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Texas Real Estate Law

Table of Contents

MODULE 7: LEASES ........................................................................................................ 3

MODULE DESCRIPTION ........................................................................................................ 3

MODULE LEARNING OBJECTIVES ........................................................................................... 4

KEY TERMS ......................................................................................................................... 4

LESSON 1: THE TEXAS DECEPTIVE TRADE PRACTICES ACT ........................................ 9

LESSON TOPICS ................................................................................................................... 9

PARTIES INVOLVED IN A LEASE AGREEMENT .......................................................................... 10

LEASE CONTRACT .............................................................................................................. 11

DEFINITION OF ESTATE ....................................................................................................... 12

TYPES OF LEASEHOLD TENANCIES ........................................................................................ 14

LESSON SUMMARY ............................................................................................................ 19

LESSON 2: LEASEHOLD ESTATES AND LEASE AGREEMENTS ................................... 20

LESSON TOPICS ................................................................................................................. 20

TYPES OF LEASES ............................................................................................................... 21

REQUIREMENTS OF A VALID LEASE AGREEMENT .................................................................... 28

ELEMENTS COMMONLY INCLUDED IN A LEASE ....................................................................... 29

LESSON SUMMARY ............................................................................................................ 39

LESSON 3: RESIDENTIAL LEASING .............................................................................. 41

LESSON TOPICS ................................................................................................................. 41

INTRODUCTION ……………………………………………………………………………………………………….42

RESIDENTIAL LEASE LEGISLATION ........................................................................................ 42

UNIFORM RESIDENTIAL LANDLORD AND TENANT ACT ............................................................ 48

RESIDENTIAL INSURANCE AND LIABILITY ............................................................................... 63

RECONCILIATION OF TENANT LANDLORD RESPONSIBILITIES .................................................... 67

LESSON SUMMARY ............................................................................................................ 68

LESSON 4: COMMERCIAL LEASES ............................................................................... 70

LESSON TOPICS ................................................................................................................. 70

INTRODUCTION ................................................................................................................. 70

CHARACTERISTICS OF A COMMERCIAL LEASE ......................................................................... 71

TYPES OF COMMERCIAL PROPERTY ...................................................................................... 77

PROCESS OF COMMERCIAL LEASING .................................................................................... 78

TEXAS STATUTES PERTAINING TO COMMERCIAL TENANCIES .................................................... 81

LESSON SUMMARY ............................................................................................................ 84

LESSON 5: CONCLUDING A LEASE ............................................................................. 86

LESSON TOPICS ................................................................................................................. 86

INTRODUCTION ................................................................................................................. 87

LEASE RENEWAL ................................................................................................................ 87

LEASE TERMINATION .......................................................................................................... 87

EVICTION……………………………………………………………………………………………………………. 90

LESSON SUMMARY ............................................................................................................ 98

LESSON 6: REAL ESTATE PRACTICE........................................................................... 100

LESSON TOPICS ............................................................................................................... 100

REAL ESTATE PRACTICE .................................................................................................... 101

CASE STUDIES ................................................................................................................. 101

3 Texas Real Estate Law

Module 7: Leases

Module Description

Leased property is an essential part of the real estate market. This module

discusses the definition, processes, and forms of leasing. It presents the student

with a comprehensive study of residential and commercial leases, the various types

of leases, and the characteristics of lease agreements.

The processes of lease origination, execution, and termination are covered in

depth. The module also describes leases in the context of landlord and tenant law.

It explains the importance and the usage of lease agreements in drafting and

executing a rental agreement.


At the end of this module, with the help of case studies, the student will learn to

apply the concepts discussed in real life situations. Prospective licensees will gain a

clear understanding of the theoretical and practical applications of leases in the

context of their profession.

Module Learning Objectives

By the end of this module, you should be able to:

Describe what a lease is and the roles of key parties in the leasing process.

Explain what makes a lease legally enforceable.

Identify and explain the terms and elements of a lease agreement.

Differentiate between the different types of leases, estates, and tenancies.

Calculate comprehensive rental payments for all types of leases.

Understand landlord and tenant rights and responsibilities under a lease.

Discern the key elements of laws governing leasing and housing practices.

Differentiate between commercial and residential leasing.

Describe causes and procedures of proper and improper lease termination.

Key Terms

Assignment: A method of transferring the rights and obligations of a contract to a

third party without canceling the contract. Assignments vary as to what rights and

obligations are transferred and to what degree.

Bankruptcy: A provision of federal law whereby a debtor surrenders his assets to

the bankruptcy court for liquidation and distribution to debtors and is relieved of

the future obligation to repay his unsecured debts.

Delinquency: Failure to pay a debt on time.

Demise: The conveyance of an estate for a certain number of years (as in a lease)

for life or at will.


Eminent Domain: A legal term referring to the power of the government to take

any privately owned property for public use. This is one of the four basic

government powers: taxation, eminent domain, escheat, and police powers. When

a property is taken from its private owner, the owner must be paid fair market rates

or fair compensation.

Eviction: The process of legally terminating the occupancy of a tenant, usually for

some breach of the lease contract.

Fair Housing Act: A federal law prohibiting discrimination in the sale or rental of

housing on the basis of race, color, religion, sex, handicap, familial status, or

national origin. This Act makes up Title VIII of the Civil Rights Act of 1968.

Fixture: Property that has been attached to a house in such a manner that it has

become real property and whose removal would cause damage or a loss of value.

Examples include built-in bookcases, sinks, toilets, tubs, track lighting, plumbing

fixtures, and electrical devices connected to electrical current.

Lease: An agreement in which an individual or corporation may receive possession

or temporary ownership of real property for a specific period of time. A lease

transfers the right of possession to the tenant, but the landlord retains reversionary

rights.

Leasehold Estate: A form of property possession that provides for only temporary

ownership. In contrast to freehold estates, leasehold estates are of limited

duration, have fewer property ownership rights, and are usually created with a

lease. There are four basic types of leasehold estates: estate for years, periodic

estate, tenancy at will, and tenancy at sufferance.


Lease Option: (also called “lease with option to buy”) A lease in which the

tenant/lessee has the option to purchase the lease either during the term of the

lease or upon its expiration.

Leasing Agent: A leasing agent is the individual responsible for the marketing of

rental space.

Lessee: (also called a “tenant”) The party in a lease that rents and will occupy a

property.

Lessor: (also called a “landlord”) The party in a lease that rents out a property to

someone else.

Percentage Lease: Lease in which the rent is composed of a base rental figure,

plus a percentage of total sales or profits at the premises.

Possession: Legal term referring to the right of a person to have control over a

property.

Quiet Enjoyment: A tenant’s right to control a premises without undue

interference from the owner, the manager, or other tenants.

Real Property: The tangible real estate and intangible rights associated with the

ownership of real estate.

Recording: The act of entering documents into a public registry or record. For the

purposes of our course, we are especially interested in the process of entering

those documents which convey interests in real estate. The process of recording for

any sort of document is sometimes also legally referred to as “recordation.”


Rent: The usually periodic and fixed consideration received from a lessee (tenant),

as set forth in the lease agreement, for the use and possession of a property.

Sale and Leaseback: A real estate transaction in which an owner simultaneously

sells a property and leases it back from the buyer. This guarantees the new owner

with a rental stream, making it a more attractive investment for the buyer; for the

seller, leasing the property offers liquidity and several operating tax advantages.

Sandwich Lease: A lease in which the owner leases out a property, which is then

leased by that lessee out to another party. The lessee of the primary lease then is

sandwiched, becoming both a lessee and a lessor.

Security Deposit: A typical consideration item for most leases; the tenant is usually

required to submit a security deposit to the landlord to cover any damage beyond

normal wear and tear that may occur to the property during the course of

occupancy.

Statute of Frauds: A state law that establishes the features of a valid contract. For

example, a state’s statute of frauds will generally require that certain types of

contracts be set out in writing and that written contracts be signed by all the parties

bound by the contract. Licensees should acquaint themselves with the specific

requirements set out in their state’s statutes because there are frequently subtle

differences between one state’s statute of frauds and that of another state.

Sublease: (also called a “sandwich lease”) The secondary lease in which a lessee

leases out a property to a third party (the “sublessee”). The original lease between

the tenant (lessee) and the landlord remains, but the first tenant becomes both

lessee and lessor.


Tenant: (also called a “lessee”) An individual who uses or occupies the property of

another for consideration of rent.

Trade Fixtures: Pieces of personal property that a tenant attaches in some

permanent way to leased (especially commercial) real estate as essential parts of

the tenant’s trade or business practices. Trade fixtures can be removed by tenants

before their lease terms expire and are frequently considered the tenants’

property. Trade fixtures are thus distinguished from ordinary fixtures, which are

considered part of the leased real estate and are not the property of the tenant.

Waste: A real estate term referring to damage of property, particularly by a lease

tenant or life tenant.

Wear and Tear: That deterioration which occurs as a result of intended use,

without negligence, carelessness, accident, misuse, or abuse.

Zoning: A municipal restriction on the type of building or use permitted in a

defined geographic area.


Lesson 1: The Texas Deceptive Trade Practices Act

Lesson Topics

This lesson focuses on the following topics:

Parties Involved in a Lease Agreement

Lease Contract

Definition of Estate

Types of Leasehold Tenancies


Parties Involved in a Lease Agreement

A lease is a contract between two parties, the lessor and the lessee. The lessor owns

the property or is otherwise authorized to lease the property to another party, as in

the case of a sublease. The lessee is the party who will rent and occupy the

property. The lessor may also be referred to as the landlord and the lessee as the

tenant.

The lessor and lessee may engage the services of agents or representatives to take

their places in the leasing process. Lawyers, property managers, and rental agents

or brokers are especially well-suited to represent the primary parties’ interest.

Lease negotiations will often require the services of a lawyer, who can advise the

parties of their rights and who may lawfully draft and execute lease agreements.

Licensees would do well to gain a thorough understanding of lease procedures,

since real estate professionals such as rental agents or brokers and property

managers may play critical roles in the leasing process.

A rental agent is a person or a representative of an organization that manages

rental property for the owner of that property. Usually, a rental agent is a real

estate broker or a representative of a real estate firm. Often the rental agent will

handle leasing issues such as showing the property to prospective tenants and

signing the lease as the owner’s representative. A property manager, while

performing other duties, may also be involved in showing and leasing rental units

to prospective tenants, collecting rent, and handling legal issues such as breach of

contract.


Lease Contract

Basic Terms

Leases are formal legal documents that reflect the negotiations of a landlord and a

tenant with regard to the possession of real property. The lease spells out the legal

rights and obligations of both parties and establishes the terms of agreement.

When a landlord proposes a rental agreement with a prospective tenant, it signifies

the landlord’s intention to grant the tenant the right to occupy the property under

the terms of the lease agreement. When a tenant signs a lease, it signifies his

interest in the property and indicates his acceptance of the obligation to pay rent

and fulfill the other requirements of the lease agreement.

Rent, therefore, is the payment received by the landlord from the tenant in return

for using and occupying the property. The amount and other characteristics of rent

are determined through the lease or rental agreement. In typical arrangements,

rent is paid periodically and regularly for the duration of the lease.

A lease agreement gives the landlord a reversionary right, which means that once

the term of the lease expires, the property will revert back to the landlord. In other

cases, the tenant has an option to buy out the lease and purchase the property

from the landlord; this is called a lease purchase or lease option. These terms will be

discussed in greater detail in subsequent sections of this module.

Written and Oral Lease Agreements

Most lessors and lessees will prefer to draw up the lease agreement, like other legal

contracts, in written form. Almost all states allow oral lease agreements on the

condition that they are for a term of one year or less. Lease agreements greater

than one year must be in writing. It is, however, a prudent practice to get all legal

contracts in writing. Written lease agreements keep the facts clear for both parties

involved, resulting in fewer misunderstandings and disputes, and provide landlords


and tenants with the means to work out major and minor details of their

relationship prior to signing the lease. Different states have their own criteria

according to the statute of frauds, but it is generally understood that a written

contract carries more weight in a court of law and is proof of the contract’s

existence

Definition of Estate

A signed lease contract cedes the lessee an interest in the property, but what does

that interest guarantee? The definition of estate clarifies the roles of the parties

involved in a lease agreement and the life cycle of real property under a lease.

Not all interest in land is equal. For example, when someone purchases a home,

that person generally has the right to use and enjoy the home to the fullest extent

of the law. However, if that person purchased the land with a mortgage from a

bank, then that bank holds some interest in the property as well. That is to say, if

the buyer defaulted on her loan, then the bank could take the property.

The distinction between the bank’s interest and the person’s actual ownership is

important: one is an ownership interest, called an estate, and one is not. Estate

refers to the degree, nature, extent, and amount of ownership interest that a

person holds in real property. The term helps us differentiate between non-

ownership based interest in land and actual ownership interest in land. Not all

property interests, such as the bank’s interest in a lien in our current example, are

estates. However, any ownership interest in real property is called an estate. There

are two types of estates: freehold estates, also called fee simple or life estates, and

leasehold estates.

One of the main ways that these two estates differ is in the way that we assign the

types of interest. Assignment refers to the transferring of interest, ownership, or

property rights from one person, called an assignor, to another, called an assignee.


In the case of freehold, or fee simple, estates, this is done through an official

document called a deed. With a leasehold estate, the document that transfers

interest is called an assignment of lease. The following screens will further outline

the meaning and differences between these two types of estates.

Freehold Estate

A freehold, or fee simple, estate lasts indefinitely and carries inheritance rights. It is

the most complete type of ownership. All other estates stem from some freehold

estate.

Leasehold Estate

In general, a leasehold estate is any ownership interest in real property that is less-

than-freehold. That is, if someone does not have complete, indefinite ownership of

a property, then she has leasehold interest. However, in practice and for everyday

purposes, leasehold is the exclusive right to occupy a property for a specific period

of time, whereupon the property reverts back to the original owner (probably the

freehold owner).

A leasehold estate is created by a formal document called a lease agreement. A

lease agreement transfers the exclusive right to occupy a property from a landlord,

called a lessor, to a tenant, called a lessee. Consider the following example:

Landlord A owns a home that she wants to rent while she leaves the country. She

wants to retain reversionary ownership rights, but wants to transfer the exclusive

right to occupy the dwelling to another for a one-year period. She would transfer

this temporary right to occupy with a lease agreement, creating a leasehold estate

for whoever rents the home.


Types of Leasehold Tenancies

There are four basic types of leasehold estates or tenancies:

1. Periodic Estate

2. Estate at Will

3. Estate at Sufferance

4. Estate for Years

We will cover each of these in detail in coming screens.

Periodic Estate

A periodic estate, or a periodic tenancy, is a leasehold estate without a specific

expiration date. It cycles at regular intervals, usually week-to-week or month-to-

month, for an indefinite period of time. Consider the following example:

A lessee rents an apartment on a week-to-week basis. Every Friday he pays rent to

the landlord to stay in the apartment another week. On any given Friday, the lessee

could decide not to give the landlord the rent for the following week, effectively

terminating the leasehold.

As in our example, the payment and acceptance of rent usually signifies the

continuation of the lease. Rent is payable at definite intervals determined by the

lease agreement.

Terminating a Periodic Estate

While each state dictates the method for giving notice of termination, it is common

practice to give notice one period prior to terminating an agreement. For example,

a lessee will usually give a week’s notice before terminating a week-to-week lease or

a month’s notice before terminating a month-to-month lease. The exception to this

is yearly periodic estate. In the case of a year-to-year lease, a lessee will usually give

notice two to six months in advance.


With a periodic estate, the lease can be terminated by either party at the conclusion

of a period, i.e. the end of the week or month. Whichever party wishes to terminate

the agreement must do so in accordance with the state’s statutes.

If a tenant is late in making rent payments, it does not mean that the lease is

automatically terminated. The tenant is responsible for rent until he formally

terminates an agreement.

Breach of Contract

A breach of tenancy can occur when the tenant does not vacate the premises after

the expiry of the lease. If the tenant continues to occupy the premises without a

renewed lease contract, a holdover tenancy is created. In such a case, the landlord

has two options: she can either serve an eviction notice to the tenant, forcing the

tenant to vacate, or she can agree to renew the lease contract under a periodic

tenancy agreement.

