Leasehold Estates
Commercial Lease Types and Leasehold Estates
Notice periods, security deposit handling, habitability standards, eviction procedure and the writing required for a long term are set by state statute and, in many places, by local ordinance. Use the definitions here for the concepts and take every deadline and dollar rule from your own jurisdiction.
A lease does two jobs at once, and exam items exploit the gap between them. It is a contract, setting out what each party promises. It is also a conveyance, handing the tenant a possessory interest in real property for a period while the landlord keeps a reversion.
This page covers both jobs: how rent is structured in the commercial lease forms the exam names, the four estates a lease can create, the duties each party owes, and how a tenancy moves or ends.
Rent Structures a Commercial Tenant Signs
Commercial lease names describe one thing only: who absorbs the operating costs of the building, and how the rent number is arrived at.
Full-Service Gross Lease
One rent figure covers everything. The landlord absorbs property taxes, insurance, maintenance and, in a full-service arrangement, utilities out of the rent collected. The tenant's cost is predictable and the landlord carries the risk that expenses rise. This is the ordinary form for residential rentals and for much conventional office space.
Net Lease
The tenant pays base rent and then picks up operating costs on top of it. The number of N's counts how many cost categories shift: a single net arrangement adds property taxes, a double net adds insurance as well, and a triple net adds maintenance, leaving the landlord with little more than the rent stream. Freestanding retail and single-tenant industrial buildings are usually written this way.
Percentage Lease
Rent has two parts: a fixed base, plus a share of the tenant's sales once sales pass an agreed breakpoint. It ties the landlord's return to how the store performs, which is why it is standard in shopping centers and malls. Expect items that test what the breakpoint is for and why a landlord would accept a lower base in exchange for the overage.
Ground Lease
The land alone is let, typically for a long term, and the tenant builds on it. During the term the tenant owns and depreciates the improvements it erected; when the term ends, the improvements normally revert to the owner of the land unless the lease says otherwise. It is the answer whenever a fact pattern has a tenant constructing a building on someone else's dirt.
Graduated Lease (Step-Up)
Rent rises on a schedule written into the lease, at dates and amounts the parties fixed when they signed. Nothing outside the document determines the increases. It is used where a new business needs a lighter early burden, or where the landlord wants agreed growth without argument later.
Index Lease
Rent is recalculated periodically against an external economic measure, such as a published cost-of-living index, rather than against a schedule the parties chose. Neither side knows the future figures at signing. It protects the landlord's real return when prices rise, and it is the contrast the exam draws with a graduated lease, where every increase is already known.
Four Estates a Lease Can Create
All four are leasehold, meaning less than freehold: possession for a time, with the landlord holding the reversion. They differ in how the tenancy ends.
Estate for years. A term with a definite beginning and a definite end, stated in the lease. It expires on its own date with no notice required from either party. Despite the name, the length is irrelevant, so a term of one week qualifies as long as the end date is fixed.
Periodic tenancy. A term that renews itself from period to period, month to month being the common form, and continues until one party gives notice. The required notice comes from state law or from the lease, so treat any specific number of days as a state fact to look up rather than something to memorize nationally.
Tenancy at will. Possession with the consent of both parties and no fixed term at all. Either side may end it, subject to whatever notice the state requires, and it generally ends on the death of either party or on transfer of the property.
Tenancy at sufferance. The weakest of the four. The tenant entered lawfully but has stayed past the end of the term without consent, which is why this is the holdover situation. It is not trespass, because possession began legitimately, and the landlord's remedy is the statutory eviction process rather than self-help.
What the Tenant Receives and the Landlord Keeps
The tenant receives exclusive possession for the term. That is the feature separating a lease from a license, and it explains why a tenant may exclude the landlord except as the lease or the law permits entry. The landlord retains the reversion, a present interest in getting possession back, which can be sold or mortgaged while the tenancy runs.
Because the lease is also a contract, the ordinary elements apply: parties with capacity, agreement, a lawful object, and consideration. Statutes of frauds require a writing once the term exceeds a length the state fixes, commonly one year, and an oral arrangement beyond that length is vulnerable no matter how clearly the parties remember it. Recording is usually optional and usually skipped for short terms, though long commercial leases and ground leases are frequently recorded or memorialized to put the world on notice.
A sale of the property does not end the tenancy. A buyer takes subject to a lease already in place, which is why estoppel certificates and rent rolls are reviewed before an investment property changes hands. Death is treated differently depending on the estate: an estate for years survives the death of either party and passes to the estate, while a tenancy at will does not.
Fixtures deserve their own line here because the lease context reverses the usual answer. Items a commercial tenant installs to carry on its business are trade fixtures, and the tenant may remove them before the term ends, repairing any damage removal causes. Anything left behind when the term expires generally becomes the landlord's by accession, which is the detail items are written around.
Duties, Breaches and Remedies
Most landlord-tenant items are really asking which duty was broken and which remedy follows from it.
