Chapter 10

THE NATURE OF LEASES AND TENANCIES

A lease is a contract for the conveyance by a lessor (owner) of possession of real estate for a defined period of time for which the lessee (tenant) agrees to pay a stipulated amount of rent. The interest created is a leasehold estate, since the tenant has possession but no title. Such an interest may either be in writing, in which case it is referred to as a "lease," or it may be oral, in which case it is referred to as a "tenancy at will."

 A leasehold interest is considered personal property, since title remains vested with the landlord. During the term of the lease or tenancy, the tenant has rights similar to that of owner, subject to restrictions in the lease or tenancy agree­ ment. Upon termination of the lease or tenancy, possession reverts to the owner.

 A leasehold interest is considered personal property, since title remains vested with the landlord. During the term of the lease or tenancy, the tenant has rights similar to that of owner, subject to restrictions in the lease or tenancy agree­ ment. Upon termination of the lease or tenancy, possession reverts to the owner.

LEASEHOLD INTERESTS. 

There are four types of leasehold interests. The two most commonly dealt with in commercial and residential leasing are a tenancy for years (lease), and a tenancy at will. The third, a periodic tenancy, is similar to a tenancy at will. The fourth, a tenancy at sufferance, occurs when a lessee or tenant retains possession after the tenancy has been terminated. The various leasehold estates are covered in detail in Chapter 4.

TYPES OF LEASES. Leases are generally classified according to the method of payment of rent. The major types of leases are:

1. Straight Lease. The rent remains the same during the term of the lease.

2. Gross Lease. The tenant pays a fixed amount of rent, and the lessor pays all property charges regularly incurred through ownership, such as insurance, taxes, and maintenance. Most residential leases are gross leases.

3. Net Lease. In a net lease, the lessee pays a stipulated rent plus operating expenses of the property, such as taxes, insurance, repairs, and maintenance. The expressions, "triple net" or "net-net-net," are redundant, since they mean the same as a net lease.

4. Percentage Lease. A percentage lease is a commercial lease in which the lessee pays a fixed amount of rent plus a percentage of annual gross receipts. The lessor reserves the right to periodically audit the tenant’s records.

5. Step-up or Graduated Lease. A step-up lease provides for periodic rent increases at future dates.

6. Reappraisal Lease. A reappraisal lease provides for rent increases based upon periodic independent appraisals of the property.

SPECIAL LEASES. In certain situations, it may be advantageous to one or both parties to lease the property rather than convey title, as in a sale and leaseback, and a ground lease.

Sale and Leaseback. A sale and leaseback is used as a form of financing. An owner-occupant remains as a tenant or lessee after the property has been sold. The seller obtains capital from the sale of building or improvement costs, and the buyer obtains an investment. The seller, who becomes the tenant, deducts the rent as a business expense. If the owner retained title and borrowed money for the cost of the improvement, only the interest would be tax deductible. In another version of a sale and leaseback, an owner erects a building, sells it to a prearranged buyer and immediately leases it back.

Ground Lease. A ground lease is one in which land is leased to a tenant who agrees to erect a building on it. The lease is generally a net lease requiring the tenant to pay "ground rent," as well as real estate taxes, insurance and mainten­ance. A ground lease is usually written for a period of fifty years or more to make the transaction desirable to the tenant. In some parts of the United States, such as Hawaii, residences are built on leased land. Such leases are written for up to ninety-nine years. Although, technically, the improvements become the property of the fee owner, certain state laws vest leaseholders with some of the rights and obligations of real property owners. The leaseholder has a right to sell the improvement and to assign the ground lease to the buyer.

ESSENTIALS OF A VALID LEASE

Since a lease is a contract, it is subject to the same requirements of any other contract, i.e. offer and acceptance, consideration, legal capacity of the parties, legal objective and signatures of the parties. In addition, leases must contain the following essentials:

1. Writing. In most states, the statute of frauds requires that a lease for more than one year be in writing in order to be enforceable. In Massachu­setts, all leases must be in writing to be enforceable.

2. Description of the leased premises. The lease must contain a full and accurate description of the leased premises, including all the appurtenances, such as parking, basement and storage space. If the lease is for land as well as building space, a description of the land similar to that in a deed, must be included.

3. Term of the lease. A lease must contain a definite period of time, whether it be days, weeks, months or years. A lease for a term of one hundred years or more is regarded as an estate in fee simple so long as fifty years of the term are unexpired. It is for this reason that long-term leases are never written for more than ninety-nine years.

4. Rent. The total rent for the entire term of the lease must be indicated, as well as the amount and time when the periodic payments are due.

5. Demise Clause. Certain words of "demise" must be used in the lease, such as "leases to.." or "does hereby let and demise."

6. Signatures. The lease must be signed by both parties and delivered to the lessee. Signatures do not have to be notarized unless the lease is to be recorded.

