§ 1.02 What Is a Lease?

• Jurisdiction: United States
• Publication year: 2022

§ 1.02 What Is a Lease?

[1]—Leasing vs. Owning

Commercial real estate tenants do not want to be in the "real estate business" and therefore they choose to lease space, largely to avoid the risks and responsibilities, such as having to do capital repairs and maintain the building. In this way, they are able to focus on their business at that location. However, commercial real estate leases have evolved over the years in such a way that many of the economic risks of ownership have been transferred from the landlord to the tenant. So while the concept of mitigating the risks of owning property through leasing it may have been largely true in the late 1970s and the 1980s, today tenants often unknowingly assume many of the risks associated with ownership as soon as the lease is signed.

A lease is indeed an alternative to purchasing a property. Although there are many benefits of owning a property, including control of the asset, the right to receive rent, tax depreciation, potential for appreciation in value, the right to sell the property or alter it, etc., a landlord also retains the risks associated with a decline in the market value of the property, vacancy and uninsured perils. In lieu of owning the property, tenants accept a set of limited benefits of the property in exchange for a set of limited obligations. A tenant's main benefit is the exclusive right to possess and use the property (or a portion thereof) for a period of time, and its main obligation is the payment of rent. Viewed through this lens, one must consider which risks and expenses of ownership are appropriate to transfer to a tenant in exchange for such limited benefits.¹

[2]—Lease vs. License²

It is important to distinguish a lease from a license. A lease is a granting of an exclusive interest for a stated period of time along with the exclusive right, as against the grantor, to use, control and occupy the demised premises. A lease demises a specific area for the control of the tenant. A license, on the other hand, is a personal nonassignable privilege to occupy or use space for a specific purpose, but not control it. A license passes no interest in the estate of the licensor.³

Leases have evolved since the late 1970s and 1980s with owners taking more active control and participation in the premises with respect to changing the demised premises, including the corridors, halls, doors, elevators and entrance ways, and entering the premises at will to repair, replace, inspect or show them. One might wonder whether most leases are now likely to be recharacterized as licenses.⁴ Owners who maintain rights to cause certain operations in the premises to occur in a certain manner and at certain times, including oversight and direction on environmentally sensitive operations, may find some future court questioning whether a leasehold interest or a license has been granted.

A lease may not be a lease even if the parties call it that. A lease has certain terms that are objective and standard. While in a commercial leasing contract, the terms to which the parties agree will generally be upheld,⁵ the courts will intercede and overturn such an agreement if the essential criteria for a lease are missing, even if the parties have labeled it a "lease."

In Sebco Corp. v. Mid-Island Equities Corp.,⁶ the court found that a document referred to as a "Lease Agreement" was, in fact, not a lease, but a license when the essential terms were examined. In Sebco, plaintiff's assignor and the representative of the defendant's predecessor in interest had executed a "Lease" in which the assignor was given "the exclusive privilege of installing and operating . . . [a] coin metered laundry" on the premises for a period of six years. The agreement provided that the assignor should have the "use and occupancy of the space near the plumbing, gas and electrical fixture." The "lease agreement" was not recorded. The defendant was the successful bidder at auction in the mortgage foreclosure action on the property and subsequently threatened to disconnect the machines. The plaintiff moved to enjoin the defendant from doing so.

In analyzing the facts of the Sebco case, the court distinguished between a lease and a license, and found that a lease "gives exclusive possession, control and domination over a certain defined area,"⁷ while the instrument at issue granted only use and occupancy rights. "Without exclusive possession," stated the court, "it is a license."⁸ The court found that the transfer of absolute control and possession, as well as an agreed rental differentiated a lease from other arrangements dealing with property rights, including licenses. How the parties labeled their agreements only evidenced their intent and was not found to be conclusive as to whether the document was a lease or a license. As such, an instrument granting exclusive privilege to operate laundry machines in a building was considered the grant of a license to service the tenants of a particular building.⁹ As a license, the arrangement was revocable and, in this case, not binding upon the defendant.