Estate at Will

An estate at will is an estate that exists for an indeterminate period of time without

an initial starting date. It is created by either an explicit agreement or by an

operation of law. Although a tenancy at will does not have a clear starting period,

the tenant of such an arrangement holds all the rights and obligations of a lessor-

lessee relationship. This includes the payment of rent at regular intervals.

Terminating an Estate at Will

A standard estate at will terminates in one of three ways: the death of either the

lessor or the lessee, the execution of some activity, or at the request of either the

lessor or the lessee. If either the landlord or the lessee dies, then an estate at will

terminates. If either party wishes to terminate the agreement, then they may do so

providing the provisions of the original agreement. Most commonly, however, an


estate at will terminates at the execution of some activity stated in the lease

agreement.

Estates at will are rare. One reason is because they are usually established with a

verbal or other non-written agreement. Consequently, if complications arise,

enforcing such an agreement for either party can be difficult. Most courts will view

a written estate at will as a periodic tenancy.

Estate at Sufferance

An estate at sufferance is also called a holdover tenancy. It arises when a tenant

refuses to vacate the premises after the appropriate and legal termination of his

lease.

An estate of sufferance is a temporary and insubstantial tenancy and can be solved

in one of two ways: either the landlord serves the tenant with an eviction notice and

legally forces the tenant out, or the landlord accepts a payment of rent from the

tenant, thereby establishing a type of periodic estate.

Estate for Years

An estate for years, also called a tenancy for years or an estate for term, is a leasehold

estate with a definite termination date stated in its lease agreement. While this

period could be years, months, or even days, an estate for years will not usually

exceed 99 years. In fact, many states have laws that change any estate for years

that exceeds 99 years into a freehold, or fee simple, estate.

In an estate for years, neither the tenant nor the landlord has to give any notice to

terminate the agreement. This is because the agreement terminates automatically

once it reaches the date listed in the lease agreement. The tenant’s, or lessee’s,

interest terminates the day the agreement does, and the property reverts back to

the original owner.


Notice for Terminating Certain Tenancies in Texas

In Texas, a monthly tenancy, or a tenancy from month to month, may be

terminated by the tenant or landlord giving notice of termination to the other. If the

rent-paying period is at least one month, the tenant or landlord must give at least

one month’s notice of termination. If the rent-paying period is less than a month,

the tenant or landlord must give notice equaling at least the number of days in the

rent-paying period. For example, if the tenant pays every two weeks, the landlord

or tenant would be required to give at least two weeks’ notice to terminate the

lease.

Other Texas Statutes Applying to Commercial and Residential Tenancies

A landlord may terminate a lease upon six months notice if the tenant or occupant

is convicted of public indecency, including prostitution and display of obscene

materials.

If a landlord defaults under a lease agreement, the landlord is liable to the tenant

for damages resulting from such failure, and as security for payment of such

damages, the tenant has a lien on landlord’s nonexempt property in the tenant’s

possession and on the rent due the landlord under the lease.

In Texas, a tenant may not sublet the premises without landlord’s prior consent.

If a tenant abandons the premises in violation of a lease, the landlord has a duty to

mitigate damages (i.e., relet the premises). Any lease provision that attempts to

waive or exempt the landlord from liability is void.

Contract Complications

The following screens will outline how the law remedies contractual complications

relating to estates for years. One of the main complications relates to changes in

ownership interest on behalf of either the lessor or the lessee. Initially, we will cover


changes in reversionary ownership due to death or sale and then move on to

complications relating to leasehold ownership.

The death of a lessor or landlord does not affect an estate for years. In such a case,

the lessor’s responsibilities pass on to her legal heir or executor. The new lessor is

expected to continue the lessee’s lease without disruption.

If a lessor or landlord sells the property, then the lessee’s rights to the property

remain unchanged, unless otherwise stated in the lease agreement.

If a lessee or tenant dies, then the leasehold estate continues, albeit for the original

lessee’s heir(s). In such a case, the heir assumes the role of the original lessee

subject to the same terms of the original lease agreement.

Breaches of Contract

If both parties agree, then an estate for years may be terminated prematurely.

However, any other premature termination or any other unauthorized action that

violates the leasehold agreement constitutes a breach of contract. One of the most

common breaches of contract occurs when a lessee remains on the property

subsequent to the expiration of the agreement.

A lessee is expected to move out at the expiry of the lease contract. If, for some

reason, he continues to occupy the property without any such provisions to the

lease agreement, then the estate becomes a tenancy at sufferance. When a tenancy

at sufferance is created by the tenant, the landlord has the option to use an eviction

notice to force the tenant to leave his unauthorized occupation of the premises.

If the lessor does wish to evict a lessee in a tenancy at sufferance, then the landlord

must take care not to accept any rental payments from the tenant. Accepting rent


from such a tenant implies that the landlord grants the tenant’s occupancy and

establishes a periodic estate.

Lesson Summary

Leases are contracts in which a lessor cedes possession of real property to a lessee

under the terms of a legally binding lease agreement. Lawyers, property managers,

and rental agents or brokers may play important roles in the leasing process.

In exchange for possession of the leased premises, the lessee owes the landlord

rent, a payment or, more commonly, a series of payments at specified intervals.

Lease agreements usually guarantee the lessor’s reversionary right, which means

that the property will return to the lessor’s possession in its original condition at the

end of the lease. Written lease agreements are preferable to oral agreements

because they provide both parties with a permanent reference for the terms of

lease and are legal proof of the lease’s existence.

The definition of estates clarifies the roles of the primary parties involved in a lease

agreement and the life cycle of real property under a lease. Estate refers to the

degree, nature, extent, and amount of ownership interest that a person holds in

real property. The term helps us differentiate between non-ownership based

interest in land and actual ownership interest in land. There are two types of

estates: freehold estates, also called fee simple or life estates, and leasehold

estates.

In practice and for everyday purposes, leasehold is the exclusive right to occupy a

property for a specific period of time, whereupon the property reverts back to the

original owner (probably the freehold owner). There are four chief types of

leasehold estates or tenancies: periodic estate, estate at will, estate at sufferance,

and estate for years.


Lesson 2: Leasehold Estates and Lease Agreements

Lesson Topics


Types Of Leases

Requirements of a Valid Lease Agreement

Elements Commonly Included in a Lease


Types of Leases

The responsibilities of lessor and lessee differ among the various types of leases,

and the mode and frequency of rent payments depends on the category the lease

falls under. Before moving on to the requirements for a valid lease agreement and

the particulars of individual leases, consider the following descriptions of the

different types of leases:

1. Gross lease

2. Net lease

3. Percentage lease

4. Variable lease

5. Ground lease

6. Oil and gas lease

7. Lease purchase

8. Sale-leaseback

Gross Lease

In a gross lease, the tenant pays a simple, flat rent every month. A gross lease

assumes that the tenant will be responsible for the payment of a fixed monthly

charge, while the landlord will be responsible for the property’s maintenance,

security, taxes, utilities, and all other operating expenses. In some cases, the tenant

may also pay utility bills.

Net Lease

In a net lease, the tenant pays a base rent rate plus all or part of the operating

expenses. In practice, net leases are used for commercial properties only. With

such an agreement, the rent paid to the lessor, or landlord, is called net. Any

additional payments that a tenant is responsible for are also called nets. This

establishes a tiered naming system. For example, the most common types of net

leases are double- and triple-net leases, called net-net leases and net-net-net leases,

respectively.


As we cover the specifics of a double- and triple-net lease, try not to get caught up

in the specifics of what constitutes a net. Instead, understand that any net lease

that only requires a tenant to pay a base rent and part of the property’s operating

expenses is a double-net lease. Any leasehold that requires a tenant to pay all of a

property’s operating expenses is a triple-net lease.

Double-Net Lease

A double-net, or net-net, lease usually charges for community area maintenance and

property taxes in addition to the base rent. The name reflects the amount of

charges for which a tenant is responsible, the rent being the first net, and the base

maintenance and property taxes being the second net.

Triple-Net Lease

A triple-net, or net-net-net, lease requires the tenant to pay a prorated portion of all

the operating expenses for the property. In some cases, a triple-net lease will even

require a tenant to pay the interest on the lessor’s loan. As with a double-net lease,

the name reflects the amount of charges for which the tenant is responsible. The

additional payments, such as the interest on the lessor’s loan, comprise the third

net that the lessor must pay.

The expenses that a tenant must pay can be both fixed and variable. For example,

the property taxes owed will, more or less, be the same every month; however, the

utilities will probably change. Consequently, the taxes the lessee will pay are a fixed

cost and the utility payments will be variable.

Calculating a Net Lease

As previously noted, a net lease requires a tenant to pay fixed and variable

operating expenses. This means that calculating the money that a tenant owes on a

property depends upon the month’s utilities and maintenance requirements.

Because of this, we will solve for a particular month. For the purposes of this


exercise, assume that the expenses listed are the only expenses for which the

tenant is responsible. That is to say, assume these values account for all of the

property’s expenses and that the lessee is not responsible for the lessor’s interest

on her loan.

Company Name Company ABC

Type of building Multi-tenant office building

Space that Company ABC leases 2,000-square-feet

Total space in Building X 10,000-square-feet

Utilities for the entire building for subject month $ 400

Taxes for entire building for subject month $ 500

Base rent for Building X $10 a square-foot

Step 1: Percentage of Total Space Used

Company ABC is responsible for the percentage of the utilities used by its office and

the taxes assessed against its office. In order to find out how much of the bills are

Company ABC’s, we must first establish how much of the entire building it uses.

Consider the following:

2,000 = X

10,000 100

(2,000) x (100) = (10,000) x X

200,000 = X

10,000

X = 20 percent


In this case, X is the percentage of the building used by Company ABC. That is to

say, Company ABC uses 20 percent of the entire office building.

Step 2: Prorating the Monthly Expenses

We now have the amount of the office building that Company ABC uses expressed

as a percentage: 20 percent. We can multiply this value by the sum of the monthly

bills to see how much Company ABC needs to pay. This is the proration step. Please

note that 20 percent is the same as 20/100. For the ease of calculation, we will use

20/100.

(400 + 500) x 20 = X

100

900 x 20 = X

100

X = $180

For this month, Company ABC must pay an additional $180 on top of its base rent.

Step 3: Establishing a Base Rent

The standard rental rate for Building X is $10 a square-foot. Consequently, if we

multiply 10 by the amount of feet that Company ABC rents, we can establish the

company’s base rent.

2,000 x 10 = X

X = $20,000

Every month, Company ABC owes a base rent of $20,000.


Step 4: Calculating the Total Month Expense

Now that we have what Company ABC owes every month, as well as its expenses

for the subject month, we can calculate how much they owe in all. By adding these

two figures together, we can calculate the total Company ABC owes its lessor(s).

180 + 20,000 = X

X = $20,180

For this month, under the company’s triple-net lease, Company ABC owes the

landlord(s) $20,180.

Percentage Lease

Percentage leases are usually used for commercial lease agreements. In this type of

lease, the tenant pays a base rent amount and a percentage of his business profits

to the landlord. A percentage lease may be applied to either a gross or net lease.

For example, a business may have to pay just a base rent and a percentage of its

profits to the landlord (in the case of a gross-percentage lease), or a business may

have to pay a base rent, a percentage of the property’s operating expense, and a

percentage of its business profits (in the case of a net-percentage lease).

This type of lease is most suitable for retail businesses where location is a prime

factor in determining the business’s income.

Variable Lease

A variable lease is a leasehold agreement in which the base rent changes. It can take

the form of a graduated lease or an index lease.


Graduated Lease

A graduated lease agreement is one in which the amount of rent increases at fixed

future dates. Generally, this type of lease commences at a low rental rate and

increases steadily over the course of the rental agreement.

Index Lease

An index lease also allows for a graduated increase of rent at periodic intervals;

however, the increases are in relative to some economic indicator, such as the

Consumer Price Index, which is a monthly index of the prices of general

commodities, and is used to calculate national inflation levels. Instead of increasing

at fixed intervals, by fixed amounts, as in a graduated lease, the amount by which

the rent increases depends upon variations in the specified index. Consequently,

the amount by which the rent increases could change.

Ground Lease

The leasing of bare, undeveloped land is carried out through a ground lease. Ground

leases are used to distinguish between ownership of the site and ownership of the

developments on a site. Generally, ground leases take the form of net leases and

last for a duration of 30-99 years. Although only a long lease will prove worthwhile

for a lessee, ground leases that exceed 99 years are rare. As previously noted,

many states will transfer leaseholds that exceed 99 years into fee simple, or

freehold, estates.

It is interesting to note that upon expiry of a ground lease, the land as well as any

construction on the land reverts back to the original landowner. The ground lease

may also have a proviso for the structure on the leased land to be destroyed before

the land reverts back to the owner.


Oil and Gas Lease

As the student may know, subsurface rights to a property may be leased or entirely

owned by a separate party than the party that holds ownership of the property’s

land or developments. One of the most common leases relating to subsurface, or

mineral, rights is an oil and gas lease. An oil and gas lease grants the exclusive right

to extract any oil or gas lying beneath a property.

In practice, the duration of this type of leasehold is expressed in years and requires

the drilling party to pay the reversionary owner royalties.

Lease Purchase

A lease purchase agreement is used when a tenant wishes to buy a property but

cannot do so right away. With a lease purchase agreement, part of a tenant’s rent is

applied to the purchase of the property. The price of the property is set by the

lessor and lessee in the lease agreement. Title to the property transfers upon full

payment of the stated sale price.

Sale and Leaseback

A sale-and-leaseback agreement is a way for landowners to free up capital while

maintaining the same overhead expenses. It is, in essence, a financing technique

dating back to the 1940s, whereby a business owner can sell her interest in a

property and then lease it back at the same monthly rate, usually from an investor

owner, and, in doing so, free up capital for other business ventures. Consider the

following example:

Business Owner A owns her property. She is doing relatively well, and would like to

open a branch office across town. Rather than take out a new loan, she decides to

sell her property to an investment buyer, who then leases it back to her. The

investment owner assumes Business Owner A’s mortgage. Consequently, she

immediately receives whatever payments she has made on the mortgage (gathered


in the form of equity), which she can then use to establish her new branch office.

Because the investor owner assumed Business Owner A’s mortgage, Business

Owner A’s monthly payment, that is rent, will be the same. She has freed up capital

without establishing another loan and, at the same time, kept her monthly

payments on her current business the same. Freehold interest in the subject

property, however, transfers from Business Owner A to the investment owner.

Business Owner A is now a tenant with the exclusive right to occupy the premises

stated in the sale-leaseback agreement.

Sale-leaseback agreements are commonly used for commercial properties only and

take the form of net leases.

Requirements of a Valid Lease Agreement

The requirements for a residential lease differ with the laws of each state according

to the state’s statute of frauds. A lease can be a written, oral, or sometimes even an

unspoken, implicit agreement. However, there are some basic foundations upon

which every lease agreement should be made to ensure its validity and legality.

While subject to state laws, consider the following list that generally applies to every

enforceable lease agreement:

The participants of the lease must hold contractual capabilities. They must be

the age of the majority, or 18 years-of-age or older, and of sound and

capable mind.

The lease must be for a legal purpose. A lease with an illegal objective is

unenforceable because a court cannot ask a person to act illegally.

The lease participants must mutually agree on all the terms and conditions of

the lease contract.

The lease must exchange some valuable consideration, which is generally

rent, in exchange for the exclusive right to use the property.

If the lease lasts longer than one year, then it must be in writing.


Elements Commonly Included in a Lease

Although there is no standard lease document, most written residential lease

agreements contain basic tenancy specifics that exist between the landlord and the

tenant. Leases are often catered for each particular transaction. Nevertheless, there

are a few specifics that almost all leases include. This section will outline those

commonly included elements. Consider the following list:

Identification and Signature of Parties

Contact Details

Possession

Term

Property Description

Usage

Rent

Security Deposit

Maintenance of Property

Pets

Quiet Enjoyment

Alterations, Improvements and Additions

Utilities

Landlord’s Re-Entry and Possession

Assignment and Subleasing

Recording

Abandonment and Holdover Tenancy

Options

Identification and Signature of Parties

The lessor and the lessee must be clearly identified in the lease agreement. The

lessor may be the owner of the property or may be the property manager, the

landlord, or a corporation. In any case, his or its identity should be clearly stated. In


the event of the lessor being married, it is also a good practice to include the name

of the spouse.

