When you acquire a unit in a cooperative, you receive a proprietary lease. When a
leasehold apartment unit in a condominium or a PUD is originally conveyed, this is done by
an apartment lease. Upon resale, that lease will be transferred by an Assignment of Lease.
The heading on the original apartment lease may have one of several descriptions:
Apartment Lease, Apartment Lease and Ground Lease, Condominium Conveyance Document,
Apartment Deed and Ground Lease, or Dwelling Lease. Regardless of the type, the
consequences of your leasehold ownership will be substantially similar to those described
in this article.
What are the typical provisions of an apartment lease?
The written lease spells out all the terms, conditions, and restrictions binding on the
lessee, and all subsequent assignees or successor lessees. These terms generally are not
negotiable. For example, the lease includes such items as the total number of years in the
lease term, the rent (both fixed and renegotiated), termination or renewal dates,
conditions of possession and use, and rights regarding the lessee's ability to make, and
to later remove, improvements. Some of the more common provisions of residential apartment
unit leases are the following:
LEASE TERM
The length of the term of an apartment unit ground lease may be for
whatever the original lessor and lessee agreed upon; however, the typical length is at
least 50 years, and usually is within a range of between 55 and 75 years.
How much lease rent must I pay?
LEASE RENT
Typically, the rent will be fixed for the early years of the lease
term and afterward will be renegotiated periodically.
FIXED RENT
Most leases have a fixed rent period of between 25 and 35 years.
During this period the rent is fixed or predetermined. Their may be one or more step up
increments during the fixed rent. You know exactly how much your lease rent payments will
be.
RENEGOTIATED RENT
At the end of the fixed rent period, the lease rent is
renegotiated, or adjusted. This is sometimes referred to as reopening. When you purchase
your leasehold apartment unit, it is very important to realize that you don't usually know
the exact amount of rent you will have to pay over the entire life of the lease. As you
can imagine, this is important factor for both you and your lender to consider as your
ability to pay monthly mortgage payments may be directly affected by changes to the lease
rent payments. This is because the renegotiated rent is generally based on a certain rate
of return on the value of the unencumbered fee simple land in the future (at the time of
renegotiation).
What are other provisions I should be aware of?
ASSIGNMENTS OF THE LEASE
The transfer of a leasehold interest is accomplished
by a document called an assignment. When you sell your leasehold apartment unit to a new
buyer, you assign the lease to the buyer, (also called the assignee). Your lease may
require the consent of the lessor prior to any assignment of the lease. Courts have held,
however, that the lessor may not unreasonably withhold consent. Even after an assignment,
you may remain responsible under the lease unless the lessor releases you and agrees to
allow the buyer to assume all the responsibilities of the lessee.
PUBLIC CONDEMNATION
Occasionally all or a portion of the leased property is
taken by a government authority for a public purpose such as road widening or sewer
installation. When condemnation occurs, the lease specifics what happens to your apartment
unit and how you are compensated for loss of your leasehold interest. Read your lease
carefully.
What happens to my unit at the end of the lease?
SURRENDER
The surrender clause provides what happens to the apartment unit and
other improvements when the lease expires. At the end of the lease term the lessee must
surrender or deliver to the lessor possession of the land. What happens to the apartment
units and other improvements on the land depends on the language of the surrender clause.
Be sure to read the surrender clause carefully. Most surrender clauses can be divided into
three types:
APARTMENT UNIT TO LESSOR
The first type of surrender clause gives the apartment
units and common elements to the lessor upon expiration of the lease. If the lessor
desires to remove the apartment unit, the lessor is responsible for any costs involved in
demolition and removal.
APARTMENT UNIT TO LESSEE
The second type of surrender clause gives the
apartment unit to the lessee. However, because the lessee must return the land to the
lessor in its original condition when the lease ends, the lessee is responsible for the
proportionate costs of the demolition and removal of the apartment unit. This could be a
disadvantage to lessees if they must pay for the demolition and removal. If the building
is still in good condition or can be refurbished, the lessor may be willing to purchase
the apartment units and improvements from the lessees.
LESSOR PURCHASES APARTMENT UNIT
The third, and least common, type of surrender
clause is one where the lessor and lessee have agreed on a price the lessor will pay for
the apartment unit and its share of the common elements upon expiration of the lease.
What other obligations do I have?
EVENTS OF DEFAULT
The lessee incurs many obligations under the lease such as
maintaining the building, paying real property taxes and lease rent, and maintaining
insurance. Failure to abide by the terms of the lease, including failing to pay real
property tax and lease rent and maintenance fees could result in money damages or even
termination of your lease.
MAINTENANCE AND INSURANCE
The lessee is usually held responsible for the
maintenance and upkeep of the property, including paying all real property taxes and
assessments, insuring the apartment against loss or damages by fire, and for maintaining
public liability insurance.
TERMINATION
The lease terminates on the expiration date specified in the lease
agreement. A lease may also be terminated by mutual agreement of the lessee and lessor, or
by eviction because of a breach of a lease provision.
