Leasehold Estates
Real Estate Leases Explained for Exam Students
Leases create leasehold estates. The exam tests commercial lease types (gross, net, percentage, ground), the four leasehold estate types, and landlord-tenant law.
Commercial Lease Types
Gross Lease (Full Service)
Tenant pays a flat rent. Landlord pays all operating expenses — taxes, insurance, maintenance, utilities. Common in office and residential rentals.
Net Lease
Tenant pays base rent plus some or all operating expenses. Three types: Net (N) — tenant pays taxes; Net-Net (NN) — taxes + insurance; Triple Net (NNN) — taxes + insurance + maintenance. NNN is common in retail.
Percentage Lease
Tenant pays base rent plus a percentage of gross sales above a breakpoint. Common in retail/shopping mall leases.
Ground Lease
The tenant leases the land only (not the building). The tenant constructs improvements and owns them during the lease term. At lease expiration, improvements revert to the landowner.
Graduated (Step-Up) Lease
Rent increases at specified intervals (e.g., $1,000/month for year 1, $1,100/month for year 2). Common in office leases.
Index Lease
Rent is tied to an economic index (such as the Consumer Price Index). Rent adjusts periodically. Protects landlords against inflation.
Leases FAQ for the Exam
What are the four types of leasehold estates?
(1) Tenancy for Years — a lease for a fixed, definite period. Terminates automatically at the end date. (2) Periodic Tenancy — renews automatically each period (month-to-month) until notice is given. (3) Tenancy at Will — no fixed term; either party can terminate at will. (4) Tenancy at Sufferance — tenant remains after lease expires without the landlord's consent ('holdover' tenant).
What is constructive eviction?
Occurs when the landlord's failure to provide habitable conditions forces the tenant to vacate. The tenant may terminate the lease without penalty if they can prove the landlord's actions made the property uninhabitable.
What is the implied warranty of habitability?
In most states, residential landlords have an implied warranty of habitability — an obligation to maintain the rental unit in a condition fit for human habitation. Failure may allow the tenant to withhold rent or terminate the lease.