Covenant of quiet enjoyment. The landlord's promise not to disturb the tenant's possession. It is implied in leases generally and is the foundation the eviction doctrines are built on.
Implied warranty of habitability. In residential tenancies, a duty to deliver and maintain premises fit to live in. Remedies where it is breached, which may include repair and deduct, rent withholding or termination, are defined by state law and are not uniform. It is chiefly a residential doctrine; commercial tenants are ordinarily expected to inspect and negotiate for themselves.
Actual eviction. The landlord physically deprives the tenant of possession, in whole or in part. Rent obligation stops for the part taken.
Constructive eviction. The landlord's failure to act makes the premises unusable, and the tenant moves out. The tenant must show the condition was substantial, that the landlord had notice and a chance to cure, and that the tenant actually vacated within a reasonable time. A tenant who stays has almost always given the claim away.
Tenant breach and the landlord's route. Nonpayment and holding over are handled through the statutory summary process, which is a court proceeding. Locking out a tenant, removing doors or shutting off utilities is self-help and is prohibited in most jurisdictions.
Security deposits. Limits on the amount, where the money must be held, whether interest accrues, and how quickly an itemized accounting must follow move-out are all set by state statute, frequently supplemented locally. Learn the structure here and the figures from your state.
Assignment, Sublease and Ending the Tenancy
Assignment and sublease are the pair most often missed, and the difference is measured in what the original tenant keeps. An assignment hands over the entire remaining interest, leaving the first tenant with nothing; the assignee deals directly with the landlord. A sublease hands over part of the term or part of the space, so the first tenant keeps a reversion and becomes a landlord to the subtenant, who has no direct relationship with the owner.
In neither case does the original tenant walk away from the promises it made. Unless the landlord signs a release, the first tenant stays liable on the lease if the new occupant fails to pay, which is why exam items about an absent original tenant so often end with that tenant still on the hook. Most leases also require the landlord's consent before either move, and commercial leases commonly qualify that with a standard such as consent not to be unreasonably withheld.
Terminations divide into the clean and the contested. Clean endings include expiration of a fixed term, proper notice in a periodic tenancy, surrender accepted by the landlord, and merger when the tenant acquires the landlord's interest. Contested endings run through breach and the statutory process. Destruction of the premises and condemnation of the property are handled by state law and by the lease clause addressing them, so read the clause before answering from instinct.
Option clauses round out the topic. A renewal option lets the tenant extend on stated terms. A purchase option lets the tenant buy, and a right of first refusal only lets the tenant match an offer the landlord receives from someone else. Those last two are close enough that items are regularly built on the difference. RE License Prep drills these comparisons directly, with a free diagnostic to show whether leases belong in your priority list, a PassPulse Score that tracks whether repaired areas hold, and a PassMap™ that orders the rest. Full access is $79 one time with a 30-day money-back guarantee.
Lease Questions Worth Settling Before Test Day
How do I keep the four leasehold estates straight?
Sort them by how each one ends. A fixed end date written in the document is an estate for years. Self-renewal until somebody gives notice is a periodic tenancy. Consent with no term and no notice built in is a tenancy at will. Staying on after the term without permission is a tenancy at sufferance. Ending is the only variable, so testing an item against endings resolves it quickly.
What is the quickest way to tell an assignment from a sublease?
Ask whether the original tenant kept anything. Everything transferred for the whole remaining term is an assignment. Anything retained, whether the last months of the term or a portion of the space, makes it a sublease, and the original tenant is now the subtenant's landlord. Either way the original tenant remains liable to the owner unless the owner grants a release in writing.
Does a triple net tenant pay for absolutely everything?
It pays base rent plus taxes, insurance and maintenance, which is the origin of the three N's. Leases vary on where structural elements, roof and major capital items land, and an absolute net or bondable lease pushes even those onto the tenant. For exam purposes, hold to the three shifted cost categories and treat the finer allocations as negotiated terms.
Who owns the building at the end of a ground lease?
Ordinarily the owner of the land does. The tenant builds, owns and uses the improvements during the term, and unless the lease provides another outcome, the improvements revert with the land when the term expires. That reversion is the reason ground leases are written for long terms: the tenant needs enough years to earn back the cost of construction.
Can a tenant stop paying rent when the landlord will not make repairs?
Only along a route the state has authorized. Some jurisdictions allow repair and deduct or payment into escrow after written notice and a cure period; others require the tenant to keep paying and sue. A residential tenant whose unit is genuinely uninhabitable may have a constructive eviction claim, but that path requires actually moving out. Withholding rent without following the state's procedure usually hands the landlord a nonpayment case.
What happens to a lease when the building is sold?
It continues. The buyer acquires the reversion subject to the existing tenancy and steps into the landlord's role for the balance of the term, which is why leases, rent rolls and tenant estoppel certificates are examined during due diligence. A tenant is not required to renegotiate merely because ownership changed hands.