LEASEHOLD TENANCIES AND TYPES
Leasehold estates can be classified into four types: (1) tenancy for years, (2) periodic tenancy, (3) tenancy at will, and (4) tenancy at sufferance.
Tenancy for years
A tenancy for years is for a fixed period of time, (e.g., one day, 99 years). The termination date is set at the time the lease is executed. A tenancy for years ends on the last day of the lease term, with no need to give notice.
A periodic tenancy exists when the rental period is indefinitely renewable for a series of same durations (e.g., week-to-week or month-to-month). The most common example is a residential lease requiring a tenant to pay monthly rent, but with no definite termination date. Periodic tenancies are generally created by implication and not by an express provision. According to Colorado law, and that of most states, such tenancies require the giving of proper notice for their termination. Notice to terminate is discussed below under the heading of â??termination of leases.â??
Tenancy at will
A tenancy at will provides that either party may terminate the lease whenever he or she chooses to do so. A tenancy at will also exists when the agreement allows a tenant to occupy the premises until sold, or until the landlord is ready to construct a new building, or some other indefinite happening. Similar to a periodic tenancy, a tenancy at will requires the givingof proper notice for its termination.
Tenancy at sufferance
A tenancy at sufferance arises when a tenant remains in wrongful possession after a lease has ended. The tenant is called a holdover tenant. The landlord may treat the tenant as a trespasser and initiate eviction, or may elect to accept the tenant for a similar term and conditions as the previous lease. The choice is the landlordâ??s; the tenant has none. If a tenant holds over due to reasons beyond their control, such as illness, the tenant may be held liable only for the reasonable rental of the holdover period.
C. Types of Leases
A ground lease is a tenancy for years whereby a parcel of unimproved land is let for a typically extended period of time. This usually allows a building to be erected on the land by the tenant and provides for the disposition of the building at the end of the lease. The landowner may become entitled to the building upon the payment of all, part or none of the value of the building, depending upon the agreement. In absence of agreement, the building legally becomes real property and belongs to the landowner who is not required to reimburse the tenant.
A long-term ground lease can offer considerable advantage to a tenant. When land values run as high as $10,000 and more per front foot, considerable capital is required to invest in the land alone. Add the cost of a building to this, and the investment may exceed an investorâ??s resources. But under a long-term ground lease, the land part of the financing problem is solved. Such a lease may be considered as borrowing of the capital value of the land for the term of the lease. The ground rent paid to the owner is, in this sense, interest on the value of the land. The land itself plus the improvements erected by the tenant become security for the â??loanâ??. A transaction with such ample security is indeed a good investment for the fee holder. Big businesses and investors do not hesitate to deal with such long-term leases, provided the location involved is suitable to their purposes. In addition, long-term leases involve a tax advantage. If purchased, the price of land is a capital investment and is not deductible; in fact the ground is not even depreciable. But rent paid by a tenant is a deductible business expense. The landowner benefits from a reduced income tax liability on the rent received over the years compared to an immediate and large capital gains tax if the property had been sold to the tenant.
A long-term ground lease holds another advantage for an owner of valuable land lacking sufficient finances to develop it. An owner may induce a tenant to make suitable improvements by means of rent concessions. With appropriate improvements the fee holderâ??s land will increase in value, said increase benefiting the owner at the end of the lease. Such leases often provide for the increases in value to be matched by increased ground rent at suitable intervals. This is what is known as a step-up lease or graduated lease. Two common ways to provide for these increases in rent are: (1) to provide for a fixed increase at stated intervals, or (2) to provide for the increase to be based upon the appraised value of the property, determined by an arbitration committee. Although the first method has the advantage of being clear and definite, it may be too inflexible to meet changing economic conditions over a long period of years. The second method involves an arbitration committee usually composed of one member selected by the tenant, one by the landlord, and the third selected by agreement of these two. This committee then applies a fixed capitalization rate to the appraised value of the property at regular intervals. This method establishes a currently reasonable rental, but may be difficult to implement if the committee members cannot agree. Some authorities on long-term leases claim that fixed rentals for the entire period give the greatest satisfaction to both parties, enabling stable, long-term business planning. Other authorities feel that such a fixed rental program works a hardship on the tenant in a recessionary period and a hardship upon the owner in an inflationary period.
Percentage leases are used for commercial establishments, generally retail stores, and usually provide for a fixed minimum rent plus a percentage of the tenantâ??s gross sales. Gross sales or gross income must be clearly defined and should provide for such things as returned merchandise, discounts for prompt payment made to customers, sales to employees, mail order sales, services rendered at cost (such as clothing alterations), income from vending machines, etc. Detailed provisions should be made concerning the tenantâ??s records and the landlordâ??s right to examine or audit the tenantâ??s books. Satisfactory use of percentage leases requires thorough knowledge and expert judgment.
A sky lease or lease of air space usually creates a tenancy for years, generally for a long period of time. In 1910, the Cleveland Athletic Club executed one of the first such leases,leasing the air space above a five-story building and erecting eight additional stories. The club paid rent for its space along with the improvement taxes, but not land taxes. The upper eight stories were to revert to the lessor at the end of the term upon the payment of its appraised value. This type of lease is based upon the common-law right of a fee holder to use his or her land from the center of the earth to the dome of the skies. Today, the governmental right to regulate air traffic has limited this property right.
One of the most interesting utilization's of air space involves the Merchandise Mart in Chicago. The building is constructed over the tracks of the Chicago and Northwestern Railroad, erected on piers 23 feet above the earthâ??s surface, leaving space necessary for theoperation of the railway.
Within the state of Colorado there exist a few such leases or sales of air space. In 1953 the Colorado legislature enacted a statute enabling creation of estates, rights and interests in areas above the surface of the ground and transfer of such interests in the same manner as interests in land. (Title 38, Article 32, C.R.S.)
A net lease requires the tenant to pay rent plus all or a substantial part of the cost of operations and maintenance. Various expressions are used in real estate to describe the many variations in net lease transactions. For instance, if a lease provides for the tenant to pay utilities, real estate taxes and assessments, etc., it might be referred to as â??netâ?? lease. If the lease additionally provides for the tenant to insure the premises, it might be referred to as â??net-netâ??. Both parties must be absolutely certain of their responsibilities in a net lease.
A gross lease is the opposite of a net lease. The rent typically includes all owner-paid operating costs associated with the premises.
Farm leases are based on the same principles as other leases. The farm tenant may pay rent based on a crop-sharing basis. The owner agrees to give possession to the land and improvements thereon, and perhaps to furnish the equipment, and the tenant agrees to furnish the labor and capital to farm the land in a sound, reasonable manner and to pay a specified share of the crops. Alternatively the rental may be a fixed sum. Farm leases vary in terms and conditions by region and community. Farm management has become one of the leading and most specialized branches of real estate. A farm manager must know soils, crops most suitable to the various types of soils, land conservation techniques, and the numerous other things necessary for successful modern farming.