Leases—Clarity Is The Key for Real Estate Investors (and Everybody Else on the Planet)

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!