Leasing & Tenancy Agreements

A lease or tenancy is an interest in personal property or real property given by a lessor to another person (usually called the lessee or tenant) for a fixed period of time, and the lessee obtains exclusive possession of the property in return for paying the lessor a fixed or determinable consideration.

In law, there are two types of property:

Real property is land or any permanent feature or structure above or below the surface. Ownership of land is an aspect of the system of real property or realty in common law systems (immovables in civil law systems and Conflict of Laws).

All other property is considered personal property or personalty in common law systems (movables in civil law and Conflict of Laws), and this property is either tangible or intangible, i.e. it is either physical property that can be touched like a computer, or it is an enforceable right like a patent or other form of intellectual property.

There are three separate levels of rights or interests affecting both forms of property. In descending order of importance they are:

• ownership,
• possession or
• control and use.

The legal documents that transfer these rights are respectively: conveyance/transfer, lease/tenancy, and bailment/pledge for tangible personalty, assignments and licenses for intangibles.

Whether it is better to lease or buy land will be determined by each state's legal and economic systems. In those countries where acquiring title is complicated, the state imposes high taxes on owners, transaction costs are high, and finance is difficult to obtain, leasing will be the norm. But, freely available credit at low interest rates with minimal tax disadvantages and low transaction costs will encourage land ownership. Whatever the system, most adult consumers have, at some point in their lives, been party to a real estate lease which can be as short as a week, as long as 999 years, or perpetual (only a few states permit ownership to be alienated indefinitely). For commercial property, whether there is a depreciation allowance depends on the local state taxation system. If a lease is created for a term of, say, ten years, the monthly or quarterly rent is a fixed cost during the term. The term of years may have an asset value for balance sheet purposes and, as the term expires, that value depreciates. However, the apportionment of relief as between business expense and depreciating asset is for each state to make (all that is certain is that the lessee cannot have a double allowance).

Private Property Rental

Rental, tenancy, and lease agreements are formal and informal contracts between an identified landlord and tenant giving rights to both parties, e.g. the tenant's right to occupy the accommodation for an agreed term and the landlord’s right to receive an agreed rent. If one of these elements is missing, only a tenancy at will or bare licence comes into being. In some legal systems, this has unfortunate consequences. When a formal tenancy is created, the law usually implies obligations for the lessor, e.g. that the property meets certain minimum standards of habitability. With a bare licence, some states do not imply any significant lessee protections

A tenancy agreement can be made up of:

• Express terms. These include what is in the written agreement (if there is one), in the rent book, and/or what was agreed orally (if there is clear evidence of what was said).
• Implied terms. These are the standard terms established by custom and practice or the minimum rights and duties formally impled by law.

Commercial Leasehold

Benefits of Commercial Leasing

For businesses, leasing property may have significant financial benefits:

• Leasing is less capital-intensive than purchasing, so if a business has constraints on its capital, it can grow more rapidly by leasing property than it could by purchasing the property outright.
• Capital assets may fluctuate in value. Leasing shifts risks to the lessor, but if the property market has shown steady growth over time, a business that depends on leased property is sacrificing capital gains.
• Leasing may provide more flexibility to a business which expects to grow or move in the relatively short term, because a lessee is not usually obliged to renew a lease at the end of its term.
• Depreciation of capital assets has different tax and financial reporting treatment from ordinary business expenses. Lease payments are considered expenses, which can be set off against revenue when calculating taxable profit at the end of the relevant tax accounting period.

Disadvantages of Commercial Leasing

There are some significant drawbacks:

If circumstances dictate that a business must change its operations significantly, it may be expensive or otherwise difficult to terminate a lease before the end of the term. In some cases, a business may be able to sublet property no longer required, but this may not recoup the costs of the original lease, and, in any event, usually requires the consent of the original lessor. Tactical legal considerations usually make it expedient for lessees to default on their leases. The loss of book value is small and any litigation can usually be settled on advantageous terms. This is an improvement on the position for those companies owning their own property. Although can be easier for a business to sell property if it has the time, forced sales frequently realise lower prices and can seriously affect book value.

 
If the business is successful, lessors may demand higher rental payments when leases come up for renewal. If the value of the business is tied to the use of that particular property, the lessor has a significant advantage over the lessee in negotiations.