[3]—Necessity of a Writing

Is a written lease absolutely necessary? There are both legal and practical reasons for having a written lease. Because of the complexity of most commercial lease agreements and the transactions they cover, it is better to have a writing even for the simplest leases. Moreover, the Statute of Frauds requires a writing for enforceability. Typically, the Statute requires a writing for real estate agreements, as well as for all transactions that have a term of more than one year.¹⁰

To be effective, a present grant of a real property interest must satisfy two distinct requirements, the first being a writing signed by the party to be charged (the "Statute of Frauds"),¹¹ and the second being the delivery of the evidentiary writing of the grant or demising.¹² The latter necessity originated with the common law requirement of livery of seizing, which, although officially eliminated by statutes, remains in the form of the requirement to deliver the "muniment" of title, that is, the writing.¹³

[4]—Elements Required for Enforceability

The following elements are necessary to satisfy the requirements for a lease where a writing is required:¹⁴

(1) The names of the parties or a clear identification of the parties.

(2) The term of the agreement, that is, how long the lease will run.

(3) The precise description of the premises.¹⁵

(4) Signatures of the parties.¹⁶

Common sense dictates that rent be included as one of the essential elements of a lease. However, a document with the above components will be upheld and enforced in the absence of a stated rent on the theory that courts can infer a reasonable rent in order to enforce the agreement.¹⁷ Most parties, however, do not want to leave the matter of rent to the discretion of a third party.

What happens, however, when the parties have satisfied the essential elements for a lease, but are unable to produce the executed written lease because it is lost? Courts have allowed parties to prove the lease's existence and its contents by producing extrinsic evidence of the lease. For example, in one case the parties produced witnesses to the lease's execution and a Xerox copy of the lease that, to the tenant at deposition, "looked like the last lease we signed."¹⁸ However, it may not always be easy to meet a given court's requirements on this issue.¹⁹

[5]—Can Electronic Communications Satisfy the Writing Requirement Under the Statute of Frauds?

E-mails, text messages, voice mail and other forms of electronic communication are used daily when conducting business and engaging in business transactions. While these communications are often casual and merely intended as preliminary discussions, they can in fact create legally binding contracts.

Preventing these communications from resulting in unintended consequences requires an understanding of the law and its possible ramifications, as well as implementation of strategies to assure that communications have their intended effect.

[a]—Electronic Transactions Statutes

Historically, the parties would enter into a formal written agreement and sign a hard copy of that agreement in ink. However, recognizing the business realities that parties are engaging in business negotiations and transactions using electronic forms of communication and desire the benefits, efficiency, and convenience of doing so, Congress enacted legislation to establish the law with respect to electronic transactions.

In 1999, Congress enacted the Uniform Electronic Transactions Act (UETA).²⁰ One year later it enacted the Electronic Signatures in Global and National Commerce Act (E-SIGN) specifically to address electronic communications with respect to international and cross-border transactions.²¹

"E-SIGN provides that a signature, contract or record to any interstate or foreign transaction may not be denied legal effect, validity or enforceability solely because it is in electronic form or an electronic record or electronic signature was used in its formation. E-SIGN specifically preempts state laws that are inconsistent with it, while exempting certain contracts or records from its purview. . . ."²²

Section 7 of the UETA contains the Act's fundamental rules:

"(a) A record or signature may not be denied legal effect or enforceability solely because it is in electronic form.

(b) A contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation.

(c) If a law requires a record to be in writing, an electronic record satisfies the law.

(d) If a law requires a signature, an electronic signature satisfies the law."²³

Note that a "stated 'paradigm' of the UETA is that it applies only to parties to transactions who have each acquiesced by some means to be bound electronically. Moreover, under the UETA a party may always refuse to be bound by electronic correspondence."²⁴

Since...