If the lessor is a corporation, then attaching a letter of authorization from the board

of directors is considered a good idea. This can prevent complications later as it can

attest to the lease’s validity.

Both the lessor and the lessee are required to sign the lease. Each signatory

maintains his original copy of the lease agreement.

Contact Details

Ideally, both parties to a lease agreement should have complete and current

contact information about one another. Complete contact information includes

current telephone numbers and addresses. If a property is maintained or run by a

party separate from the actual owners, such as a property management company,

then the tenant should also receive information about the actual owners of the

property.

Possession

Each local area has zoning laws that determine the usage of land and building

codes for a property. Such laws may place restrictions on the number of people

allowed to occupy the premises. The lease agreement needs to clearly state the

maximum number of people allowed within one residential unit. Exceeding the

legally defined occupancy rates could mean additional legal liability for the owner.

Term

One of the most important things that should be stated on a lease is its start date

and end date, coupled with the total duration of the lease. For example, a term can

be stated as follows:


“For a term of 92 days, starting from 1st August 2003 to 31st October 2003…”

This procedure can eradicate many long-term issues and establish a clear

understanding of the duration of the lease.

Although each state’s requirements differ, it is a good idea for a tenant to give

notice before vacating the premises. Conventionally, most states may require the

tenant to provide two-one month(s) notice for a one-year lease or four-month

notice for a multi-year lease. Ideally, notices are provided in writing.

Property Description

Residential properties need to be defined in broad terms, such as location and

number of units, while commercial property requires a thorough legal description.

Property description characteristics may also include neighboring areas such as

parking space, basements, attics, and storage areas.

Usage

While, in general, a tenant may enjoy her property to the fullest extent of the law,

there may be local and/or private restrictions on its use. Such restrictions tend to

change depending on whether the property is commercial or residential and its

exact location. Ascertaining the zoning laws for the leased property is the first step

to adequately defining legal usage.

Residential Usage

Generally, residential leases allow any kind of usage as long as it is not illegal or

destructive. However, most residential leases clearly prohibit the usage of the

property for commercial purposes. The exception to this is small home offices.

Often, unobtrusive, inconspicuous home offices are acceptable. Regardless of

whether a specific lease allows such an office, the lease should address the issue to

prevent subsequent complications.


Commercial Usage

Conversely, a commercial property should be used for commercial purposes only

and, in practice, is subject to stringent private controls. It is particularly important

that commercial owners specify how their properties may be used as it can affect

even the smallest detail; for example, the size of a business’s front sign.

Rent

The lease agreement must describe the amount of rent, the frequency of

payments, and the method of payment. The agreement should also state whether

rent has to be paid in advance and the procedures for early termination. Some

landlords also levy a late charge on deferred rent payment and/or a fine for

unauthorized use or animals. The lease agreement should describe any such

penalties and fines in detail.

Security Deposit

A security deposit is the lessor’s collateral in the event that the lessee defaults on a

rent payment, causes damage to the leased property, or does not adhere to some

other covenant in the lease agreement.

States set the statutes relating to security deposits. Generally, a state will dictate:

The maximum amount that a lessor can charge for a security deposit.

To what it may be applied.

Whether it incurs interest, payable by the lessor.

When the lease expires, the remaining balance of the security deposit is usually

returned to the lessee.

Maintenance of Property

For most residential properties, it is the landlord’s responsibility to maintain the

property. The landlord is responsible for the upkeep of common areas such as


hallways, staircases, and elevators. The landlord is also responsible for the

maintenance of health and safety devices, such as smoke alarms, fire detectors,

and building security systems. In return, it is the tenant’s responsibility to leave the

premises in the same state as it was when she first leased it, excepting normal wear

and tear.

In more complex residential arrangements and in commercial leases, the landlord

and tenant can assign maintenance by item. In such a case, the landlord and tenant

might assign responsibility using a list similar to the one below:

Building roof, exterior, painting

Gutters

Windows

Parking, gardens

Taxes, property management expenses

Property insurance and liability

Utilities: gas, electricity, water, sewage, telephone

Garbage disposal

Structural additions made by tenant

Pets

The lease agreement needs to clearly state whether or not pets are allowed on the

premises and, if so, under what conditions. The lease agreement should cover the

specifics of pet ownership on the premises, including pet restraint, cleaning, noise

control, identification, and quantity. Sometimes a pet agreement is drafted as an

addendum to the lease agreement.

Quiet Enjoyment

The covenant of quiet enjoyment means that the lessee may use the premises

according to the terms of the lease agreement without interference from the

landlord. Once the lease agreement is signed by both parties, the lessee has every


right to enjoy the property within the conditions agreed upon, free from

unnecessary intrusion.

Alterations, Improvements and Additions

The lease agreement allows a tenant and landlord to determine what changes a

tenant can make to a property. Usually, a tenant cannot make any alterations to a

premise without the express permission of the landlord. The types of changes that

most landlords permit depend upon the whether the property is residential or

commercial.

Fixtures

It is worth noting here that there are different types of alterations and that the

nature of an alteration affects the tenant’s responsibility to return the property to

its pre-leased state. As the student may recall, real property refers to the land and

anything, whether manufactured or natural, permanently attached to it. This means

that if a tenant permanently attaches something to a property, then in general, it is

called a fixture, and becomes the property of the landlord. Consider the following

example:

Tenant A gets permission to repave his driveway. Consequently, he pulls up the old

driveway and lays new cement. Even though tenants usually have to restore a

property to its pre-leased state and despite the fact that the water and rocks were

once Tenant A’s property, Tenant A may not pull up the cement when he moves

out. When he laid the cement as a driveway, it became permanently attached to the

land, and thus, a part of the property.

This example may seem obvious; however, a fixture does not have to be quite so

permanent. The function of an alteration can also make any materials linked to the

alteration a fixture. If something is tailored specifically for a particular use on the


property, then it too, is generally considered a fixture. Consider the following

example:

Tenant B sews a cushion for a large bay window in the kitchen when he was unable

to find a standard pillow that fit. Because the cushion is tailored for the subject

property only and for a particular use on the property, it is likely to be considered

part of the property.

In this example, the function of the adjustment established it as part of the

property. This could apply to many items in a home, although some of the most

common fixtures relate to floor and window coverings.

Trade Fixtures

One could see how, potentially, fixtures becoming the property of the landlord

could place an undue burden on the lessees of commercial properties. For

example, consider how many items a business owner installs in a commercial

property:

Shelving

Registers

Displays

Racks

Refrigerators

Industrial freezers

Signs

As many of these items are screwed, bolted, or nailed in, they would be considered

fixtures. However, forcing a business owner to leave such items seems

unreasonable. Items that are used for the function of a business, such as those

previously listed, among others, are called trade fixtures. Unlike standard fixtures,

these items remain the property of the tenant, providing that he removes them


prior to the expiration of his lease agreement. After a lease expires, any trade

fixtures left on the premises become the property of the landlord.

Utilities

Since leased properties are livable units, they require the usage of services such as

electricity, gas, water, sewerage and garbage disposal, telephone, etc. The party

responsible for maintaining and paying for such services depends upon the type of

lease, as illustrated on previous screens. If a property is a multi-unit property, it is

usually the landlord’s responsibility to maintain the utilities. If it is a single house, it

is more likely to be the tenant’s duty.

Landlord’s Re-Entry and Possession

The lease agreement may permit or restrict the landlord from entering the

premises once the agreement becomes effective. Most lease agreements give the

landlord the right to enter the property for specific purposes with the consent of

the tenant. This clause in the agreement could be used for the landlord to carry out

maintenance work on the property or to show it to prospective renters or buyers.

This provision also affects locks, keys, alarm systems, and any other security

devices within the leased property. The lease agreement will often stipulate when

and whether the tenant can change an existing security device or install new

devices. If the landlord is given re-entry rights, then the tenant cannot change the

locks or alarms without the consent of the landlord.

Subleasing

The term sublease refers to a lease that transfers interest from a tenant, or original

lessee, to another party, or sub-lessee, for a portion of the tenant’s leasehold while

allowing the original tenant to retain some reversionary interest.


Consider the following example:

Tenant A signed her lease in December, and it is to last one year. The problem is

that Tenant A is a student at the local University and is hoping to return to her

parents’ house for the duration of the summer break. Not wanting to break her

lease or have to find a new apartment at the end of the summer, Tenant A decides

to sublease her apartment to another person for the duration of the summer. At the

end of the summer, the apartment would revert back to her possession.

While a sublease transfers occupancy rights from the original tenant to another for

the stated period, the original tenant is still responsible for her lease agreement

with the landlord. This means that if a sub-lessee damages the property, it is the

lessee’s responsibility to work something out with the sub-lessee. This also applies

to rent. If a sub-lessee fails to give the original lessee rent, then the original lessee is

still accountable for the rent to the landlord.

The student could see how subleasing a dwelling could quickly complicate a

situation. Consequently, leases generally contain a clause that prevents subleasing

without prior permission from the landlord.

Recording

Recording refers to the act of documenting a deed or lease in the county clerk’s

office. While this depends on state laws, most leases that last for longer than one

year must be recorded. Sometimes, a simple memorandum of lease may be

recorded. A memorandum of lease usually indicates just the amount of interest

conveyed and the parties involved in the lease contract, but will not give out any

further details of the lease.


Abandonment and Holdover Tenancy

There are two common opposing problems that landlords face in regard to tenants:

abandonment and holdover tenancy. Abandonment occurs when a tenant vacates a

property prior to the expiration of a lease agreement. A holdover tenancy is when a

tenant refuses to leave after the expiration of a lease agreement.

When a tenant abandons a property without prior notification, the property may

still remain legally leased out to the tenant for a subsequent period of time,

depending on the state law. Once the stated duration expires and the tenant does

not return, the landlord can begin negotiating a new lease agreement.

The valuables left behind by the abandoning tenant usually become the property of

the landlord after a stated amount of time has passed. Before the abandonment

term expires, the landlord is required, as an act of good faith, to try to contact the

missing tenant and return his valuables.

If a tenant refuses to leave a premise after a lease expires, then he is said to be a

holdover tenant. Holdover tenancy is akin to estate at sufferance. A landlord can

remove a hold over tenant with an eviction notice.

Options

The lease agreement can specify what lease avenues are open to the landlord and

tenant in a variety of instances that may or may not arise over the course or

termination of the lease agreement. For example, the tenant could have the

options of renewing the lease, purchasing the lease, or buying out the lease.

Consider the following list of common options:

1. Renew: Continue the lease for another term, with or without a change in rent

2. Purchase: Buy the lease at the end of its expiry

3. Buy-out: Buy the lease before its expiry


Lesson Summary

The responsibilities of lessor and lessee vary with the different types of leases, as

do the kinds of fees included in rental payments. A gross lease is the simplest kind;

the tenant pays the landlord a flat fee for monthly rent, and other services are paid

either by the landlord or by the tenant directly to the purveyors of services.

In the context of a commercial net lease, the term “net” refers to any payment that

the tenant makes to the landlord, and these terms compound as categories of fees

are added to the base rental fee. Hence, a flat rental fee plus community area

maintenance and property taxes is a net-net or double-net lease; add prorated

property expenses to the tenant’s obligation, and the result is a net-net-net or

triple-net lease. Calculating the total costs of a net lease requires the tenant to

factor in all the categories of fees, which may include fees at both fixed and variable

rates.

In a percentage lease, the tenant owes the landlord a set portion of total business

profits in addition to the rates of a normal gross or net lease. A group of close

relatives, variable leases, include index and graduated leases. Their distinguishing

quality is a varying base rental rate. In order to keep rates competitive in a changing

market, rental payments for index leases are correlated with an outside indicator of

the value of goods and money such as the Consumer Price Index. Graduated leases

increase at a set rate per rental period and thus allow for an expected rise in costs.

Ground leases apply to undeveloped property and are usually long-term. Oil and

gas leases are the most prominent subtype of mineral leases and grant the lessee

the exclusive right to develop and extract oil or gas from a piece of real property

that she does not otherwise possess. A lease purchase is the formal term for a rent-

to-own arrangement in which the lease expires at the end of a set term upon the

lessee’s purchase of the premises. Sale-leasebacks permit a previous owner to

retain use of a property while surrendering the capital investment to a new owner.


In order to be valid, leases must conform to certain legal standards, which are

specified in each state’s statute of frauds. Lease agreements should generally

contain or specify rules regarding all the of following: identification and signature of

parties, contact details, possession, term, property description, usage, rent, security

deposit, maintenance of property, pets, quiet enjoyment, alterations,

improvements and additions, utilities, landlord’s re-entry and possession,

assignment and subleasing, recording, abandonment and holdover tenancy, and

options.


Lesson 3: Residential Leasing

Lesson Topics


Introduction

Residential Lease Legislation

Uniform Residential Landlord and Tenant Act

Residential Insurance and Liability

Reconciliation of Tenant Landlord Responsibilities


Introduction

All residential leasing transactions are subject to special laws and liabilities. To fully

understand the relationship between a residential tenant and landlord, one must

be familiar with these laws and all the associated liabilities.

This lesson will cover federal legislation that applies to the letting of residential

dwellings. In particular, we will cover the federal fair housing law, the Uniform

Residential Landlord and Tenant Act and the lead-based paint hazard pamphlet

that the U.S. Department of Urban Development (HUD) and the Environmental

Protection Agency (EPA) require landlords to distribute.

This lesson will then detail the tenant’s and landlord’s respective liabilities and offer

insurance options and risk management techniques that can protect both parties,

such as homeowner’s insurance, property maintenance, and renter’s insurance.

Residential Lease Legislation

To promote equitable housing and protect public welfare, the U.S. government,

mainly HUD, enforces a variety of laws that apply to residential dwellings. Two laws,

in particular, help to define the residential tenant-landlord relationship and prohibit

unfair discrimination: the federal Fair Housing Act and the Uniform Residential

Landlord and Tenant Act.

Federal Fair Housing Act

The federal Fair Housing Act is Title VIII of the Civil Rights Act of 1968 (the “Act”). In

essence, it prevents landlords from refusing housing, financial providers from

refusing financing, and real estate professionals from refusing services to a bone

fide prospect because of that person’s:

Race

National origin

Familial status


Color

Sex

Handicap

Religion

In addition to this, the Act outlaws real estate advertisements that discriminate

against these protected classes. Consider the following statutes, taken from the Fair

Housing Act verbatim. After reviewing the law, we will address what this means for

tenants, landlords and real estate professionals.

Section 804 [42 U.S.C. 3604]. Discrimination in Sale or Rental of Housing and

Other Prohibited Practices

As made applicable by section 803 of this title and except as exempted by sections

804 and 807 of this title, it shall be unlawful—

(a) To refuse to sell or rent after the making of a bona fide offer, or to refuse to

negotiate for the sale or rental of, or otherwise make unavailable or deny, a

dwelling to any person because of race, color, religion, sex, familial status, or

national origin.

(b) To discriminate against any person in the terms, conditions, or privileges of sale

or rental of a dwelling, or in the provision of services or facilities in connection

therewith, because of race, color, religion, sex, familial status, or national origin.

(c) To make, print, or publish, or cause to be made, printed, or published any notice,

statement, or advertisement, with respect to the sale or rental of a dwelling that

indicates any preference, limitation, or discrimination based on race, color, religion,

sex, handicap, familial status, or national origin, or an intention to make any such

preference, limitation, or discrimination.


(d) To represent to any person because of race, color, religion, sex, handicap,

familial status, or national origin that any dwelling is not available for inspection,

sale, or rental when such dwelling is in fact so available.

(e) For profit, to induce or attempt to induce any person to sell or rent any dwelling

by representations regarding the entry or prospective entry into the neighborhood

of a person or persons of a particular race, color, religion, sex, handicap, familial

status, or national origin.

(f) (1) To discriminate in the sale or rental, or to otherwise make unavailable or

deny, a dwelling to any buyer or renter because of a handicap of—

(A) that buyer or renter,

(B) a person residing in or intending to reside in that dwelling after it is so

sold, rented, or made available; or

(C) any person associated with that buyer or renter.

(2) To discriminate against any person in the terms, conditions, or privileges of

sale or rental of a dwelling, or in the provision of services or facilities in

connection with such dwelling, because of a handicap of--

(A) that person; or

(B) a person residing in or intending to reside in that dwelling after it is so

sold, rented, or made available; or

(C) any person associated with that person.

