Ø The lease is a contract between the owner (lessor) and the tenant (lessee). It is also a conveyance way of transferring exclusive use and possession to the tenant under the terms of the lease in returns for rent or other consideration.
Ø It is not uncommon to encounter a commercial lease of 50 pages or more outlining the duties and responsibilities of the owner and the tenant.
Ø Historically the tenant was given exclusive rights of use and possession as limited by the terms of the lease.
Elements of an enforceable lease:
An enforceable lease, at a minimum, must contains elements common to the requirements of a valid contract:
Ø A beginning and ending date
Ø Identification of the lessor and the lessee
Ø A legal description of the property leased
Ø The rental terms including the time and place of payment
Ø Signatures of the parties to the lease
Types of leases:
Leases may be classified by the method of rent payment. There are six main ways to vary rents:
- Fixed rent leases:
Ø Fixed rents are generally limited to relatively short terms, one to three years.
Ø Without some means of providing rent increases proportional to inflation, owners are reluctant to commit property over a longer term in the face of expected price increase.
- Graduated rent leases:
Ø For property under development, tenants may negotiate low rents during the early life of the property which are graduated upward as the property undergoes more profitable operation.
Ø For example, a land owner may rent his land over the first 2 years for Tk. 10000 per year, the next three years to Tk. 20000 per year, and the next five years for Tk. 50000.
Ø In short the owner accepts lower rents when the property is less profitable.
- Price index leases:
Ø Leases that vary rent proportionately with changes in the consumer price or another index preserve the purchasing power of the owner.
Ø Neither party gains an advantage under a price index lease; the index lease maintains the economic position of the owner and tenant.
- Revaluation leases:
Ø The revaluation lease requires selection of an appraisal board-usually appraisers selected by the owner and tenant and a third party-to reappraise the property of rental purposes.
Ø The specified time of revaluation will be stated in the lease.
Ø Acceptance of the revaluation is not compulsory on either party.
- Percentage leases:
Ø Retail stores are often rented on the basis of minimum fixed rent with a provision that as gross sales reach a stated level the owner will be paid a percentage of gross sales.
Ø For example, supermarkets may agree to pay a minimum rent in addition to 1.5 percent of the annual gross sales over Tk. 2000000
Ø As retails sales increases, rents increases
- Net leases:
Ø In the current context, net leases refer to leases that maintain the rent in constant price (Tk.)
Ø Such a lease calls for two types of rent:
1. Rent of the base year
2. Additional rent
Ø The additional rent equals the prorated share of operating expenses for the current year that exceeds the operating expenses of the base year.
Ø The increase in operating expenses is prorated for each tenant according to the ratio between the square footage occupied by the tenant and the total building square footage.
Ø Under these terms, the building owner merely earns a fixed, net operating income.
Ø The lease does not compensate for inflation.
Ø However it is common to have the base year rent adjusted annually according changes in the consumer price index.
Ø The index of the net lease is to give tenants a long term lease (over 10 to 15 years) and at the same time, protect the owner unpredictable increases in operating expenses.
Ø To serve this purpose, generally, owners must provide tenants with a statement of operating expenses to justify the claim for additional rent.
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