7. Delivery and Acceptance. The lease becomes valid when delivered to the tenant. In Massachusetts, a copy of the lease must be delivered to the tenant within thirty days after it's signing.

8. Recording: Seven-year rule in Massachusetts. Recording is not essential to the validity of a lease regardless of its term. However, in Massachusetts, a lease, which will run for a term of seven years or more, is not binding upon a new owner unless notice of the lease is recorded (constructive notice), or the buyer has actual notice of the lease. For example, a tenant has an eight-year lease, which is not recorded, and the building is sold to a buyer who does not have notice of the lease. By law, the new owner is not bound by the lease. For recording requirements, the term of the lease starts from the date the lease was signed rather than the date of possession. For example, a lease for a term of five years, which does not commence until three years after it is signed, comes within the recording requirement.

COVENANTS IN LEASES - EXPRESSED AND IMPLIED

EXPRESSED COVENANTS. There are many conditions or restrictions, which may be included in a lease or tenancy agreement. Expressed covenants protect the owner’s rights as well as the tenant's. Some covenants may be barred by law, while others must be included and worded strictly in accordance with tenant protection laws:

1. Restrictive Covenants. Most leases contain clauses regarding the keeping of pets, changing of locks, conducting illegal activities, making excessive noise, etc.

2. Landlord’s Obligation to Make Repairs. A condition in a lease, which limits the landlord's duty to repair, is unenforceable if it conflicts with statutes requiring the landlord to keep the premises in a safe and habitable condition. However, it is not improper for a lease to require the tenant to maintain the heating equipment if the landlord is not responsible for heat.

3. Use of the Premises. The purposes for which the leased premises are to be used and the restrictions on its use must be set forth in the lease.

4. Improvements to the Premises. Neither the landlord nor the tenant is required to make any improvement to the leased premises unless required by the terms of the lease. Any improvements or fixtures installed by the tenant become a part of the real estate unless the landlord agrees to their removal. Trade fixtures may be removed.

5. Assignment and Subleasing. Most leases prohibit the lessee from assigning or leasing without the owner’s consent. However, by law, the owner may not unreasonably withhold such consent. Subleasing transfers an interest or a part of the premises with a reversion remaining with the lessee. The original lessee remains liable for the rent. If the transaction conveys the entire term leaving no reversionary interest, it is considered an assignment, and the assignee becomes directly liable to the landlord for the rent. Under a sublease, the original lessee’s interest is known as a sandwich lease.

6. Option to Purchase. An option to purchase allows the tenant to buy the rented premises upon pre-specified terms. The option runs with the lease in the event it is assigned, but does not extend beyond the term of the lease.

7. Right of First Refusal. A right of first refusal gives the tenant the right to either purchase the property or to renew the lease if offered for sale.

8. Option To Renew. An option to renew allows the tenant to renew the lease for an additional term upon specified conditions. The parties must execute a new lease.

9. Automatic Extension Clause. An automatic extension clause is a provision in residential lease, which extends the term of the lease for a specified time period, unless notice to the contrary is given prior to the termination of the lease.

10. Number of Persons to Occupy. A lease may limit the number of occupants, but a clause terminating a lease if the tenant has a baby or adopts a child is unenforceable.

11. Insurance Requirement. Commercial leases often require the tenant to maintain hazard insurance on the building to cover losses caused by the tenant. If the tenant does not have such coverage, the right of subrogation allows an insurer to hold the tenant liable for the loss if it resulted from the tenant’s negligence. Residential tenants should be advised of this, and be given an opportunity to obtain proper insurance.

12. Security Deposit. A lease may provide some form of security in case the tenant causes damage to the premises or vacates before the lease expires. State law regulates handling of security deposits. Massachusetts's security deposit regulations are covered in detail in Chapter 20. Note: Certain real estate securities must be registered with the SEC (Securities and Exchange Commission).

13. Tax Escalation Clause. A tax escalation clause requires the tenant to pay a percentage of the annual increase in real estate taxes.

14. Rent Adjustments. A lease may contain a clause, which provides for rent increases based upon the Consumer Price Index (CPI).

IMPLIED COVENANTS. Once a valid lease has been executed the lessor and lessee are bound by the following covenants, which are implied by law:

1. Quiet Enjoyment. Quiet enjoyment is the right of the lessee to use the premises free of disturbance or interference by the landlord or third parties. For example, a tenant leases a second floor apartment over a store. After taking possession, the landlord allows the storeowner to erect a neon flashing sign next to the tenant’s bedroom. This is a breach of the implied covenant of quiet enjoyment.