Section 805 [42 U.S.C. 3605]. Discrimination in Residential Real Estate-Related

Transactions

(a) In General.—It shall be unlawful for any person or other entity whose business

includes engaging in residential real estate-related transactions to discriminate

against any person in making available such a transaction, or in the terms or

conditions of such a transaction, because of race, color, religion, sex, handicap,

familial status, or national origin.


(b) Definition.--As used in this section, the term "residential real estate-related

transaction" means any of the following:

(1) The making or purchasing of loans or providing other financial

assistance—

(A) for purchasing, constructing, improving, repairing, or maintaining a

dwelling; or

(B) secured by residential real estate.

(2) The selling, brokering, or appraising of residential real property.

(C) Appraisal Exemption.--Nothing in this title prohibits a person

engaged in the business of furnishing appraisals of real property to

take into consideration factors other than race, color, religion, national

origin, sex, handicap, or familial status.

Section 806 [42 U.S.C. 3606]. Discrimination in Provision of Brokerage Services

After December 31, 1968, it shall be unlawful to deny any person access to or

membership or participation in any multiple-listing service, real estate brokers'

organization, or other service, organization, or facility relating to the business of

selling or renting dwellings, or to discriminate against her in the terms or conditions

of such access, membership, or participation, on account of race, color, religion,

sex, handicap, familial status, or national origin.

Implications of the Federal Fair Housing Act for Landlords

Not only may landlords not refuse housing on the basis of race, national origin,

color, sex, religion, familial status, or handicap, but they may not alter the

ramifications or privileges associated with leasing a residential property on such

grounds either. In addition, landlords must allow any tenant with a handicap to

make any reasonable accommodations to her unit, providing that the tenant return

the property to its prior condition upon the lease agreement’s expiration. This could

mean that a landlord may have to make exceptions to his general rules.


For example, if a blind person has a guide dog, then the landlord must allow the

disabled individual to keep her dog, even if the landlord does not usually allow

animals.

A handicap is any disability that limits one or more of a person’s life activities. In the

eyes of the law, a disability can actual or perceived. This means that if a landlord

believes that a prospect may have a disability, and, as a result, refuses to rent to

her, then the landlord has violated the federal Fair Housing Act, regardless of

whether or not the prospect is actually disabled. The definition of a handicap or

disability extends beyond the types of physical impairments that one may

commonly think of. For example, persons with HIV or AIDS fall under this category,

and, while persons addicted to illegal drugs do not, alcoholics do.

Landlords must avoid discrimination in their advertisements. If an advertisement

shows a preference with regard to race, sex, familial status, religion, color, national

origin, or handicap, then the landlord has violated the Fair Housing Act. It is

important to note that the placement of an ad or an ad’s pictures can show such

discrimination. Consider the following example:

Landlord A places an ad in a newspaper that circulates in a predominately Spanish

speaking section of town that is only in English and contains only Caucasian

persons. Although Landlord A does not state anything discriminatory, the nature of

the ad, being only in English, and the inclusion of only Caucasian persons could

illustrate a discriminating preference.

Landlords must avoid all discriminating advertisements. In general, landlords

should remember to, “Describe the property, not the people.”


Implications of the Fair Housing Act for Tenants

For tenants, the Fair Housing Act means that they cannot be unfairly denied

housing due to color, sex, national origin, familial status, handicap, religion or race.

In regard to accommodations for a disability, it does, however, state the following:

Only reasonable accommodations must be made

The tenant must return the property to its pre-leased condition

Implication of the Fair Housing Act for Real Estate Professionals

As with landlords, real estate professionals must avoid discriminating

advertisements. Any unfair preference that discriminates against the seven

protected classes constitutes a violation of the Fair Housing Act.

In addition, real estate professionals may not refuse service to anyone on the basis

of race, sex, color, national origin, familial status, religion, or handicap. This law not

only protects individuals from unfair discrimination, but also ensures that real

estate salespersons and brokers must show residential dwellings to all bona fide

prospects.

Exemptions from the Fair Housing Act

It is important to note that this law applies to residential dwellings only. Exemptions

are also made for properties owned by religious organizations associations and

societies, as well as some other non-profit institutions. There are some other

exceptions, such as single-sex dormitories and, in some instances, an owner selling

her primary residence without the assistance of a real estate broker or salesperson.

It is always preferable to seek legal council if a landlord, real estate professional, or

anyone else believes that they are exempt from fair housing legislation. In addition,

it is important to remember that federal fair-housing legislation is meant to

promote free trade, equitable treatment, and property laws, from which we all


benefit. All landlords and salespersons should seek to uphold the spirit of this law

in every residential transaction.

Uniform Residential Landlord and Tenant Act

The National Conference of Commissioners on Uniform State Laws drafted the

Uniform Residential Landlord and Tenant Act in 1972. Although states may choose

whether or not to adopt the Act in its entirety, almost all states and form-

promulgators use it as a guideline. Regardless of whether or not it is the law in a

given state, it still offers insight into how landlords and tenants should view one

another and the basic, good-faith obligations of both. In essence, this Act

standardizes:

The obligations of tenants and landlords

The remedies for breaches of a lease agreement by either party

The contents, length, and general form of a valid lease agreement

Intent

As stated in the Act, Part 1, Article 1, Subsections 1 through 3, the Act seeks to:

Simplify, clarify, modernize, and revise the law governing the rental of

dwelling units and the rights and obligations of landlords and tenants

Encourage landlords and tenants to maintain and improve the quality of

housing

Make the law uniform with respect to the subject of this Act among those

states which enact it

Scope

The Act is meant to apply to leased dwelling units only. Under this Act, a dwelling

unit “means a structure or the part of a structure that is used as a home, residence

or sleeping place by one person who maintains a household or by two or more

persons who maintain a common household” (Article 1, Part 3, Subpoint 3).


As pointed out early in the same article, this means that the Act does not apply to:

Incidental residencies, such as prisons or hospitals

Occupancies under sale contracts

Transient centers

Any commercial, agricultural, or industrial lease agreement

Good-Faith Relationship

The Act is, to a certain degree, meant to be applied liberally. This means that the

authors of the Act want landlords and tenants to uphold the spirit of the doctrine,

rather than its letter. In particular, the authors stress that the Act assumes a good-

faith transaction on behalf of both parties.

The Act defines good faith as “honesty in fact in the conduct of the transaction

concerned” (Article 1, Part 3, Subpoint 4). Under a Comment in the same Article, the

authors specifically state that:

“Every duty under this Act and every act which must be performed as a condition

precedent to the exercise of a right or remedy under this Act imposes an obligation

of good faith in its performance or enforcement” (Obligation of Good Faith,

Comment 1, Article 1).

This means that no one may use this Act to try to gain position or ground with

dishonest or insincere motives. The Act is meant to protect landlords and tenants

acting in good faith and to clarify unclear or inconsistent points for them. It is not

meant to give either an unfair advantage or to be the source of loopholes or

frivolous lawsuits.


General Provisions for a Residential Lease Agreement

The Act does not attempt to cover every aspect of a lease agreement. Instead, Part

4of Article 1 outlines the general provisions for a valid lease agreement, covering

the ramifications for the existence of a lease and prohibited clauses.

Initially, the section outlines what happens in the event that a lease is unclear or

absent. For example, in the absence of a written lease, the Act states that a tenant

must still pay rent without notice or demand at whatever time and place has been

formally or informally agreed upon at regular intervals, which usually means at the

beginning of each month. In addition, the Act states here that any lease without a

definite term is assumed to be a month-to-month lease, unless the tenant is a

week-to-week roomer.

If a landlord fails to issue, sign, or deliver a lease agreement, then acceptance of

rent constitutes a binding agreement between the landlord and tenant. This means

that all laws, such as eviction notice, apply. This applies to the tenant as well. If a

tenant fails to deliver or sign a lease agreement, then acceptance of the property

and payment of rent effectively activates the lease agreement and all relevant laws

apply. It is interesting to note, however, that if a lease agreement for longer than

one year takes effect in this manner, then it only last for one year.

The Act prohibits unfair provisions in lease agreements. The same section of the Act

specifically states that a lease agreement MAY NOT require a tenant:

Agree to waive or forego rights or remedies under this Act

Authorize any person to confess judgment on a claim arising out of the rental

agreement

Agree to pay the landlord’s attorney’s fees

Agree to the exculpation or limitation of any liability of the landlord arising

under law or to indemnify the landlord for that liability or the costs

connected therewith


Responsibilities of Residential Leasehold Parties

With the understanding that the Act requires, first and foremost, that all parties

conduct business in good faith, the Act addresses the particular responsibilities of

both landlords and tenants. The following screens will outline the duties of a

landlord first and then a tenant’s obligations.

Landlord’s Obligations under the Act

In Article 2, the Act outlines the basic duties and liabilities of a landlord, which in

general include the receipt and equitable handling of security deposits,

management and maintenance of the property, and her limited liability for injury.

Once a lease agreement takes effect, the landlord must hand possession of the

property over to the tenant. In addition, the landlord must provide the tenant with

the names and addresses of all persons, such as managers or other owners, with

whom the tenant will do business.

It is common practice for landlords to require a security deposit on a leased

property. Consequently, the Act specifies what constitutes an equitable security

deposit and when a landlord may retain the deposit upon the lease agreement’s

expiration. According to the Act, landlords “may not demand or receive security,

however denominated, in an amount or value in excess of one month’s periodic

rent.” It does, however, state that a landlord may apply the deposit to:

Lost rents due to a default on behalf of a tenant, and/or

Damages to the property

Landlords are responsible for the maintenance of a leased property. The Act

requires that a landlord:

Comply with the requirements of applicable building and housing codes

materially affecting health and safety


Make all repairs and do whatever is necessary to put and keep the premises

in a fit and habitable condition

Keep all common areas of the premises in a clean and safe condition

Maintain in good and safe working order and condition all electrical,

plumbing, sanitary, heating, ventilating, air-conditioning, and other facilities

and appliances including elevators, supplied or required to be supplied by

him

Provide and maintain appropriate receptacles and conveniences for the

removal of ashes, garbage, rubbish and other waste incidental to the

occupancy of the dwelling unit and arrange for their removal

Supply running water and reasonable amounts of hot water at all times and

reasonable heat between October 1st and May 1st except where a building

that includes a dwelling unit is not required by law to be equipped for that

purpose, or the dwelling unit is so constructed that heat or hot water is

generated by an installation within the exclusive control of the tenant and

supplied by a direct public utility connection

Respect a tenant’s right of quiet enjoyment by giving notice before entering a

property

Tenant’s Obligations under the Act

Although, in general, the landlord must maintain the property, the tenant does

share some responsibility in the property’s maintenance. The Act states that a

tenant must:

Comply with all obligations primarily imposed upon tenants by applicable

provisions of building and housing codes materially affecting health and

safety

Keep that part of the premises that he occupies and uses as clean and safe

as the condition of the premises permit

Dispose of all ashes, garbage, rubbish and other waste from his dwelling unit

in a clean and safe manner


Keep all plumbing fixtures in the dwelling unit or used by the tenant as clear

as their condition permits

Use in a reasonable manner all electrical, plumbing, sanitary, heating,

ventilating, air-conditioning, and other facilities and appliances including

elevators in the premises

Not deliberately or negligently destroy, deface, damage, impair, or remove

any part of the premises or knowingly permit any person to do so

Conduct himself and require other persons on the premises with his consent

to conduct themselves in a manner that will not disturb his neighbors’

peaceful enjoyment of the premises

Return the property to the same condition that he received it, which includes

removing all personal property or alterations

Lead-Based Paint Hazard Pamphlet

In the interest of public welfare, HUD and the EPA have produced a pamphlet on

the dangers of lead-based paint, which landlords of dwellings built prior to 1978

must distribute to their tenants.

Lead is a malleable, grayish-blue metal that, prior to the late 70s, was used in a

variety or products, including paint and pipe solder. It was found that paints that

contained lead were more resilient and stayed fresher-looking longer. Since then,

however, lead has been linked to a variety of health problems and can be

particularly dangerous to children and pregnant women.

While we no longer use lead in such products, it is a likely component in exterior

paints applied before 1978. As a result, any dwelling erected before that date may

contain lead-based paint. When properly managed, this paint poses little threat to a

dwelling’s inhabitants. It is, however, important that such persons are aware of the

hazard so that they may take any necessary precautions. For this reason, HUD and

the EPA now require that landlords provide the pamphlet Protect Your Family from


Lead in Your Home to all lessees of dwellings built before 1978. In addition, they

must give notice to such tenants if renovation is to occur or large sections of paint

will be disturbed. There are severe consequences for failing to do so.

Texas Statutes on Residential Tenancies

Traditionally, the landlord/tenant relationship was not subject to substantial state

regulation. However, Texas has adopted legislation to provide more tenant

protections in residential tenancies. Some of the more significant tenant

protections contained in Texas statutes are discussed below.

Landlord’s Duty to Make Repairs

A landlord has the duty to repair a condition that materially affects the physical

health or safety of a tenant, or that arises from landlord’s failure to provide or

maintain a device to supply hot water of a minimum temperature of 120 degrees

Fahrenheit. In order to effect a repair, a tenant must give notice of the condition to

the landlord where rent is normally paid. Additionally, the tenant must not be

delinquent in the payment of rent at the time notice is given. Unless the condition

was caused by normal wear and tear, the landlord does not have the duty to repair

a condition caused by: (1) the tenant; (2) a lawful occupant of tenant’s dwelling; (3) a

member of tenant’s family; or (4) a guest or invitee of the tenant. The landlord is

not required to furnish utilities from a utility company if the utility lines are not

reasonably available. Additionally, a landlord is not required to furnish security

guards.

If the condition results from an insured casualty loss, such as fire, smoke, hail,

explosion, or a similar cause, the period for repair does not begin until the landlord

receives the insurance proceeds.

A landlord is liable for failure to make repairs if: (1) the tenant has given the

landlord notice where the tenant's rent is normally paid; (2) the condition materially


affects the physical health or safety of an ordinary tenant; (3) the tenant gives the

landlord a subsequent written notice to repair or remedy the condition after a

reasonable time to repair or remedy the condition, or the tenant has given the

original notice by sending same by certified mail, return receipt requested, or by

registered mail; (4) the landlord has had a reasonable time to repair or remedy the

condition after the landlord received the tenant's original notice and, if applicable,

the tenant's subsequent notice; (5) the landlord has not made a diligent effort to

make repairs; and (6) the tenant was not delinquent in the payment of rent at the

time any required notice was given.

Normally, the law presumes that seven days is a reasonable time for the landlord to

make repairs. To rebut that presumption, the date on which the landlord received

the tenant's notice, the severity and nature of the condition, and the reasonable

availability of materials and labor and of utilities from a utility company must be

considered.

If a landlord fails to make required repairs, the tenant may: (1) terminate the lease;

(2) have the condition repaired; (3) deduct the cost of repairs from the subsequent

month’s rent, not to exceed the greater of $500.00 or one month’s rent; or (4) seek

judicial remedies. If the tenant terminates the lease, the tenant is: (1) entitled to a

pro rata refund of rent from the date of termination or the date the tenant moves

out, whichever is later; (2) entitled to deduct the tenant's security deposit from the

tenant's rent without necessity of lawsuit or obtain a refund of the tenant's security

deposit according to law; and (3) not entitled to the other repair and deduct

remedies.

If a tenant elects to bring court action against the landlord, the tenant’s judicial

remedies include: (1) an order directing the landlord to take reasonable action to

repair or remedy the condition; (2) an order reducing the tenant’s rent, from the

date of the first repair notice, in proportion to the reduced rental value of the


premises resulting from the condition until the condition is repaired or remedied;

(3) a judgment against the landlord for one month’s rent plus $500; (4) a judgment

against the landlord for the amount of the tenant’s actual damages; and (5) court

costs and attorney’s fees, excluding attorney’s fees arising out of a cause of action

for personal injury damages.

The full provisions of Texas law pertaining to a residential landlord’s duty to make

repairs, and the tenant’s remedies resulting from such failure, are complex and

beyond the scope of this course. In dealing with a situation that involves a

residential landlord’s duty to make repairs, a licensee would be well advised to seek

advice from a Texas licensed attorney who specializes in the landlord/tenant area.

