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transcript
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.
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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.
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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.
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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.”
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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.
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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.
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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
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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.
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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
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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.
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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.
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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.
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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
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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.
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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
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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
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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.
20 Texas Real Estate Law
Lesson 2: Leasehold Estates and Lease Agreements
Lesson Topics
This lesson focuses on the following topics:
Types Of Leases
Requirements of a Valid Lease Agreement
Elements Commonly Included in a Lease
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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.
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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
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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
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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.
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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.
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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.
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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
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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.
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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
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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:
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“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.
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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
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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
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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
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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
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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.
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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.
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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
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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.
40 Texas Real Estate Law
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.
41 Texas Real Estate Law
Lesson 3: Residential Leasing
Lesson Topics
This lesson focuses on the following topics:
Introduction
Residential Lease Legislation
Uniform Residential Landlord and Tenant Act
Residential Insurance and Liability
Reconciliation of Tenant Landlord Responsibilities
42 Texas Real Estate Law
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
43 Texas Real Estate Law
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.
44 Texas Real Estate Law
(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.
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(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.
46 Texas Real Estate Law
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.”
47 Texas Real Estate Law
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
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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).
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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.
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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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
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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.
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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,
64 Texas Real Estate Law
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.
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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.
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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.
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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
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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
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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.
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Lesson 4: Commercial Leases
Lesson Topics
This lesson focuses on the following 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
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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.
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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.
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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.
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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.
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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.
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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.
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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,
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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.
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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
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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.
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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.
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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.
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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
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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
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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.
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Lesson 5: Concluding a Lease
Lesson Topics
This lesson focuses on the following topics:
Introduction
Lease Renewal
Lease Termination
Eviction
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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.
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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.
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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
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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
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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
92 Texas Real Estate Law
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*
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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,
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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.
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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
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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.
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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
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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.
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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.
100 Texas Real Estate Law
Lesson 6: Real Estate Practice
Lesson Topics
This lesson focuses on the following topics:
Real Estate Practice
Case Studies
101 Texas Real Estate Law
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?
102 Texas Real Estate Law
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.
103 Texas Real Estate Law
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
104 Texas Real Estate Law
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
105 Texas Real Estate Law
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
106 Texas Real Estate Law
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:
107 Texas Real Estate Law
“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?
108 Texas Real Estate Law
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.
109 Texas Real Estate Law
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.