Lease Laws and Provisions on the Real Estate License Exam - dummies

Lease Laws and Provisions on the Real Estate License Exam

By John A. Yoegel

Real Estate License Exams will ask questions regarding leases. Because a lease is a legal document, it’s a good idea to have attorneys review them, both as a landlord and as a tenant. Even fill-in-the-blank lease forms should be reviewed by an attorney.

Laws governing leases

The statute of frauds, which all states have adopted in some form, usually requires that a lease for a term longer than one year be in writing. Some states have also adopted another law, the Uniform Residential Landlord and Tenant Act, which provides additional terms and conditions that should be addressed in the lease.

Typical provisions of a lease

A lease is a form of a real estate contract. Like all contracts, a lease needs a few items to be considered valid. The main provisions of a valid lease are

  • Legally competent parties: Also referred to as having the capacity to contract, this provision means that everyone signing the lease has met all the legal requirements of age and competence.

  • Mutual agreement: The lease must include an offer and acceptance of the terms. All parties must clearly understand the terms of the lease.

  • Legal objective: This provision states that what is being contracted for is lawful.

  • Consideration: The exchange of space for money or other items of value must be enough to make the lease valid. The consideration could be in the form of services such as a janitor being given an apartment in exchange for working in the building.

  • Agreement in writing: Depending on the provisions in your state’s version of the statute of frauds, the lease may have to be in writing. Typically leases for more than a year have to be written agreements.

Although the minimum requirements technically create a valid lease, they really don’t provide useful and specific details. Most leases also contain the following language to clarify certain details:

  • A description of the leased premises: This could be an apartment number or floor number and may include an actual survey description if a piece of land is leased. In a nonresidential lease the description could include a drawing that shows the dimensions and location of the space within the building.

  • The term of the lease: The lease typically provides a beginning and ending date.

  • The amount and date of rent payments: This statement includes how much the rent is, when the rent is due, any grace periods that may be offered, penalties for late payment, and where the rent is to be sent.

  • Provisions for rent increases: Leases sometimes have provisions for automatic rent increases at certain intervals, which is sometimes called a graduated lease. Rent increases may be tied to the Consumer Price Index, in which case the lease may be referred to as an index lease.

  • The amount of security deposit: Lease provisions provide for the deposit amount and clarify when the landlord must return it to the tenant at the end of the lease. State laws vary as to how security deposits may be used.

  • How the premises can be used: A landlord can limit how the tenant uses the leased space. For example, commercial space couldn’t be used as living quarters.

  • Whether and how improvements can be made: Improvements to the space are often part of a commercial lease but also may be part of a residential lease. Whether the landlord or tenant does the improvements is a matter of negotiations. Typically, residential tenants are permitted to make improvements with the landlord’s permission and are required to return the space to its original condition at the end of the lease.

  • Provisions outlining maintenance responsibilities: Landlords are generally required to maintain the premises in useable and what is called habitable condition. Certain commercial leases may require tenants to pay for or assume certain maintenance responsibilities.

  • Details for destruction of the premises: In cases where a tenant is leasing land or has built a building on leased land, the tenant may be responsible if the building or other structures are destroyed. Tenants aren’t usually responsible for destruction of a building in which they lease only a part of the space.

  • Provisions for occupancy limits: Depending on state or local law, a landlord may or may not be able to limit occupancy of the unit to the tenant who signed the lease.

  • Provisions for subleasing: The lease may provide for the renting of the space by the tenant to a subtenant through a sublease. Provisions may also be made for someone else taking over the lease. This is called assignment. In a sublease, the original tenant is still liable. An assignment to a new tenant usually needs the approval of the landlord because the new tenant is usually completely liable.

  • Termination on sale clause: Under normal circumstances, if the landlord sells the building, the lease survives the sale and the new owner takes possession subject to the lease. If the lease contains a termination on sale clause, however, the new owner can evict the tenant upon proper notice or renegotiate the lease with the tenant.

  • The right of quiet enjoyment: Whether stated or not, a lease generally conveys to the tenant the right of quiet enjoyment, a legal term that means the tenant has exclusive use of the leased premises without interference from the landlord. The landlord usually can’t enter the premises without the tenant’s permission except in an emergency.

  • Any options: A lease also may contain a renewal clause guaranteeing the tenant the right to renew the lease or a purchase option giving the tenant the right to purchase the property at or before the end of the lease term.