Utilities

A landlord who expressly or impliedly agrees to furnish and pay for water, gas, or

electric service is liable to the tenant if the utility company cuts off service to the

tenant’s dwelling or gives written notice that such utility service is about to be cut

off because of landlord’s nonpayment of a utility bill. If a landlord is liable for failure

to furnish utilities, the tenant may: (1) pay the utility company; (2) terminate the

lease in writing if the move-out is to be within 30 days from the date the tenant has

notice from the utility company of a future cutoff or notice of an actual cutoff,

whichever is sooner; (3) deduct from the tenant's rent, without necessity of judicial

action, the amounts paid to the utility company to reconnect or avert a cutoff; (4) if

the lease is terminated by the tenant, deduct the tenant's security deposit from the

tenant's rent without necessity of lawsuit or obtain a refund of the tenant's security

deposit pursuant to law; (5) if the lease is terminated by the tenant, recover a pro

rata refund of any advance rentals paid from the date of termination or the date

the tenant moves out, whichever is later; (6) recover actual damages including, but

not limited to, moving costs, utility connection fees, storage fees, and lost wages

from work; and (7) recover court costs and attorney's fees, excluding any attorney's

fees for a cause of action for damages relating to a personal injury. If the tenant


makes a rent deduction for the tenant's payment of the landlord's utility bill, the

tenant must submit to the landlord a copy of a receipt from the utility company.

If a tenant pays directly for utilities, the landlord may not interrupt utility service

unless the interruption results from bona fide repairs, construction, or an

emergency. However, a landlord may interrupt electrical service furnished to a

tenant if: (1) the electrical service furnished to the tenant is individually metered or

submetered; (2) the electrical service connection is in the name of the landlord or

the landlord's agent; and (3) the landlord complies with the rules adopted by the

Texas Public Utility Commission for discontinuance of submetered electrical

service.

Also, a landlord may interrupt electrical service if: (1) the electrical service furnished

to the tenant is not individually metered or submetered; (2) the electrical service

connection is in the name of the landlord or the landlord's agent; (3) the tenant is at

least seven days late in paying rent; (4) the landlord has mailed or hand-delivered

to the tenant at least five days before the date the electrical service is interrupted a

written notice that states: (A) the earliest date of the proposed interruption of

electrical service; (B) the amount of rent the tenant must pay to avert the

interruption; and (C) the name and location of the individual to whom or the

location of the on-site management office where the delinquent rent may be paid

during the landlord's normal business hours; (5) the interruption does not begin

before or after the landlord's normal business hours; and (6) the interruption does

not begin on a day, or on a day immediately preceding a day, when the landlord or

other designated individual is not available or the on-site management office is not

open to accept rent and restore electrical service. The landlord must restore the

service not later than two hours after the time the tenant tenders, during the

landlord's normal business hours, payment of the delinquent electric bill or rent

owed to the landlord. If a landlord violates this section, the tenant may: (1) either

recover possession of the premises or terminate the lease; and (2) recover from the


landlord an amount equal to the sum of the tenant's actual damages, one month's

rent or $500, whichever is greater, reasonable attorney's fees, and court costs, less

any delinquent rents or other sums for which the tenant is liable to the landlord.

Lockout

A landlord may not intentionally prevent a tenant from entering leased premises

except by judicial process unless the exclusion results from: (1) bona fide repairs,

construction, or an emergency; (2) removing contents from premises abandoned by

a tenant; or (3) changing the door locks of a tenant who is delinquent in paying at

least part of the rent. If a landlord changes the door locks, the landlord must place

a written notice on the tenant's front door stating: (1) an on-site location where the

tenant may go 24 hours a day to obtain the new key or a telephone number that is

answered 24 hours a day that the tenant may call to have a key delivered within

two hours after calling the number; (2) the fact that the landlord must provide the

new key to the tenant at any hour, regardless of whether or not the tenant pays any

of the delinquent rent; and (3) the amount of delinquent rent and other charges.

A landlord may not lock out a tenant for nonpayment of rent unless: (1) the lease

contains a provision allowing the landlord to change locks because of a tenant's

failure to timely pay rent; (2) the tenant is delinquent in paying all or part of the

rent; and (3) the landlord has locally mailed not later than the fifth calendar day

before the date on which the door locks are changed or hand-delivered to the

tenant, or posted on the inside of the main entry door of the tenant's dwelling not

later than the third calendar day before the date on which the door locks are

changed a written notice stating: (A) the earliest date that the landlord proposes to

change the locks; (B) the amount of rent the tenant must pay to prevent changing

of the locks; (C) the name and street address of the individual to whom, or the

location of the on-site management office at which, the delinquent rent may be

discussed or paid during the landlord's normal business hours; and (D) in

underlined or bold print, the tenant's right to receive a key to the new lock at any


hour, regardless of whether the tenant pays the delinquent rent. A landlord may

not change the locks for nonpayment of rent on a day, or on a day immediately

before a day, on which the landlord or other designated individual is not available,

or on which any on-site management office is not open, for the tenant to tender the

delinquent rent.

If a landlord violates this section, the tenant may: (1) either recover possession of

the premises or terminate the lease; and (2) recover a civil penalty of one month's

rent plus $1,000 actual damages, court costs, and reasonable attorney's fees in an

action to recover property damages, actual expenses, or civil penalties, less any

delinquent rent or other sums for which the tenant is liable. If a landlord fails to

provide a key upon request of the tenant, the tenant may recover an additional civil

penalty of one month's rent.

A landlord may not change locks for nonpayment of rent: (1) when the tenant or

any other legal occupant is in the dwelling; or (2) more than once during a rental

payment period.

Security Devices

A dwelling must be equipped with the following security devices: (1) a window latch

on each exterior window; (2) a doorknob lock or keyed dead bolt on each exterior

door; (3) a sliding door pin lock on each exterior sliding glass door of the dwelling;

(4) a sliding door handle latch or a sliding door security bar on each exterior sliding

glass door of the dwelling; and (5) a keyless bolting device and a door viewer on

each exterior door of the dwelling.

If a dwelling has French doors, one door must have the security devices referenced

in 1 through 5 above, and the other door must have a keyed dead bolt or keyless

bolting device capable of insertion into the doorjamb above the door and a keyless

bolting device capable of insertion into the floor or threshold, each with a bolt of


one inch or more; or a bolt installed inside the door and operated from the edge of

the door, capable of insertion into the doorjamb above the door, and another bolt

installed inside the door and operated from the edge of the door capable of

insertion into the floor or threshold.

A keyless bolting device is not required if: (1) the dwelling is part of a multiunit

complex in which the majority of dwelling units are leased to tenants who are over

55 years of age or who have a physical or mental disability; (2) a tenant or occupant

in the dwelling is over 55 years of age or has a physical or mental disability; and (3)

the landlord is required or permitted to periodically check on the well-being or

health of the tenant. Further, a keyless bolting device is not required if the tenant is

over 55 years of age or has a physical or mental disability, and the tenant requests

in writing that the landlord deactivate or not install the keyless bolting device. A

keyed deadbolt or doorknob lock is not required if at the time the tenant agrees to

lease the dwelling: (1) at least one exterior door has a keyed dead bolt and keyless

bolting device; and (2) all other doors have a keyless bolting device.

At the tenant’s request and expense, the landlord must install a keyed dead bolt on

an exterior door if the door has a doorknob locked but not a keyed dead bolt, or a

keyless bolting device but not a keyed dead bolt or doorknob lock. Additionally, a

landlord must install, at the tenant’s request and expense, a sliding pin lock or

sliding door security bar if the door is an exterior sliding glass door without a sliding

pin lock or sliding door security bar.

A landlord must rekey or change security devices within seven days after each

tenant turnover date.

If a landlord fails to install mandatory security devices, the tenant may rekey or

install the device and deduct the reasonable costs from the tenant’s next rent

payment.


Alternatively, the tenant may serve a written request for compliance on the

landlord, and if the landlord does not comply within three days after the notice is

received, unilaterally terminate the lease without court proceedings. However, a

landlord is given seven days for compliance if the lease contains underlined or

boldface language summarizing landlord’s statutory duties. A tenant may also file

suit against a landlord for failure to provide or rekey required security devices and

obtain a judgment for: (A) a court order directing landlord to comply; (B) tenant’s

actual damages; (C); court costs; and (D) attorney’s fees except in suits for recovery

of property damages, personal injuries, or wrongful death.

Security Deposits

Provided the tenant gives the landlord written notice of his forwarding address, the

landlord must refund e tenant’s security deposit on or before the 30th date after the

date the tenant surrenders the premises. However, the landlord may deduct from

the deposit damages and charges for which the tenant is legally liable under the

lease or as a result of breaching the lease. The landlord may not make deductions

for normal wear and tear. If the landlord retains all or portion of a tenant’s security

deposit, the landlord must give the tenant the balance of the security deposit, if

any, and a written description and itemized list of all deductions. The landlord is not

required to give a description and itemized list of deductions if the tenant owes

rent upon surrender of the premises and there is no controversy over the amount

of rent owed.

A landlord is presumed to have acted in bad faith if the landlord fails to return a

security deposit or provide a written description and itemization of deductions on

or before the 30th day after the date tenant surrenders the premises. If a landlord

in bad faith retains a security deposit, the landlord is liable for $100, three times the

portion of the deposit wrongfully withheld, and the tenant’s reasonable attorney’s

fees in a suit to recover the deposit. If, in bad faith, the landlord does not provide a

written description and itemized list of damages and charges, the landlord forfeits


the right to withhold any portion of the security deposit or to bring suit against the

tenant for damages, and is liable for the tenant’s reasonable attorney’s fees in a suit

to recover the deposit.

Right to Vacate and Avoid Liability Under Certain Circumstances

If a tenant obtains a temporary injunction or protective order for family violence,

the tenant may terminate the lease and vacate the premises without any further

liability for future rent or other sums due for early termination of the lease. The

tenant must give the landlord a copy of the injunction or protective order and

vacate the premises. If the landlord tries to recover future rent or sums due for

early termination after the tenant has obtained an injunction or protective order,

provided a copy to landlord, and vacated the premises, the landlord is liable for

tenant’s actual damages, a civil penalty equal to one month’s rent plus $500 and

attorney’s fees.

A servicemember or dependent may vacate a dwelling and avoid liability for future

rent and other charges for early termination of the lease if the tenant enters

military service after executing the lease, or if the lease was executed while the

servicemember was in military service and the servicemember receives military

orders for a permanent change of station or for deployment of 90 days or more.

The tenant must give the landlord a written notice of termination and a copy of the

appropriate government document providing evidence of the tenant’s entrance

into military service, permanent change of station, or deployment for 90 days or

more. If the lease provides for monthly rent payments, termination is effective on

the 30th day after the date the next rent payment is due following delivery of

tenant’s termination notice. If the lease does not provide for monthly rent

payments, the lease terminates on the last day of the month following the month in

which notice is delivered. If the landlord violates Texas law pertaining to the

servicemember’s early termination rights, the landlord is liable for tenant’s actual

damages, a civil penalty of one month’s rent plus $500, and attorney’s fees.


Retaliation

A landlord may not retaliate against a tenant because the tenant: (1) in good faith

exercises, or attempts to exercise, a right or remedy granted by lease, municipal

(city) ordinance, or federal or state statute; (2) gives a notice of repair or exercises a

repair remedy; or (3) makes a complaint concerning building or housing code

violations. Prohibited acts of landlord retaliation are: (1) filing an eviction

proceeding; (2) depriving the tenant of the use of the premises except as otherwise

authorized by law; (3) decreasing services to the tenant unless the service

reductions apply to the entire project; (4) increasing the tenant’s rent or terminating

the lease unless authorized by the lease, or unless rent is increased as part of a

pattern of rent increases for the entire project; or (5) engaging in bad faith conduct

that interferes with the tenant’s rights under the lease. Notwithstanding the above,

the landlord may file eviction proceedings against the tenant based on nonpayment

of rent; intentional property damage; threats against the personal safety of

landlord, landlord’s employees, or other tenants; material breach of lease; holding

over after the tenant gives notice of termination or intent to vacate; holding over

after the landlord gives notice of termination prior to any allegation of retaliation;

and holding over after landlord gives notice of termination based on the landlord’s

good faith belief that the tenant may affect the quiet enjoyment of other tenants,

affect the health or safety of the landlord or other tenants, or damage the property

of the landlord or other tenants.

If a landlord engages in prohibited retaliation against the tenant, the tenant may

recover actual damages, a civil penalty of one month’s rent plus $500., court costs,

and reasonable attorney’s fees.

Residential Insurance and Liability

Landlords cannot be responsible for every injury on a leased property, and

accordingly, tenants cannot be responsible for every accident incurred. This does,

however, pose a problem: When a costly accident, injury, or mistake does occur,


when are the respective parties liable and for how much? Although the answer to

this would depend upon the particularities of each unique situation, there are some

general rules and risk management techniques that both tenants and landlords can

use.

Landlord Liability

Landlords are responsible for maintaining a leased property. If they fail to do so,

then the property may become uninhabitable or unsafe. If an injury occurs because

of a landlord’s negligence, then the landlord can be held liable. This particularly

applies if a tenant files a maintenance request that the landlord ignores, and an

injury results.

The liability of a landlord exceeds basic, physical requirements. Increasingly,

landlords are being held liable for injuries resulting from criminal activity on their

premises. Tenants who commit crimes on a landlord’s property harm the other

tenants and jeopardize the security of the property and its surroundings. Tenants

who have been victims of assaults and other crimes while on the landlord’s

property can, in some cases, sue the landlord. If criminal activity occurs repeatedly

on a property and a landlord does nothing, then she may be responsible for any

injuries incurred.

Tenant Liability

Tenants share a similar liability. If injuries occur or the property is damaged due to

their negligence, then they are generally held responsible. Tenants must report

problems to their landlords. The landlord must know about a problematic situation

to remedy it. This applies to everything from basic, physical problems, such as a

leaky water main, to the more general problems, such as criminal activity. Most

landlords will remedy a problem, providing that he knows about it. If the landlord

fails to do so, then proper, documented reporting can serve as proof should the

tenant need to take legal action.


Negligence does not have to lead to a serious injury for a tenant to take legal

action. If a landlord’s negligence has rendered a premise inhospitable, then the

tenant has a variety of legal remedies. If there are problems with any of the

dwellings’ main components, which, according to HUD, include the lighting, heating,

cooling, water, plumbing, and waste management, then in most circumstances the

tenant may:

Refuse to pay rent

Reduce the amount of rent paid

Make repairs and then either charge the landlord for the repairs or deduct

them from the rent

Report the landlord to local authorities

End the lease agreement without any prior notice

Tenants can be held liable for damage to other tenants’ personal property and/or

units as well. Consider the following example:

Tenant A notices that his water heater is leaking. Even though it continues to do so

for three weeks, Tenant A fails to notify his landlord. His neighbor, in the duplex

next door, notices a water stain developing on her hardwood floor next to their

conjoining wall. Unfortunately, by the time she notices it, the water not only stained

the floor blue, but her antique chest as well. She notifies the landlord. The landlord

could require Tenant A to pay for the excess damage to his floor as well as his

neighbor’s because he failed to report the problem, and Tenant A’s neighbor could

sue him for the damage done to her personal property, the antique chest.

The general rule is: Either party, the landlord or tenant, can be held liable for an

injury to a person or damage to property (personal or real) if it can be shown that

the injury or accident occurred due to negligence.


Landlord’s Risk Management Techniques

The best way for a landlord to avoid costly lawsuits or loss of rents is to keep her

property in a safe and clean condition. Landlords should keep the line of

communication between themselves and their tenants open. This way, if a problem

does arise, the landlord can deal with it efficiently.

Proper applicant screening is a good risk management tool, not only for

maintaining a safe environment, but in ensuring that a landlord receives her due

rents and that the property is returned to her in the same condition that it was

leased. When screening residential applicants, landlords should inquire about a

prospective tenant’s:

Employment history

Credit history

Criminal background

Prior rental history

Providing the tenant with a clearly written lease and addressing a tenant’s concerns

and questions effectively can also help. A well-written lease agreement can prevent

mistakes before they occur. In general, landlords should go over the particulars of a

lease and the procedures for filing maintenance requests to prevent costly

misunderstandings.

