The standard definition of a real estate lease is pretty
cut-and-dried: A lease is a contract. The contract gives
the lessee (tenant) the right of possession and use of an
asset (house, business facility, etc.) for a specific
period of time. In return for possession and use, the
lessor (landlord) receives payments during that period of
time.
Ah, but the devil is in the details of those leases! Often,
if you don't pay close attention to the language, an
agreement can become anything but cut-and-cried!
A clearly written lease benefits both parties. If you're
the lessor, you receive a fair income stream from the
property you've leased. If you're the lessee, then you
receive use of the property at a fair rental.
On the other hand, a badly written lease is a recipe for a
lot of financial trouble and personal headaches. For
example, if you're the lessor, you could end up with a
property that produces little income and/or appreciation.
If you're the lessee, you could end up paying rent that's
excessive in terms of prevailing market conditions.
So, from either party's point of view, it pays to fully
understand leases before one is ever signed. Here are some
rules to help you out:
Rule #1: Always get the lease in writing! I repeat, get it
in writing! Never, ever, ever rely on a verbal lease! Such
leases can be enforced, but they're much more difficult to
prove because nothing is written down and no one has a
physical basis on which to judge the validity of the
agreement. Good business sense dictates that leases and
contracts be written out in detail.
Rule #2: The language of the lease should be as clear as
possible. If someone offers you a lease with terms that are
vague or muddled, your ears should prick up at possible
financial danger. Insist that the language be rewritten so
you are absolutely clear as to what the rights and
responsibilities of each party are.
Rule #3: The lease should specifically define the rights
and responsibilities of the lessor and the lessee.
Definitely avoid any generic or "boiler-plate" leases.
Also, a generic form may not be consistent with your state
and local laws and provide grounds for breaking the
agreement. A lease should always be custom-tailored to a
specific property and your particular needs.
Rule #4: The lease language can be readily interpreted and
enforced by a third party (courts, etc.). If you need to go
to court to take care of lease violations, you want the
court to have no trouble in understanding the terms of
contract. Otherwise, things may not go in your favor.
Rule #5: The lease should provide consequences for
violating the terms (default, etc.). There should be clear
penalties for lease violations (e.g., late payments,
returned checks, etc.). If such penalties are not clear,
then you can have a devil of a time in collecting what's
due you (if you're the lessor).
Rule #6: The lease provides a prescribed manner of dispute
resolution. To deal with potential lease problems, you want
to be sure to have a dispute mechanism (attorney, law firm,
etc.) included in the lease language. That way, both
parties understand clearly how they can address any
disputes.
Rule #7: Make sure you get the complete lease. If someone
offers you a summary of a lease or just the first one or
two pages, insist on receiving the complete lease. Without
the complete lease, you could be signing up for rough
journey instead of a smooth ride.
Rule #8: Read every word of the lease! You may find terms
that are unacceptable, and you may want to change some of
the language or add addendums. Of course, terms are often
the subject of negotiation between lessor and lessee.
Rule #9: Always have your legal advisor review any lease
before signing it. Unless you have extensive legal
experience yourself, have an attorney or other professional
review the lease terms and explain them to you.
Key Point: Fully understand every aspect of a lease before
you sign it!
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Jack Sternberg is a nationally recognized expert on real
estate investment and the creator of the renowned "Buyers
First Program" who's been in the business for more than 30
years. Sternberg's deals have totaled over $750 million and
he's been to the closing table more than 1,500 times. For
more, visit http://www.askjacksternberg.com
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