What is a Land Lease Agreement?
A Land Lease Agreement (sometimes called a Land Tenure Agreement) is a long-term (typically 7-99 year) agreement, which allows one party to use the land or property of another in exchange for rent or use. The land can be used for many purposes including for residential, commercial or agricultural uses. For example, developers may lease large tracts of land until they are ready to invest in improving the land , participants in any government-assisted low-income housing or Section 8 programs may lease homes for their use or enjoyment or you may read about residents of mobile home communities wishing they had agreed to a land lease with their landlord to allow them to own the land under their home. The advantages and disadvantages of entering into a land lease depend on the situation or purpose for which use of the property is required.
Essential Features of a Land Lease Agreement
Land lease agreements should entail the following elements to ensure that the parties are protected and that the agreement is clear: Environmental Remediation/Indemnification- including concerning contamination existing prior to lease execution or caused by lessee’s operations during term. Permitted Uses-ensure that the proposed uses are permitted in the zoning code as well as any applicable permits and/or licenses imposed by the government. Term-fixed, with or without renewal rights to extend. Rental Rate-fixed or adjustment of rent Options to Purchase-negotiated in the lease. Approvals/Fees-lessee is responsible for all documentation required to obtain approvals, including the fees, and most permitting (however the landlord may be the applicant). Access-the right to use roads to and from the land; parking areas. Construction Standards-aesthetics, type of construction, compliance with any architectural review boards. Property Maintenance-grass cutting, snow removal.
Different Formats of Land Lease Agreements
Land lease agreements come in all shapes and sizes, depending on the specific purpose of the lease as well as the relationship between the parties. Common formats include standard lease agreements, percentage leases and ground leases.
Standard Lease
Standard lease agreements are the most common type of land lease agreement. Often employed by developers for residential or commercial construction, and by owners who desire apartment or office tenants to occupy their land for a period of time, a standard lease agreement typically includes a monthly or annual payment of a specified amount of rent. A standard lease may be for a term of several years or several decades, depending on the goals and/or the needs of the developer or land owner.
Percentage Lease
A percentage lease is generally utilized in a retail context, and is designed to provide the lessor with a payment that is tied to the leaseholder’s success in business. A percentage lease typically requires the leaseholder to pay (1) a monthly or annual fixed amount of rent, and (2) a percentage of the leaseholder’s monthly or annual gross sales in addition to the fixed amount of rent. A percentage lease may include a minimum monthly or annual rental amount for the duration of the lease, and usually is subject to a renewal right allowing the leaseholder to renew at a market rate. An advantage of a percentage lease for the leaseholder is the lower monthly rent obligation in the beginning phases of the lease. For the landowner, a percentage lease has the advantage of offering a return directly commensurate with the business’s success.
Ground Lease
Ground leases are frequently described as "ground lease" definitions according to their function. Commercial ground leases, which are the most common type of ground lease, are often utilized to lease raw or undeveloped land to developers for commercial building, and are characterized by the following features:
How to Create a Land Lease Agreement
There are a number of aspects that should be included in each land lease agreement, including:
• Definition of the property. The lots that are leased should be specifically identified in the lease. A street address might not be sufficient in some jurisdictions—the legal description might have to be included or some other method of identifying the site such as tax accessors parcel number, or survey number.
• Date of the sale. The date of the sale is important to establish the beginning of the compensation during the term of the land lease agreement. Often, the date is not the same as the date of the lease agreement because there may be time between agreement and actual sale.
• The term of the lease. The term may begin on the date of the making of the agreement, the date the agreement is recorded, or it may commence on a specified date. The lease may run for a certain number of years or may run as an estate at will. You might want to include the option to renew the lease and the terms of that renewal in the land lease agreement.
• The rent. This is perhaps the most important part of the land lease agreement. Will there be a fixed rent or will it be tied to the appraised value of the land? What kind of deposit if any will be paid under the terms of the land lease agreement? Will there be late charges assessed and the effect of default of late payments?
• Improvements. Will the buyer be permitted to make improvements to the land? If so, what types and how will that affect the lease? The lease should also specify who is responsible for maintaining and paying taxes on the improvements.
• Default. The lease should specify what happens if the buyer defaults on the lease. Will it allow time to cure the default and if so, how long? The lease should also specify whether the lease can be assigned and the effect of assigning the lease.
• Obligation to give notice. Notice may be required to be given for various activities. The lease should specify who must give notice and when and where to give it.
• Acknowledgement of parties. As with other types of agreements, acknowledgement of the affiliation of the parties is required along with provisions for the testimony, certification, and acknowledgment.