Tenant’s Risk Management Techniques

As illustrated in a prior example, the best way for tenants to avoid costly lawsuits is

to report problems immediately to their landlords. Nevertheless, accidents do

occur. A tenant can make an honest mistake that can severely damage both his

dwelling or property and the property and units of others. One way that tenant can

avoid monetary liability for accidents is through renter’s insurance.


Just as owners are eligible for homeowners insurance, tenants are eligible for

renter’s insurance. Renter’s insurance usually covers fire, theft, burglary, and

personal injury or assault. It is usually available for up to $50,000. Personal liability

coverage can also be included in the insurance policy. Personal liability insurance

can cover the cost incurred from accidentally damaging another unit or physically

harming another tenant. Neither renter’s insurance nor personal liability insurance

tends to cover earthquakes or floods. A renter who wants to protect his property

from these natural disasters may need to purchase additional coverage.

Reconciliation of Tenant Landlord Responsibilities

Now that we have covered the federal Fair Housing Act, the Uniform Residential

Tenant and Landlord Act, environmental hazard legislation, and tenant and

landlord liabilities, could you tell who is responsible for what?

The following exercise will utilize the information covered in this lesson. The first

column contains an obligation or responsibility. Place a check mark in the landlord

column if fulfilling the duty is the responsibility of the landlord. Conversely, place a

check in the tenant column if the responsibility belongs to the tenant.

Responsibility Landlord Tenant

Provide safe water supply

Keep carpet clean for the duration of the lease

Perform lessee credit/background check

Report a leaky water heater

Make available hot and cold water taps

Put locks on doors

Properly dispose of ashes and other garbage

Remove personal property prior to the lease’s

expiration


Provide required lead-based paint pamphlets

Install smoke and fire alarms

Lesson Summary

To understand the use of a residential lease, the student must understand the laws

that govern its form and applications. This lesson explained the nature of a

residential landlord-tenant relationship through the presentation of applicable

federal laws, individual obligations, and personal liability and risk management.

Federal agencies, particularly the U.S. Department of Housing and Urban

Development, or HUD, and the Environmental Protection Agency, or the EPA,

enforce certain laws to promote public welfare and equitable treatment.

HUD enforces the federal Fair Housing Act, which is Title VIII of the Civil Rights Act

of 1968. This Act states that no one may be discriminated against in residential real

estate transactions because of their race, national origin, religion, color, sex, familial

status, or handicap and that no advertisement may show any preference based on

a listed class. This Act also states that no advertisement may show an unfair

preference relating to the seven protected classes. Under this law, a handicap may

be either actual or perceived, and landlords must make any reasonable

accommodations on behalf or disabled persons.

The National Conference of Commissioners on Uniform State Laws drafted the

Uniform Residential Landlord and Tenant Act in 1972. This Act, though not applied

universally, serves as a guideline for almost all state agencies and form

promulgators pertaining to residential leases. Initially, this Act establishes the basic

requirements for a lease agreement, which is, in general, an acceptance and

possession of a property and a payment and acceptance of rent. Second, this Act

states the landlord’s and tenant’s obligations. In general, a tenant is responsible for

using a leased property reasonably and returning it to its pre-leased condition upon


expiration of the lease agreement. Landlords must provide a safe and habitable

environment, make all necessary repairs, and respect the tenant’s right to quiet

enjoyment of her property. This Act is meant to be applied liberally and in the spirit

of good faith.

Lead is a bluish-grey metal that, prior to 1978, was used to promote the longevity of

exterior paint. However, it has since been marked a carcinogen and can be

particularly dangerous to children and pregnant women. Such paint poses little or

no threat when properly managed. HUD and the EPA require that landlords of

residential dwellings built before 1978 issue prospective tenants the pamphlet

Protect Your Family from Lead in Your Home. Landlords must also supply tenants with

the information if the home is to be renovated or large sections of paint will be

disturbed.

Tenants and landlords share responsibility for the care of a property. A tenant and

landlord are responsible for any injury or damage to person or property (real or

personal) that occurs due to negligence. Landlords can prevent such problems

through clear communication, proper applicant screening, and consistent property

maintenance. Tenants may avoid liability by reporting any suspicious behavior by

other tenants or physical problems with the property to their landlords. In addition,

renter’s and personal liability insurance policies are available.


Lesson 4: Commercial Leases

Lesson Topics


Introduction

Characteristics of a Commercial Lease

Types of Commercial Property

Process of Commercial Leasing

Texas Statutes Pertaining to Commercial Tenancies

Introduction

Commercial leases are based on negotiations between potential tenants and

property owners. Several other parties may be involved or may act as agents for

the principal parties. A commercial property with multiple rental units may require

the services of a professional on- or off-site rental agent, who would handle all


leases and inquiries into leasing. Some properties may employ a property manager,

whose duty, among others, is to advertise and lease the premises. Large properties

will often hire a real estate broker to market, show, and lease the property because

negotiating the details of a large-scale lease requires familiarity with typical

agreements and provisions, as well as keen business acumen.

Characteristics of a Commercial Lease

Because each commercial lease is specific to the building and the needs of the

parties involved in the lease, there is no standard form for commercial leases. The

commercial lease is an accord between businesspeople and, as such, has special

characteristics that would not apply, for instance, to a residential lease. Owners and

commercial property managers must be sure, before making any agreements, that

the property is zoned for commercial use; for example, one cannot establish a

clothing boutique in the middle of a residential neighborhood without special

zoning exemptions. It is illegal to do business of a certain volume outside of

commercial zones, and both the tenant and the owner would face the possibility of

forfeiting assets upon the discovery of a commercially leased property in a non-

commercial district.

The percentage lease is common to properties that are used for profit, such as

industrial, commercial, and some special-purpose properties; obviously, this form

of lease is not appropriate for residential properties. In a gross percentage lease,

the rent includes a base rental figure, usually based on the premises’ intrinsic

characteristics, plus a percentage of total profits to be paid after the lessee’s

business has accrued a certain minimum profit. A net percentage lease requires the

tenant to pay all of the above expenses, plus the operating costs for the leased

premises.


The lessor and lessee should be careful to specify in the lease what services will or

will not be provided by the lessor. Will the lessor arrange for trash pickup and

cleaning services, and will there be a separate fee? Which party will pay real estate

taxes? Typically, commercial leases fall into the category of some form of net lease,

in which the lessee pays some costs in addition to the stated rent.

Finally, in drawing up a new commercial lease, the lessor must usually engage the

services of a lawyer. It is illegal for a layperson to draft legal documents, as such

activity constitutes the practice of law. As discussed above, even documents that

claim to be “standard” commercial leases will rarely conform to all the needs and

specifications of a particular commercial lease.

Essential Provisions of a Commercial Lease

Each of these terms denotes a critical portion of any commercial lease agreement.

Additional provisions may be needed, according to the demands of the parties and

the property in question.

Names of Parties: The names of the lessor and lessee as well as any legal agents

for either party.

Description of Premises: The address and legal description of the property and

the areas of the property to be leased under the agreement.

Term: The length of the lease, start and end dates, and renewal options. This clause

includes the landlord’s guarantee to give possession of the premises to the tenant

on the appointed start date of the lease.

Rental Rate: The cost of leasing the premises for a stated period of time. This

portion of the lease will also specify the due date of rents.


Usage Standards: The permitted uses of the property with respect to zoning. This

clause also specifies any forbidden uses of the property, such as illegal activity; the

storage, manufacture, or sale of hazardous substances; etc.

Utilities: The tenant’s obligations or the landlord’s guarantee to pay charges for

electricity, water, sewer service, gas, telephone, internet, and other

telecommunication services.

Property Taxes: The tenant’s obligations or the landlord’s guarantee to pay

national, state, or local property taxes.

Competition: In the case of multi-tenant retail or combined-use properties (these

terms are explained further in the lesson), the tenant may want the landlord to

guarantee that the landlord will not lease nearby premises to businesses that might

detract from the tenant’s market or client base.

Sublease and Assignment Policies: The rights of the tenant to assign or sublease

any part of the premises to subsidiaries of the tenant company or to outside

parties, the conditions under which the landlord would permit such assignments,

and the standards for notifying the landlords of assignments or subleases.

Repairs: Assignment of responsibility to landlord or tenant for making and paying

for necessary repairs and routine maintenance during the lease term.

Alterations and Improvements: What alterations will be permissible during the

tenant’s possession of the premises, what standards the changes must conform to,

and whose responsibility it will be to arrange and pay for such changes.


Insurance: Which party will be responsible for fire and extended coverage

insurance during the lease term; usually, the landlord pays for general fire and

damages insurance to the building as it is when rented, and the tenant pays for fire

and extended coverage of the tenant’s personal property. This clause also details

the tenant’s responsibility to pay undiminished rent while the property is under

repair from fire or other damages. All insurance premiums should be paid on or

before the start date of the lease.

Signs: The degree to which the landlord has control over signs and other

advertisements placed on the property, and on what grounds the landlord may

object.

Landlord Entry: The rights of the landlord to inspect the property at given hours

and the rights of the tenant to request that the landlord not interrupt tenant

business as a result of inspections.

Parking: The degree to which parking areas are open to the public, to the tenant’s

employees and clients, and to the landlord during the lease term.

Building Rules: Rules that the landlord specifies for use of the building from the

outset; standards for changing such rules, proper notification, etc.

Damage and Destruction: The tenant’s obligations to repair or replace any

property damaged by the tenant. This clause also describes the tenant’s right to

terminate the lease with proper notice if the premises become unusable for the

tenant’s purposes.

Default: The landlord’s right to terminate the lease upon the tenant’s failure to pay

rent. This clause specifies the grace period for paying rent and the legal procedures

necessary for eviction.


Quiet Possession: The landlord’s guarantee that he will not disturb the tenant’s

right to use the premises exclusively during the term of the lease.

Condemnation: The tenant’s requirement to surrender possession of the leased

premises upon condemnation by a national, state, or local government.

Security Deposit: The amount, purposes, and conditions for return of the security

deposit.

Subordination: The responsibility of the tenant to recognize the landlord’s

previous and future obligations, such as mortgages, deeds of trust, and liens.

Notice: Correct addresses of tenant and landlord, to which formal notices should

be sent.

Brokers: Policies concerning the landlord’s and tenant’s rights or lack of rights to

employ independent brokers to market or find the property, and the policy for

payment of marketing and finding fees to brokers.

Waiver: The landlord’s and tenant’s covenant not to make waivers for defaults or

other breaches of lease.

Memorandum of lease: In cases in which the lease is not filed for legal record, the

parties will execute a memorandum of lease to go on record in its place.

Headings: Only the actual provisions of the lease should be understood as legally

binding; clauses are titled in order to organize the lease comprehensibly and do not

in themselves guarantee any particular provision.


Successors: The lease binds the parties and their legal representatives, heirs,

successors, or persons to whom the parties may assign their interest in the lease.

Consent: In matters for which the tenant must obtain the landlord’s consent, the

landlord should be as prompt as possible in responding to requests.

Performance: The tenant’s right to claim breach of lease if the landlord does not

perform his side of the covenants made in the lease.

Termination: The policies concerning termination of the lease, including the

amount of time and method of notification required for proper notice as well as

any fees or other consequences contingent upon improper termination of the

lease.

Compliance with law: The landlord’s and tenant’s responsibility to comply with all

national, state, and local laws in the use of the premises. One of the most critical

laws with which tenants and landlords of commercially leased properties should be

familiar is the Americans with Disabilities Act, which will be discussed below as an

issue in the negotiating process.

Final agreement: Statement that the lease is the definitive agreement about the

premises, that it supersedes all previous agreements, and that it may only be

modified by future agreements in writing that specifically state their supremacy.

Signatures: In order for the lease to be legal, both parties and/or any legal

representatives must sign the document.


Types of Commercial Property

A number of types of property are eligible for commercial leases and related types

of leases. A description and some ramifications of commercial leasing practices for

each type follows.

Retail Properties

The percentage lease, discussed above, will be especially applicable to retail

properties; the landlord will benefit from the profits of her tenants. Leases for free-

standing, single-tenant retail properties are fairly simple, but leases for multi-tenant

properties such as malls and strip shopping centers may involve prorated utilities

and other negotiations about shared space and resources.

Office Properties

Again, as in retail, single-tenant and multi-tenant properties will have different

needs and lease requirements. Large office complexes will have a number of

shared-space issues pertaining to parking, utilities, common areas, grounds, and

possibly food services. A property manager or, more specifically, a leasing manager

may handle leases for large multi-tenant properties. Percentage leases may also

apply to office spaces, to be calculated by tenant company profits.

Warehouse Space

Percentage leases may not be applicable to warehouse spaces, since their purpose

may be for storage of non-saleable goods only. In some cases, a landlord may take

a percentage of a tenant company’s total profits.

Special Purpose Property (Non-Residential)

Commercial leases will generally be applicable to for-profit special-purpose

properties. Non-profit tenants will require similar types of leases, with some

differences; percentage leases, for instance, will likely be inapplicable to non-profit

tenants. Some for-profit special purpose property tenants are restaurants, bars,


movie theaters, live-performance venues, art galleries, and hotels and motels.

Hospitals, nursing homes, and medical offices may be for-profit or non-profit.

Legitimate churches and schools are generally non-profit, as are charitable

organizations and non-profit foundations.

Combined-Use Properties

An increasingly popular type of commercial real estate is the combined-use

property in which a landlord rents a facility to a diverse group of tenants; one of the

best examples of combined- or mixed-use property is the mall complex, which may

contain shops, restaurants, movie theaters, hotels, apartments, and office spaces

all under one roof. Some urban skyscrapers have similarly diverse features. The

combined-use property concept is an old one; historic downtown areas are

increasingly being converted back to mixed-use purposes, with retail space on the

ground floor and office or loft space above, and a number of new suburban

complexes are following suit. Issues of competition, shared resources, and varying

percentage leases will be critical to mixed-use developments.

Process of Commercial Leasing

Although there are no set protocols for negotiating commercial leases, the process

has customs and common issues of which landlords and tenants should be aware.

In a typical process, a landlord advertises the availability of a space, then interested

tenants present lease proposals. The landlord chooses an attractive proposal, and

the parties negotiate the terms of the lease agreement, which culminates in signing

and the transfer of possession to the tenant under the terms of the lease.

Evaluating Tenant Proposals

The tenant’s initial proposal should include introductory letters, financial and

generic information about the tenant’s company, and a proposed lease agreement

specifying everything that the tenant wants from the lease.


When the landlord receives the proposal, she should evaluate it on the basis of

answers to several qualifying questions, in contrast to other proposals as well as to

market rates and the terms of commercial leases for comparable properties.

How financially stable is the tenant?

What kinds of services does the tenant request?

Does the tenant propose competitive rates?

The landlord should move forward with the proposal of a tenant who has sufficient

net equity to support the terms of the proposed lease, who requests reasonable

services and improvements, and who proposes better rental rates than other

similarly qualified candidates for tenancy.

Negotiating the Terms of the Lease

In most cases, both landlord and prospective tenant will wish to engage a lawyer to

help with lease negotiations in order to protect and clarify the clients’ rights and for

use in drafting lease clauses. Lawyers will help clients research zoning laws and

other regulations governing general commercial practices as well as those

pertaining specifically to leases. The two parties should agree upon accepted

modes of communication for lease negotiations: will e-mail messages and phone

conversations be regarded as valid? Or will only hard copies of letters and

documents be acceptable?

Once in receipt of proposals, the landlord is in a position of power in the

negotiations; it is his decision whether to agree to the terms set forth by the

prospective tenant. The landlord’s power to ask a particular rate will be conditioned

by the desirability of the property’s amenities or location, as well as by the

availability of similar space in the area. The condition of the commercial real estate

market will also affect the rent that a landlord can ask for; when few tenants are

interested in office properties, for example, because of general economic

contraction leading to corporate downsizing, landlords may need to lower rents


and offer more improvements and services to prospective tenants in order to be

attractive in a competitive market.

Some common adjustments to the proposal in the negotiation stage include the

extent of improvements to the property to be made before transfer of possession,

and final decisions about the initial lease term and renewal options.

