Deeds and Leases

Deed - the actual written instrument by which ownership (title) of property is transferred. To be valid, a deed must

  • Identify the parties involved in the transfer, the buyer (grantor) and the seller (grantee)
  • There must be consideration given for the property (usually stated as $10 plus other consideration in order to keep the price private - taxing jurisdictions can only ask that the true price be voluntarily disclosed)
  • A legal description of the property must be included so that the exact boundaries of the property transferred are known
  • The specific interests being transferred must be spelled out (land, mineral rights, etc.)
  • The deed must be signed by both parties and witnessed (notarized)

The deed typically contains covenants and warranties as well, unless these covered by state statute:

  • Covenant against encumbrances (other than those of public record)
  • Covenant of seisin or ownership (the right to convey the property)
  • Covenant of quiet enjoyment (there are no other claims on the property)
  • Covenant of further assurances (that seller will execute any other documents that are needed for conveyance of title)
  • Warranty forever (seller will defend the transfer of title as valid in the future)

Types of Deeds

  • General Warranty Deed - broadest type of deed which includes the covenants and warranties
  • Special Warranty Deed - limits seller's warranties to events that occurred during his/her ownership (lawsuit for ownership of Padre Island)
  • Bargain and Sale Deed - implies that the seller has title and the right to sell the property, but does not guarantee validity of title
  • Quitclaim Deed - transfers any interest that the grantor may have in a property. Generally used to clear the title (typical following a divorce settlement)

Leases – Agreement (contract) transferring use and possession (but not ownership) of property from owner (lessor) to tenant (lessee) in exchange for consideration (rent).

Types of Leases:

  • By duration of term
  • Tenancy for a stated period (or “Estate for years”) – term of lease is stated and possession reverts to the landlord at the end of the term. (Long-term leases are usually recorded at the courthouse so that public knows that tenant has an interest in the property. The interest is referred to as a “leasehold estate”.)
  • Tenancy (or “Estate”) from period to period – indefinite duration that terminates upon written notice by either party (usually thirty days); otherwise, it automatically renews for an additional, equal period of time
  • Tenancy (or “Estate”) at will – may be terminated at any time by either party. In Texas, courts assume it is a periodic estate (another name for Estate from period to period) and that reasonable notice must be given to terminate
  • Tenancy (or “Estate”) at sufferance – an illegal holdover from an expired valid lease agreement. Legal action is required to evict tenants (the landlord must sue for possession).
  • Ground Lease – unimproved land is leased for an extended period of time (50 – 99 years, typically). Tenant needs assurances that they will have use of land for a sufficiently long period of time to justify constructing specialized improvements for manufacturing, retail, etc. Improvements become property of landowner at the end of the lease.
  • By Method of Rent Payment
  • Gross Lease – Fixed amount of rent to be paid during the life of the lease. The burden of expenses, taxes, etc., falls upon the landlord. (Today, utilities are generally paid by the tenant.)
  • Net Lease – Tenant pays a fixed amount of rent, but shares in the costs of operation. The risk (uncertainty) of operating expenses is therefore shifted to the tenant. A net net (or, double net) lease requires the tenant to pay insurance in addition to operating expenses. A net net net (or, triple net) lease also requires the tenant to pay real estate taxes.
  • Graduated (or step-up) Rent Lease – Rental payment is fixed for an initial period, but increases by specified percentages at fixed intervals. When increase is tied to an index such as the Consumer Price Index (CPI) it is called an index lease.
  • Reappraisal Lease – the increase in rent is tied to increases in the appraised value of the property
  • Percentage Lease – Rent is based upon some percentage of sales made on the premises. Typically used in retail shopping centers with a fixed base rate plus a percentage of sales

Other leases include agricultural leases, hunting leases, oil and gas leases.

A lease should explicitly state who pays for what expenses with regard to maintenance, property taxes, insurance and utilities. Landlord is generally responsible for “normal” wear-and-tear in maintenance as well as taxes and insurance. Commercial leases will often have expense stops, or limits, on the maximum operating expenses that the landlord must pay. The remainder must be paid by proportionately by the tenants.

Assignment – allows tenant to transfer all rights to a new tenant although still liable if tenant does not pay rent

Sublease – transfer of a portion of the rights under a lease. The new tenant pays rent to the first tenant who then pays the landlord.

Security deposits – required to give the landlord protection if damages occur, tenant breaks lease or fails to pay rent

Improvements – unless they can be removed easily, improvements by tenants become fixtures and remain with the property when the lease terminates

Landlord has the right to enter premises only to protect the property – relates to covenant of enjoyment that accompanies the leasing of this property right to the tenant. The tenant, of course, has the obligation to protect the value of the property since it will revert to the landlord upon expiration of the lease

Warranty of habitability – Landlord has the obligation to ensure that the premises are maintained in reasonable condition. If it is not kept habitable, the tenant can move out and claim constructive eviction by the owner. Common areas must also be maintained (In commercial leases, the cost of common area maintenance is often shared by the tenants.)