Legal Framework and Statutory Provisions
Land lease agreements must comply with local laws, regulations, and codes. For example, leases must be recorded with the appropriate government offices, and there may be local and state taxes that apply to rental income. Homeowner associations (HOAs) can also impact land leases by imposing restrictions on what is allowed on a leased lot.
Lease agreements may be challenged by heirs, parties in bankruptcy, and other parties with an interest in real estate . A poorly drafted or poorly written land lease agreement could result in loss of the landlord’s property.
Parties to a land lease agreement should be familiar with Oregon’s Landlord and Tenant Act, including the management of advance rent, security deposits, acceptance of rent, responsibilities of landlord and tenant. If you are not familiar with this statute, you should contact an Oregon attorney or real estate broker, if negotiating or drafting a land lease agreement document.
Helpful Tips for Negotiating a Land Lease Agreement
For both landlords and tenants, negotiation of a land lease is an extremely important step in the process. As is always the case with commercial leases, much will depend on market conditions, the strength of the parties, the negotiations that took place before the agreement in principle was signed, and other factors. However, there are some options available to parties that can help either to secure the best possible deal, or to lessen the blow if the terms are not ideal. A first step is to ensure that adequate research is carried out. A basic analysis of current market conditions and future trends can provide valuable information. For example, in some areas such as North Myrtle Beach, SC, where vacation property values have decreased for a number of years while other areas like Myrtle Beach proper have seen increases, understanding this fact can help in negotiating a positive deal. Next, as with any contract, whether negotiated with an individual or an organization, know your opponent’s strengths and weaknesses position. In the case of a private individual lessor, this may mean understanding his or her personal circumstances and the potential impacts on the lease. A short-term downswing in the stock market that affects a private person’s pension fund could lead to a more favorable deal. On the other hand, a powerful corporation or real estate investment trust (REIT) will have a great deal of leverage due to its power. In these cases, you may benefit from bringing in an experienced and highly qualified middleman/investment broker. A third step is timing. Real estate markets tend to be cyclical in nature, with an upward trend followed by a flat or even negative trend. In the upward market, the tenant is more likely to get a highly favorable deal while the reverse is true in a downward market. Rates can be kept down by waiting for a downturn, but this strategy carries significant risks. A downturn may never occur. In addition, the tenants own business cycle may influence timing. A business expanding rapidly will most likely benefit from a long-term lease, while one that is not expanding would be wise to get a short-term lease to avoid paying more than it needs to. A final point is that the tenant should also consider creating a penalty for failing to negotiate in good faith. Some of these penalty clauses are easily enforceable while others are not. Take care to ensure that your penalty clause has been confirmed to be legally enforceable. The insertion of such a clause may deter any party from playing games during negotiations.
Common Mistakes to Avoid
It’s easy to walk a tenant through a list of items and have them initial that they understand each section of the land lease agreement. However, when it comes time for drafting or transitioning into the actual lease, there are some common pitfalls to avoid:
- Failure to have the leasehold estate deeded to the lessee. This is not a common mistake on the landlords part; however, there are some tenant mistakes that may lead to this failure – making improvements without getting them deeded, not putting structures on permanent foundations, or neglecting the property and inadvertently allowing it to become real property again.
- Failure to understand and calculate rent adjustments. This mistake is made by both parties. Read the rent adjustment section carefully as there are instances where rent adjustments can be detrimental to the lessee. Also, if included in the agreement, calculate the rent adjustments accurately-you can agree to an index but not understand how that index works.
- Mistakes in calculating the rent price. If either party makes a mistake in calculating the rent price, then you should hire your attorney to fix the issue before both parties use it as part of their budgets or accounting. Once the agreement goes into place it’s harder to change.
- Drafting a new lease of the same property without consulting with an attorney. The new lease might have entire sections scrapped or added that were beneficial to the previous lease. Even for something as simple as a lease extension, it’s important that you consult your attorney before signing or drafting.
Closing Thoughts and Conclusions
In conclusion, as this overview shows, the language used in a land lease agreement is of the utmost importance to the definition of the rights and responsibilities of both the lessor and the lessee. The terms can become complex or ambiguous. Options relevant to the matter, such as early termination clauses or application of ancillary agreements, must be considered . Of particular concern may be whether the structure of the agreement gives the tenant appropriate protection, while still allowing the landlord fair recourse in the event of delinquency or abandonment.
Because of the complexities involved in negotiating and drafting land lease agreements, parties should always seek the advice of legal counsel experienced in dealing with these agreements.