A new tenant’s use of the commercial space may require the premises to be

updated to government standards of equal accessibility for disabled workers and

clients. Title III of the Americans with Disabilities Act covers the responsibility of any

persons or organizations that own, lease to, or operate a place of public

accommodation to ensure that they do not discriminate against the disabled. The

tenant and landlord will have to decide which party is responsible for facilitating

and paying for the necessary alterations and improvements to new or existing

properties in order to make them ADA compliant. A good rule of thumb may be

that the landlord is responsible for alterations that have to do with the intrinsic

structure of the leased premises, but the tenant is responsible for any

accommodations that must be made based on the tenant’s use of the leased

premises. The parties will probably wish to consult their lawyers on this topic in

order to determine the extent of each party’s responsibility and to ensure that the

standards of all disability laws are met.

The parties need to decide on whether a short- or long-term initial lease best suits

their needs. Renewal options attached to a short-term lease minimize the risk to

both parties by ensuring that the tenant will be able to cut losses from an

unfavorable leasing situation and that the landlord will not lose percentage profits

on a failing or low-profit tenant’s business. In addition, renewal options minimize

risk by guaranteeing the tenant the right to continue the lease if the conditions

prove favorable and by making the landlord less likely to incur the costs of re-

marketing or maintaining a vacant property.


Short-term leases are primarily attractive for their flexibility in case of a tenant’s

need to expand, bankruptcy of either party, contraction of business in the

property’s neighborhood, discovery that the intrinsic qualities of another space

better suit the tenant’s needs, or determination that the tenant’s client base is

deterred by the current location.

Long-term leases provide more security against vacancy for the landlord, but they

also give the tenant more negotiating power since the landlord benefits from the

initial terms. In a long-term lease, the tenant and landlord can hold each other to

the original lease terms regardless of changes in the market. Such terms, however,

may include annual rent increases or another attempt to account for market

fluctuations, and these possibilities should be considered in the negotiating stage

as well.

The final agreement should be in writing, and should be signed and dated by both

parties.

Texas Statutes Pertaining to Commercial Tenancies

In order to define some of the rights and responsibilities of landlords and tenants

in commercial leases and in order to provide some basic tenant protections, Texas

has established a basic framework of statutory regulation governing commercial

tenancies. Key portions of these statutes are summarized below.

Interruption of Utilities, Removal of Property, and Exclusion of a Commercial

Tenant

A landlord may not interrupt utilities paid for directly by the tenant to the utility

company unless the interruption results from bona fide repairs, construction, or an

emergency.


A landlord may not remove a door, window, or attic hatchway cover or lock, latch,

hinge, hinge pin, doorknob, or other mechanism connected to a door, window, or

attic hatchway, or remove furniture, fixtures, or appliances furnished by the

landlord, unless the landlord removes the above items for a bona fide repair or

replacement.

A landlord may not intentionally prevent a tenant from entering the leased

premises except by judicial process unless the exclusion results from: (1) bona fide

repairs, construction, or an emergency; (2) removing the contents of premises

abandoned by a tenant; or (3) changing the door locks of a tenant who is

delinquent in paying at least part of the rent.

If a landlord changes the door lock of tenant who is delinquent in paying rent, the

landlord must place a written notice on the tenant’s front door stating the name

and the address or telephone number of the individual or company from whom the

new key may be obtained. The new key is required to be provided only during the

tenant’s regular business hours and only if the tenant pays delinquent rent.

A tenant is presumed to have abandoned the premises if goods, equipment, or

other property, in an amount substantial enough to indicate a probable intent to

abandon the premises, is being removed from the premises, and the removal is not

within the normal course of the tenant’s business.

A landlord may remove and store abandoned property of the tenant. The landlord

must send a notice to the tenant by certified mail, return receipt requested, stating

that landlord may dispose of the tenant’s property within 60 days after the date the

property is stored. The landlord then may dispose of the stored property if the

tenant does not claim the property within 60 days after the date the property is

stored.


If a landlord violates any of the above provisions, the tenant may: (1) either recover

possession of the premises or terminate the lease; and (2) recover tenant’s actual

damages, the greater of one month’s rent or $500, reasonable attorney’s fees, and

court costs, less any delinquent rents or other sums for which the tenant is liable to

landlord. However, a lease supersedes (i.e., overrides) the above provisions to the

extent of any conflict.

Security Deposit

The landlord must refund a tenant’s security deposit not later than the 60th day

after the date tenant surrenders possession of the premises and provides notice to

landlord of tenant’s forwarding address. The landlord may deduct damages and

charges for which the tenant is legally liable under the lease or damages and

charges that result from a breach of the lease. The landlord may not make

deductions for normal wear and tear. “Normal wear and tear” means deterioration

that results from the intended use of the commercial premises, including breakage

or malfunction due to age or deteriorated condition, but the term does not include

deterioration that results from negligence, carelessness, accident, or abuse of the

premises, equipment, or chattels by the tenant or by a guest or invitee of the

tenant.

If the landlord retains all or a portion of a tenant’s security deposit, the landlord

must give the tenant the balance of the security deposit, if any, along with a written

description and itemized list of deductions. The landlord is not required to give the

tenant a description and itemized list of deductions if: (1) the tenant owes rent

when the tenant surrenders possession of the premises; and (2) no controversy

exists concerning the amount of rent owed.

A landlord who in bad faith retains a security deposit is liable for $100, three times

the portion of the deposit wrongfully withheld, and the tenant’s reasonable

attorney’s fees. If the landlord in bad faith fails to provide a written description and


itemized list of damages and charges deducted from the security deposit, the

landlord: (1) forfeits the right to withhold any portion of the security deposit or to

bring suit against the tenant for damages to the premises; and (2) is liable for the

tenant’s reasonable attorney’s fees in a suit to recover the deposit. The landlord is

presumed to have acted in bad faith if the landlord fails to provide a written

description and itemized list of deductions on or before the 60th day after the date

the tenant surrenders possession of the premises.

Assessment of Charges

A landlord may not assess a charge, excluding a charge for rent or physical damage

to the leased premises, unless the amount of the charge or the method by which

the charge is to be computed is stated in the lease, an exhibit or attachment that is

part of the lease, or an amendment to the lease. This provision does not affect a

landlord’s right to assess a charge or obtain a remedy allowed under statute or

common law.

Lesson Summary

Commercial leases involve landlords, tenants, and their legal representatives, who

may include managers, real estate brokers, and lawyers. There is no standard form

for the commercial lease, so the services of a lawyer may be needed in order to

draft lease clauses and help with the negotiating process. The parties should be

sure that the use of the premises does not infringe upon municipal zoning policies.

The percentage lease is a major difference between residential and commercial

leasing; the landlord may take a percentage of a tenant’s profits as part of the lease

conditions. All such conditions should be clearly specified in the lease agreement.

There are a number of essential provisions of a valid lease, including discussions of

term, rental rate, use standards, utilities, property taxes, sublease and assignment

policies, repairs, alterations and improvements, insurance, signs, competition,

landlord entry, parking, building rules, damage and destruction, default, quiet


possession, condemnation, subordination, security deposit, notice, brokers, waiver,

memorandum of lease, headings, successors, consent, performance, compliance

with law, and final agreement. Different types of commercial properties, which

include retail, office, warehouse, non-residential special-purpose, and combined-

use properties, will have different needs and may require additional provisions not

specified in the above list.

The lease negotiation process typically begins with the submission of tenant

proposals to a landlord who has advertised her property’s complete or partial

availability. Next, the landlord considers the proposals, chooses a qualified tenant,

and the two parties negotiate the terms of the lease. The lease is valid upon the

signatures of both parties on the lease agreement and the transfer of possession

from the landlord to the new tenant.


Lesson 5: Concluding a Lease

Lesson Topics


Introduction

Lease Renewal

Lease Termination

Eviction


Introduction

Leases do not always conclude as neatly as a lease agreement might lead one to

think. In many cases, the lease does end with the expiration of the stated term, and

the reverting of the premises back to the lessor. However, just as the tenant may

wish to stay longer in the leased premises and may ask the landlord to grant a lease

renewal, the tenant or landlord may also need or want to end the lease early for a

number of reasons. Some of these reasons are legitimate, but some are not and fall

under the heading of breach of contract. Breach of contract by either party can lead

to negotiation and resolution of the problem or to disciplinary action, which may

culminate in actual eviction or an order of constructive eviction. Evictions, whether

constructive (tenant-initiated) or actual (landlord-initiated), require legal

authorization, as may some disciplinary actions.

Lease Renewal

When leases expire, many agreements provide for the possibility of renewing the

lease, often at an adjusted price. The tenant and landlord should sign a new lease

agreement, including all the essential elements of the previous lease, at the time of

renewal. In the presence of a renewal clause, it is the tenant’s prerogative to renew

or terminate the lease upon the expiration of the original lease.

Lease Termination

The reason for terminating a lease may depend on the conditions under which the

lease agreement was made or on external factors that neither lessor nor lessee can

control. Discussions of terminations that are not caused by a breach of lease follow,

namely, expiration, bankruptcy, eminent domain, and merger.


Expiration

In the case of leases with specific starting and ending dates, such as an estate for

years, lease agreements automatically terminate at a pre-determined expiration

date, unless the tenant opts to renew. In other types of lease agreements, such as

those specifying periodic estate, the expiration date will not be pre-determined.

Leases may also be terminated before the pre-determined expiration date, as when

the lessor and lessee mutually agree to terminate the lease. If, for example, the

tenant offers to surrender the lease and the landlord accepts, the lease is

terminated on peaceful grounds. There may be a service charge for breaking the

agreed term, but this fee is considered a business penalty and not a punitive

charge; no legal action is required if the lease agreement specified such charges in

the case of premature termination.

Leases are not automatically terminated at the death of the lessor or the lessee or

when the property changes ownership. There are two exceptions to this rule. The

first exception is an estate at will tenancy agreement. The nature of estates at will

demand that termination occurs at the death of either the landlord or the tenant.

The second exception is the transfer of lease with a sale agreement. Some lease

agreements may contain this clause, which allows the lease to be continued even

after the property changes ownership.

Bankruptcy

The lease agreement may be terminated when the tenant or the landlord files for

bankruptcy. Landlord bankruptcy generally terminates all leases, unless a new

buyer or mortgage-holder makes a separate set of new agreements with current

tenants.


When a tenant files a petition for bankruptcy, he is granted automatic stay at the

premises under the Bankruptcy Code. This prevents the landlord from taking any

action against the lessee. The lessee may also choose to vacate the premises,

terminating the lease; all owed payments will be deferred for a given period after

the declaration of bankruptcy.

Section 365 of the Bankruptcy Code authorizes a lessee, subject to the court's

approval, to resume an unexpired lease. In a recent court case in the U.S. Court of

Appeals, a judge announced that the lessee, who had filed for bankruptcy, should

be allowed to continue her lease agreement even though the landlord had already

started eviction proceedings against her. The lessee obtained a judgment of

possession under state law.

Please click here to read the U.S. Bankruptcy Code:

http://caselaw.lp.findlaw.com/casecode/uscodes/11/toc.html

Eminent Domain

Eminent domain is the term referring to national, state, or local governments’ right

to possess property that previously belonged to private owners. When the

government requires private property for public development projects, the

government will offer a market value estimate for the property owner to accept as

the sale price.

If the property or any part of it is leased, the lease agreement automatically

terminates when the sale to the government takes place. If the lease agreement

does not contain a clause for this event, the tenant may demand monetary

compensation from the government.

To read more about eminent domain, please click on this web page:

http://www.law.cornell.edu/anncon/amdt5b_user.html#amdt5b_hd23

http://caselaw.lp.findlaw.com/casecode/uscodes/11/toc.html

http://www.law.cornell.edu/anncon/amdt5b_user.html#amdt5b_hd23


Merger

In instances when the lessor and the lessee merge their leasehold interest, the

tenancy agreement is terminated. For example, if one party buys out the other, the

existing lease agreement is terminated.

Breach of Lease

A breach of contract by either party has repercussions. If the landlord reneges on

any of the terms of agreement stated in the lease agreement, the tenant may look

to the courts for redress. Similarly, if the tenant breaches the contract, the landlord

may take the tenant to court to recover rent or damages.

Even if the wronged party chooses not to take the other party to court, the breach

can be noted in case of future disruptive events. For instance, if the tenant does not

pay rent on time, the landlord can agree to give him an additional month on the

condition that if he delays rent payment again, the lease agreement will stand

terminated.

Damage to Property

Damage and destruction clauses are usually included in the lease agreement,

whereby any significant damage to the property can result in an instant termination

of the lease. Damage to property is a serious charge, and it is up to the landlord

what action to take when this violation occurs. Sometimes landlords may hold the

tenant liable for the destruction. At other times, landlords may evict tenants.

Eviction

Eviction is commonly understood as the forcible removal of a tenant and his

personal property from leased premises, which also constitutes the termination of

the lease, although the tenant may still be obligated to pay rent for the remainder

of the term. Eviction also refers to motions filed by the tenant to redress a

landlord’s breach of lease that resulted in partial or total inability to use the leased


premises. Eviction is one of the most drastic options available to either the landlord

or the tenant in the attempt to correct breaches of lease.

Research indicates that non-payment of rent is amongst the highest contributors

for eviction proceedings. The U.S. Bureau of Census has compiled comprehensive

statistics on failure to pay rent amongst tenants of varying backgrounds. The

information was last revised on December 17, 2004.

Figure 1 shows that twenty-seven percent of all renters failed to pay rent on time.

Figure 1

Source: http://www.census.gov/hhes/www/housing/poms/singlefam/sfdelinq.html

How do different owners and landlords deal with tenants who consistently refuse

to pay the rent? Figure 2 shows that the majority prefer to send a late payment

notice to the tenant, while a much smaller number begin eviction proceedings.

Presence of

rent

delinquent

tenants

27%

No rent

delinquent

tenants

68%

Rent

delinquency

not reported

5%

Presence of Rent Delinquent Tenants in Last 2 Years

http://www.census.gov/hhes/www/housing/poms/singlefam/sfdelinq.html


Figure 2

Source: http://www.census.gov/hhes/www/housing/poms/singlefam/sfdelinq.html

*The various methods sum to more than the total number of rent delinquencies

because of multiple responses.

There are two types of evictions: those initiated by the landlord, called actual

evictions, and those initiated by the tenant, called partial or constructive evictions.

Actual Eviction

The landlord has the option to evict the tenant if the tenant has committed a

violation of the lease agreement. The process begins when the landlord files a

lawsuit for possession of the property and receives a writ of possession ordering

the eviction of the tenant. The tenant is then escorted from the premises by law

enforcement officials. The procedures of eviction vary from state to state, and

landlords must be careful to abide by them.

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

Total withDelinquincies

Notify Tenants,Take No

Further Action

Notify Tenants /Begin

CollectionProcedure

Begin EvictionProcedures

Do Nothing andWait

Other

Methods of Dealing with Rent Delinquent Tenants*

http://www.census.gov/hhes/www/housing/poms/singlefam/sfdelinq.html


Constructive Eviction

An eviction notice may also be initiated by the tenant. In charges of partial eviction,

a breach of contract on the landlord’s part results in the tenant’s partial inability to

use the leased premises as stated in the lease agreement, and the tenant may sue

for compensation in the form of payment or services. The tenant may pursue a

constructive eviction when the landlord commits a breach of contract resulting in

the tenant’s total inability to use the leased premises or when the property is

destroyed through an act not induced by the tenant.

Types of Notices Prior to Eviction

Before an eviction notice can be served on the tenant, the landlord must first

terminate the tenancy. Tenancy can be terminated by providing a proper written

notice to the tenant stating the terms of the lease’s end as applicable under the

parties’ lease agreement.

Although notices and their requirements differ according to state, some of the

more common ones are given below.

Late Notice: A late notice, as the name suggests, is a notice submitted by the

landlord informing the tenant that her rent payment is past due. The notice also

informs the tenant of when rent is expected (if at a particular date) and notifies the

tenant of any excess charges levied.

Pay Rent or Quit Notice: This notice is an ultimatum to pay rent or move out. The

usual grace period given for this kind of notice is five days.

Cure or Quit Notice: This notice is used when the tenant has performed some

breach of contract, which can be corrected. For instance, if the tenant keeps pets in

the apartment against the lease agreement, the landlord may serve him a cure or

quit notice to the effect that if he removes the pets within a certain amount of time,


the tenancy will continue, and if not, then the landlord will start eviction

proceedings.