2. Prevention of Waste. It is implied that the tenant will keep the premises in such condition so as not to diminish its value. Voluntary or Commissive Waste consists of a deliberate act of destruction by the tenant, such as destroying, altering, or removing buildings or trees. Permissive or Passive Waste occurs when the tenant fails to exercise the ordinary care of a prudent person for the preservation and protection of the property. The tenant is not liable for "ordinary wear and tear."

TERMINATION OF LEASES AND TENANCIES

Leases and tenancies may be legally terminated by any of the following:

1. Expiration of the term.

2. Destruction or condemnation by eminent domain of the premises.

3. Mutual agreement or surrender of the premises.

4. Abandonment by the tenant.

5. Default or breach of the leasing terms and conditions.

6. Mortgage foreclosure, provided the mortgage preceded the lease.

7. Proper termination notice given by either party.

 The following events do not automatically terminate a lease or tenancy:

1. Death of the landlord does not terminate a lease; however, neither the death of the landlord or the tenant terminates a lease and will be binding upon their respective estates, unless there is language to the lease to the contrary. In Massachusetts, when a mobile home park tenant dies, the lease will continue for one year from the date of death.

Note: A tenancy at will terminates upon the death of either the landlord or the tenant.

2. Sale of the premises does not terminate a lease or tenancy. In Massachu­setts, a lease for seven years or more is not binding upon a new owner unless the lease is recorded or the new owner has actual knowledge of it.

TERMINATION NOTICE. A tenancy at will may be terminated by a thirty-day notice given by either party. The landlord may terminate a tenancy or a lease for non-­ payment of rent by giving a fourteen-day notice.

Thirty-Day Notice to Terminate a Tenancy at Will. Massachusetts requires a minimum thirty-day notice or at least one full rental period to terminate a tenancy at will. For example, in order to terminate a month to month tenancy, a full month notice must be given prior to the rent due date. Thus, if a landlord wishes to terminate a tenancy on August 31, the tenant must be notified before August 1.

Fourteen-Day Notice to Quit for Non-Payment of Rent. In Massachusetts (G.L. Chap. 186, Secs. 11 & 12), a lease or tenancy may be terminated for non-payment of rent by a fourteen-day notice in writing. The tenancy may continue if the tenant pays the back rent within ten days of receipt of the notice, provided there has not been a prior fourteen-day notice given within the preceding twelve months. In the case of a commercial lease, paying the rent due prior to the commencement of a court action to recover possession may reinstate the lessee.

CONSTRUCTIVE EVICTION. If conduct of the landlord effectively prohibits the tenant's use and enjoyment of the leased premises, the tenant may consider the lease terminated and vacate without liability for any future rent. The tenant’s duty to pay rent continues so long as the tenant remains in possession. Constructive eviction is completed when the tenant vacates the premises. For example, the landlord's failure to maintain elevator service in a high-rise building can be the basis for a constructive eviction.

EVICTION PROCEEDINGS. An action of eviction or ejectment is the legal process by an owner to regain possession of the leased or rented premises following a default or breach of the terms of the letting, or when the tenant remains in possession after the lease has expired, or when the tenant refuses to vacate after receiving a termination notice.

LANDLORD AND TENANT RIGHTS

LANDLORD'S RESPONSIBILITIES. Under common law, the landlord was under an obliga­tion only to keep the premises in the same condition that existed at the time of the letting. The responsibility applied only to the common areas shared by all the tenants. The landlord was responsible to tenants and their guests for injuries, which occurred, through the landlord’s negligence, in the common areas, such as stairs or hallways. The landlord was not liable for injuries to tenants and their guests in premises exclusively in control of the tenant. The rule of caveat emptor '("buyer beware") was strictly applied.

By statute and court rulings, the landlord’s responsibility for the safety of tenants and their guests has been changed. Generally, these changes impose a duty upon the landlord to maintain the entire leased premises in a safe, habitable condition, and in conformity with the health and sanitary code, regardless of the condition at the time of the letting.

TENANT RESPONSIBILITIES. The tenant is required to pay the rent and to keep the premises in the same condition, minus reasonable wear and tear, as they were at the time of the letting. The tenant is responsible for negligence resulting in harm to guests while on the premises exclusively occupied by the tenant.

TENANT PROTECTION LAWS. Most states, including Massachusetts, have enacted many laws to protect tenants from unscrupulous landlords. Tenant protection laws regulate such things as security deposits, first and last month’s rent, tax escalation clauses, retaliatory evictions, and the landlord's duty to maintain the premises in a safe and habitable condition.

Tenant protection laws also regulate the landlord's duty to furnish services or make repairs, post identification signs on the building, deliver a copy of the lease within thirty days, and to install automatic locks.

Removal of or Locking Out a Tenant. It is illegal to remove or to exclude a tenant from his or her apartment without a court order.

KEY WORDS AND PHRASES

MA - Standard Form Apartment Lease (Simplified Fixed Term)

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