord-Tenant Law

Landlord-tenant laws describe the legal rights of both landlords and tenants. These laws differ from state to state and are in addition to federal laws such as Fair Housing Laws. Some states are known to be landlord-friendly, with the law favoring the landlord, while other states are known to be tenant-friendly. Landlord-tenant laws are often referenced when a landlord needs to evict a tenant, and these laws describe the exact procedures that must be legally followed.

Rent Control

Rent control is when some part of the government, usually a city, regulates and limits the amount of rent that a landlord can charge a tenant. This is the opposite of market rent, where supply and demand determine the rent.

Withholding Rent

If a landlord does not adhere to a lease provision, a tenant might withhold—or not pay—his or her rent until the landlord does what they are supposed to do. Sometimes, a leasehold allows the tenant to withhold rent, sometimes the landlord-tenant law allows the tenant to withhold rent, and sometimes the tenant will decide to withhold rent illegally.

Trade Fixtures

Trade fixtures are a type of personal property that is used specifically for a business. While normal fixtures—things that are attached—stay with the property when the leasehold expires, trade fixtures go with the tenant. Built-in refrigerator cases in a convenience store, or a hydraulic lift in an auto garage, are two examples of trade fixtures.

Property Management

Property management involves much more than just leases. Real estate agents who manage an owner’s property are responsible for the overall oversight, maintenance, and control of the property. Property managers are also accountable to the owner for the condition and financial performance of the real property. Likewise, property owners also have obligations to their property managers to provide the funds and resources that allow them to do their job.