Unconditional Notice/Notice to Terminate: This is the most severe type of notice

and does not allow room for negotiations between the landlord and tenant. A

landlord who has served a notice to terminate is usually one with a serious

grievance against the tenant. This notice demands the tenant to quit the property

within a period of 30 days. Landlords may be forced to take such strong action

against tenants who use the premises for illegal purposes, who are consistent rent

violators, or who cause serious damage to the property.

Landlord’s Responsibilities at Eviction

The eviction procedure is fraught with many obstacles and legal loopholes. A

landlord must be very sure about the claims he intends to bring against the tenant

upon initiating an eviction procedure.

Landlords must follow the legal eviction procedure almost to the letter in order to

ensure a positive outcome. The general procedure is described in the following

chart, but regulations differ somewhat from state to state.


Figure 3: Eviction Procedure

If the landlord tries to evict a tenant through coercion (illegal eviction), this action

could easily backfire as the tenant would be in a position to file suit against the

landlord. Landlords sometimes try to evict a tenant directly by cutting off the supply

of utilities (e.g. electricity, gas, phone, etc.), by threatening the tenant with dire

consequences, or by throwing out the tenant’s possessions. These measures are

strongly discouraged as they could easily turn against the landlord in a court of law.

Defendant is

summoned

Schedule trial date

Trial

Judgment

Schedule Eviction

Ye

s

Defendant leaves peacefully?

N

o

Forcible Eviction Plaintiff wins possession

of premises


The courts frown upon landlords trying to take the law in their own hands; it is best

for landlords to carry out evictions according to lawful procedures.

Texas Eviction Procedures

Eviction suits must be brought in the justice court in the precinct in which the real

property is located. If the tenant is in default or holds over beyond the end of the

lease term, the landlord must give the tenant at least three days’ written notice to

vacate the premises prior to bringing suit. If a building is purchased at a tax or

trustee’s foreclosure sale under a lien superior to the tenant's lease and the tenant

timely pays rent and is not otherwise in default under the tenant's lease after

foreclosure, the purchaser must give a residential tenant at least 30 days' written

notice to vacate if the purchaser chooses not to continue the lease.

The notice to vacate must be given in person or by registered mail or by certified

mail, return receipt requested. to the premises in question. Personal notice may be

made by delivery to the tenant or any person residing at the premises who is 16

years of age or older or by affixing the notice to the inside of the main entry door. If

the dwelling has no mailbox and has a keyless bolting device, alarm system, or

dangerous animal that prevents the landlord from entering the premises, the

landlord may securely affix the notice on the outside of the main entry door. If the

landlord has previously given a written notice or reminder to the tenant that rent is

due and unpaid, the landlord may include a demand for the tenant to pay the

delinquent rent or vacate the premises by the date and time specified in the notice.

If the landlord wants to recover attorney's fees in an eviction suit, the landlord must

give the tenant a written demand to vacate the premises, which must state that if

the tenant does not vacate the premises before the 11th day after the date of

receipt of the notice and if the landlord files suit, the landlord may recover

attorney's fees. The demand must be sent by registered mail or by certified mail,

return receipt requested, at least 10 days before the suit is filed.


If the landlord provides the required notice and prevails in the eviction proceeding,

the landlord is entitled to recover reasonable attorney’s fees and costs of court

from the tenant.

A landlord who prevails in an eviction suit is entitled to a judgment for possession

of the premises and a writ of possession. The writ of possession may not be issued

before the sixth day after the date on which the judgment is rendered unless a

possession bond has been filed and approved under the Texas Rules of Civil

Procedure and judgment for possession is thereafter granted by default. The court

shall notify a tenant in writing of a default judgment for possession by sending a

copy of the judgment to the premises by first class mail not later than 48 hours

after the entry of the judgment.

Either party may appeal from a final judgment to the county court at law. The party

seeking an appeal must file an appeal bond with the justice court within five days

after the judgment is signed. The bond is in favor of the adverse party, conditioned

that the appeal will be diligently prosecuted, or the party appealing will pay all costs

and damages which may be adjudged against that party. If a tenant in a residential

eviction suit is unable to pay the costs of appeal or file an appeal bond, the tenant

may appeal the judgment of the justice court by filing with the justice court, not

later than the fifth day after the date the judgment is signed, a sworn pauper's

affidavit that states that the tenant is unable to pay the costs of appeal or file an

appeal bond. If the landlord prevails in a residential eviction, the court will specify in

the judgment the amount of rent to be paid each rental pay period during the

pendency of any appeal.

A final judgment of a county court in an eviction suit may not be appealed on the

issue of possession unless the premises are being used for residential purposes

only. A judgment of a county court may not be stayed pending appeal unless, within

10 days of the signing of the judgment, the appellant files a supersedeas bond in an


amount set by the county court. In setting the supersedeas bond, the county court

shall take into consideration the value of rents likely to accrue during appeal,

damages which may occur as a result of the stay during appeal, and other damages

or amounts as the court may deem appropriate.

Lesson Summary

The conclusion of a lease agreement is called termination. Some lease agreements

end because they have a specific expiration date, and when that date is reached,

the agreement automatically ends. The landlord and the tenant can mutually

discuss and determine the expiration date. Leases may be renewed at the time of

expiration with the mutual agreement of lessor and lessee or in accordance with a

renewal clause.

Other causes of lease termination include bankruptcy, eminent domain, and

merger. A tenant who cannot afford to pay is often granted a temporary stay order

until the terms of the bankruptcy agreement are established by a court. Landlord

bankruptcy is generally grounds for immediate termination of all existing lease

agreements, although the creditors or a new landlord may negotiate a new

arrangement with existing tenants. The government can also cause the termination

of a lease agreement by claiming private property and paying a fair market value to

the property owners to buy out the property to be converted into a public domain.

Lease agreements may end abruptly when tenants commit a breach of the lease

contract. If the landlord can prove the breach, and the tenant refuses or is unable

to fix the problem, the lease agreement ends, with formal termination and

sometimes actual eviction. The same rule applies to landlords.


Eviction procedures may be initiated by the landlord, in the case of actual eviction,

or the tenant, in the case of partial or constructive eviction. Landlords should not

attempt to informally evict a delinquent tenant but must pursue legal eviction

proceedings through the courts.


Lesson 6: Real Estate Practice

Lesson Topics


Real Estate Practice

Case Studies


Real Estate Practice

This module has covered many specifics of leasing and landlord and tenant issues

over a relatively short period. To ensure a comprehensive understanding, we will

integrate the information provided in the module through a key term activity and a

series of comprehension questions delivered in case study form

Case Studies

Please read each case study thoroughly and consider each situation. Then, write

your response in the space provided and when you are finished compare your

answer with ours.

Case Study 1

Landlord L starts negotiations with five different prospective tenants for the

purpose of leasing his property. He settles on Tenant T and orally agrees on a lease

term of one year. Landlord L says he picked Tenant T out of the five applicants

because he felt reasonably assured of the latter’s dependability to pay the rent on

time.

Three weeks later Landlord L receives a call from the lawyer of Applicant A, who

was one of the people interested in leasing the property of Landlord L. The lawyer

explains that Applicant A felt she had been discriminated against based on her race,

which is African-American. The lawyer further goes on to state that Landlord L will

be sued for $50,000 for his discriminatory actions unless he pays a $10,000

settlement to Applicant A.

What should the landlord do in such circumstances? What, if anything, could he

have done to prevent the lawsuit in the first place?


Feedback:

Landlord L’s insurance company advises him to pay the settlement cost because

Landlord L does not have any written proof explaining why he selected Tenant T

and not Applicant A.

Landlord L determined that Tenant T was employed with a stable income, good

credit history, and excellent references, whereas Applicant A had recently declared

bankruptcy, despite holding a higher paying job. Job stability was far more

important to Landlord L than actual salary figures, and he based his decision on

this factor alone. Landlord L did not have any written documentation explaining his

selection criteria and procedure, nor did he possess any written documentation of

the applicants’ job history, credit ratings, and references. Landlord L was thus

forced to pay for settling the dispute.

Case Study 2

The tenant lives in a large cooperative building, housing more than 1700

apartments. She is lonely and decides to buy a puppy. She makes no attempt to

hide the puppy and takes it for daily walks, during which many tenants and the

building’s security and maintenance staff often pet the little dog.

The landlord of this building does not reside on the premises. When he finds out

about the puppy three months later through the board of directors, he serves the

tenant with a cure or quit notice because the tenant’s lease agreement clearly

states that pets are not allowed in the building.

The tenant invokes the clause in the lease agreement which specifies that if the

landlord does not start legal proceedings against a pet owner for at least three

months after knowledge of the pet, then the No Pets clause is automatically

revoked.


Do you believe that the landlord was unjustly treated because he was not informed

of the puppy’s presence until after three months had passed? Whose responsibility

was it to inform the landlord? Or was it the landlord’s own responsibility to stay

aware of his tenant’s activities? Is the tenant primarily to blame since she brought in

a pet and did not adhere to the No Pets clause?

Feedback:

In this case, the security guards and the maintenance staff were not responsible for

informing the landlord of the puppy, even though they saw it daily. The landlord

should have appointed someone to check on his tenant’s activities and report any

inconsistencies directly to him. Even though the puppy was in plain sight, the three

months clause cannot come into effect since the landlord did not have knowledge

of the pet. The clause can only come into effect when the landlord sees and

acknowledges the presence of the pet.

Case Study 3

A tenant signed a lease agreement to move into a residential property. Then she

married, and her husband moved in with her. The landlord served the tenant with

an eviction notice citing that that tenant committed a breach of contract.

Is the landlord acting in an ethical and legal manner? Is he violating the Fair

Housing Act, which disallows discrimination based on familial status?

Feedback:

Since the law prohibits discrimination against a family, the landlord can be held

liable for violating the Fair Housing Act.

Case Study 4

The landlord moves a known smoker into the apartment below a non-smoking

tenant. The non-smoker begins to suffer from asthma and nausea when the smoke


enters his apartment. The non-smoking tenant sues the landlord for breach of

responsibility.

To what extent is the non-smoking tenant justified? How can the landlord defend

himself against such a suit? What measures could the landlord have taken to

prevent such a medical condition from happening?

Feedback:

The landlord is responsible for violating the covenant of quiet enjoyment, which

allows each tenant to live peacefully in any legal manner they choose. The landlord

is guilty of breach of contract and can be liable for payment of the tenant’s medical

and other costs.

The landlord could have protected himself by making sure that the ventilation in

the building prevented smoke from one apartment from entering into another

apartment. The landlord could have asked the smoker to only smoke near an open

window. The landlord could also ensure that the ventilation system in the building

was well-maintained and cleaned regularly.

Case Study 5

Tenant Y wants to sue Landlord K for deducting the following from the security

deposit amount: $400 for paint and touch-up work and $300 for carpet stains.

What can Landlord K do to settle the matter amicably without being dragged to

court?

Feedback:

The landlord could negotiate the amounts with the tenant, figure out what seems

fair to both parties, and charge a percentage of the $700. If the tenant has been a

long-standing one with a good reputation, the landlord could also waive the


charges for the paint and the carpet because they might have to be replaced

anyway.

Case Study 6

Landlord A is trying to rent the upper floor of a building constructed in 1892 as

office space. The building has a number of unique advantages due to its age; for

example, it has period bay windows looking over Main Street, the original mosaic

foyer floor looks like new, and the downtown area that surrounds it is being rapidly

revitalized. No one has used the space, however, in almost 50 years. The building’s

plumbing and electrical wiring will have to be completely redone, and a thorough

structural review is still in the works. Cosmetic changes will be necessary to update

the space for contemporary tastes, and a certain amount of restoration will be

needed to show the period elements in their best light. The building has recently

been designated a historic site by the municipal government, so any renovations

must comply with the rules for preserving historic sites. Unfortunately, Landlord A

has not disclosed any of the drawbacks in her advertising. Tenant A is desperate to

get a downtown space for her up-and-coming family law firm. She submits a

proposal to Landlord A, offering a very competitive price from the outset.

In considering the proposal, what characteristics should Landlord A look for? When

Tenant A discovers the omissions of information, what should she do, assuming

she still wants to rent the building?

Feedback:

Since she already knows that Tenant A is proposing competitive rates, Landlord A

should evaluate Tenant A on the basis of her financial stability, using a statement of

Tenant A’s net equity. Tenant A failed to specify what services and improvements

she would require of the landlord in order to sign the lease agreement. However,

Tenant A did ask to see the building before going further with the agreement. When

she discovers the extent of necessary repairs and the historic-site restrictions, she


should immediately engage the services of an experienced property lawyer. With

his help, Tenant A should be able to require Landlord A to make certain

concessions on the proposed rental rate and/or to agree to finance some or all of

the repairs; in short, Tenant A and the property lawyer will use Landlord A’s non-

disclosure of the property’s status to gain leverage in the negotiating process.

Case Study 7

Tenant B is getting worried. She reserved a space in a new mall for her juniors

boutique. Tenant A signed the lease agreement with Landlord B one month before

the mall was due to open. It has been six months and the facility is still under

construction; Tenant B’s merchandise is coming in, and because demand for her

products is based on seasonal fashion trends, she is losing money by the day.

What can Tenant B do?

Feedback

Tenant B should hire a lawyer to file suit for breach of lease against Landlord B for

violating the part of the lease that specifies prompt possession of the premises on

the date given in the lease agreement. Tenant B and her lawyer should demand

that Landlord B pay Tenant B damages in the amount of money Tenant B has lost

due to the delayed opening. Since the breach would also be grounds for the tenant

to terminate the lease, Tenant B may then decide whether to try renting another

space or to stop all current merchandise orders and wait for the end of

construction.

Case Study 8

A fire spread though the ABC Building. The fire clause in the lease agreement

stated:


“If the premises are...damaged or rendered...unusable by fire or other casualty, the

damages thereto shall be repaired by and at the expense of the owner and the

rent, until such repairs shall be substantially completed, shall be apportioned from

the day following the casualty according to the part of the premises which is

usable…. ”

One of the tenants had made improvements to the property. Are these leasehold

improvements included in the restoration work required from the landlord?

Feedback:

If the lease agreement states clearly that all alterations and improvements made to

the property by the tenant become fixtures, then yes, the landlord would be

responsible for restoring those improvements after the fire. If the improvements

are deemed as trade fixtures or immovable property, then the landlord does not

need to pay for their restoration.

Case Study 9

Landlord K has owned a large restaurant for some time. She decides to close her

business and rent the property to Tenant Z, who wants to use the space as a dinner

theater. Landlord K had previously installed wheelchair ramps, disabled-access

bathroom stalls, Braille lettering on signs, and made the other accommodations

necessary for a restaurant of its size. Tenant Z’s dinner theater, however, will have

different needs. For one thing, Tenant Z plans to install graduated seating on four

sides above a floor stage for a theater-in-the-round.

What set of laws demands that public facilities accommodate the needs of disabled

clients, what kinds of changes will be needed, and who should pay for them?


Feedback:

The Americans with Disabilities Act (ADA) requires businesses to comply with ADA

specifications for disabled access to all facilities intended for public use, as well as

for facilities large enough to require access for disabled employees. The raised

seating will require special ramps and/or alternative seating for disabled

customers, and there may be other needs. Tenant Z should pay for the changes

because it is his use of the building that requires these modifications; Landlord K

has already fulfilled her responsibilities under the ADA.

Case Study 10

Tenant G signed a periodic lease agreement which required her to pay the rent in

advance on the 1st of every month. When she failed to make rent payments for two

months, Property Manager P agreed to serve a late notice for rent arrears to be

paid by the end of the thirty day period. When tenant G still failed to pay rent by

that date, Property Manager P started eviction proceedings against Tenant G. The

judge promptly awarded possession of the property to the Property Manager P.

One month later, before the possession suit could be carried out, Tenant G filed for

bankruptcy.

What happened to the eviction proceedings? Were they affected by the bankruptcy

filing, and if so, in what way?

Feedback:

Under section 362 of the Bankruptcy Code, an eviction cannot continue after the

filing of the bankruptcy petition. The Bankruptcy Code provides that only unexpired

leases can be assumed. What is an expired lease, and how can it be determined?

Each state has its own laws determining what constitutes an expired lease.


If the court decides that the landlord has advanced far enough into the eviction

proceedings to consider the lease expired, then the eviction stands, but if the court

decides that the landlord has not taken the tenant’s rights of possession away, then

the eviction order may be overturned.

Please return to the course player to take the interactivities, graded case study

and then the module quiz.

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