Slide Lease 2

LEGAL ASPECTS OF
LEASING
M. SADIQUL ISLAM
LEGAL ASPECTS OF LEASING
Four categories of leases from legal perspective:
(a) Sale and leaseback of real property (land,

building)
(b) Chattel leases intended as security
arrangements (e.g., leases of equipment, aircraft,
computers)
(c) True leases of personal property,
(d) Leases of natural resources (e.g., mining, drilling
for oil or gas etc.)
M. SADIQUL ISLAM
Leases of Real Property
 Rights of ownership in real property are
called estates and are classified to
indicate the quantity, nature, and extent
of the rights.
 Two major categories of estates are
- Freehold estates – exist for indefinite
time.
- Leasehold estates - exist for
predetermined time.
M. SADIQUL ISLAM
Leases of Real Property
 A real property lease is a contract by which the owner of the

property (lessor) grants to another, the tenant (lessee), an exclusive
right to use and possession of the real property for a definite and
ascertainable period of time.
 It carries with it an obligation to pay rent to the lessor.
M. SADIQUL ISLAM
Lessee’s Obligation to Pay Rent
 Leasehold estate carries an implied

obligation to pay reasonable rent.
 But the lease contract almost always
contains an express promise, known as
covenant, by the lessee to pay specific
amount of rent at specific times.
M. SADIQUL ISLAM
In the absence of such an express covenant,
> rent should be reasonable
> rent is payable only at the end of the term.
In general a provision is included to the effect that the breach of any
covenant:
> will entitle the lessor to declare the lease to an end,
> lessor will have the right to regain possession of property.
M. SADIQUL ISLAM
If there were no such provision, under

common law, the lessee fails to pay rent
> lessor only can get a judgment to
recover the amount of such rent,
> but lessor cannot evict the lessee from
the premises or to regain the property.
M. SADIQUL ISLAM
Termination of the Lessee’s Obligation to
Pay Rent
 The implied obligation to pay reasonable

rent ceases when the leasehold is
transferred by assignment.
 When the lessee assigns a lease that
does not contain an express agreement
to pay rent, the implied obligation to pay
rent passes to the assignee.
M. SADIQUL ISLAM
Termination of the Lessee’s Obligation to
Pay Rent
If there is express covenant to pay rent,

the lessee remains liable despite the fact
that he has assigned the leasehold to
another lessee.
> If the assignee fails to pay rent, the
original lessee will have to pay the rent.
M. SADIQUL ISLAM
Are Leases Assignable?
If there are no specific restrictions in

the lease contract, leases are freely
assignable.
However, many leases prohibit
assignment without lessor’s written
consent.
M. SADIQUL ISLAM
Assignment vs. Sub-lease
A sublease differs from an assignment in
that it (sublease) involves the transfer of
less than all the lessee’s rights in the lease.
In sublease all rights are not transferred to
sub-lessee.
If sub-lessee defaults, the original lessee
remains liable for rental payment.
the sub-lessee has no obligation to the
original lessor.
M. SADIQUL ISLAM
Assignment vs. Sub-lease
For example, Karim assigns a property to

Rahim with the provision that if Rahim
fails to pay rent, Karim will have the
right to re-enter the property.
Although they call it an assignment,
legally it will be treated as a sublease,
because it involves the transfer of less
than all the lessee’s rights in the lease.
M. SADIQUL ISLAM
Destruction of property and Lessee’s
Obligation to Pay Rent
When the lessee leases the land

together with a building and the
building is destroyed (by fire or other),
under common law:
> lessee will have to pay rent
> lessee cannot terminate the lease.
M. SADIQUL ISLAM
This is because the lessee has taken

lease of the land.
The concept of an estate is divorced

from the economic benefits that go
with it.
M. SADIQUL ISLAM
 In general, lease contracts contains clauses covering the fortuitous
destruction of premises.
 For example, on damage of the property, the lessor will repair and restore
and if the premises are wholly unusable the lessee’s obligation to pay rent
will be suspended until the premises is restored.
 But if the lessor decides to demolish and reconstruct the premises, the lease
will terminate.
M. SADIQUL ISLAM
Public Controls and Condemnation and Lessee’s
 Any law prohibiting the use that the lessee has in mind when he
enters into the lease will not relieve the lessee of the obligation to
pay rent.
M. SADIQUL ISLAM
 Total condemnation of the property for public use may cause
termination of lease and relieve the lessee from obligation to pay
rent. For example, if the land is acquired by the government for the
construction of road, the lessee is relieved of his obligations.
M. SADIQUL ISLAM
 Partial condemnation of the property does not relieve the lessee

from its obligations under it. The lessee is however, entitled to
condemnation award. Lessors however prefer to insert a clause in
the lease providing for a proportionate reduction of the rent.
M. SADIQUL ISLAM
Abandonment of Lease
If the lessee wrongfully abandons the property before the expiration of

lease term and the lessor re-enters the property or releases to another,
the lessee’ obligation to pay rent terminates.
If the lessor desires to hold the lessee to its obligation to pay rent, he must
leave the property vacant.
M. SADIQUL ISLAM
Obligation to Repair and Restore
The lessee is under no duty to make any repairs to the property, unless
the lease expressly provides. However, in case of sale and leaseback,
(where the transaction is a means of finance) the lessee ordinarily
desires to keep the property in good working order.
M. SADIQUL ISLAM
Indemnification Clause
 Majority of leases contain an exculpation or indemnification clause

by which either the lessor or lessee or both attempt to limit their
liability for damages for injuries to persons or property caused by
their own negligence.
 Exculpation excuses one party from liability for otherwise valid
claims that may be made against them by the other party to lease.
M. SADIQUL ISLAM
Indemnification Clause
• Indemnification represents a promise by one party that the other
party will be secure from loss or damage from claims made by third
person.
• Sale and leasebacks often have tax indemnification clause, which
states that the lessee will indemnify the lessor if the transaction is
not recognized as a true lease/valid sale.
M. SADIQUL ISLAM
Expiration of the lease
 A lease for a definite term expires at the end of the term by virtue of
its own limitation. Most leases are for a definite term.
M. SADIQUL ISLAM
 A periodic tenancy is a definite term to be held over and over in

indefinite succession. For example, a lease “from year to year”
creates periodic tenancy. A periodic tenancy may be terminated by
either party at the expiration of any one period, but only after giving
adequate notice to the other party.
M. SADIQUL ISLAM
 A lease containing a provision that either party can terminate at will

creates a tenancy at will. So does a lease that does not specify any
duration.
M. SADIQUL ISLAM
Sale and Leaseback of Real Estate
 A sale and leaseback involves a valid contract of
sale and a valid real property lease.
 The lease contract should be oriented to:

1. Protecting the ability of the lessee to use and
enjoy the property in the same manner as if he
were the owner.
2. Protecting the principal amount of sums
advanced to the lessee (the sales price).
M. SADIQUL ISLAM
Sale and Leaseback of Real Estate
3. Protecting the interest payment on the principal amount (the lease
payments less the return of the principal).
4. Protecting the tax position of the lessor.
M. SADIQUL ISLAM

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LEGAL ASPECTS OF

Four categories of leases from legal perspective:

(a) Sale and leaseback of real property (land,

 A real property lease is a contract by which the owner of the

 Leasehold estate carries an implied

If there were no such provision, under

 The implied obligation to pay reasonable

If there is express covenant to pay rent,

If there are no specific restrictions in

For example, Karim assigns a property to

When the lessee leases the land

This is because the lessee has taken

The concept of an estate is divorced

 Partial condemnation of the property does not relieve the lessee

If the lessee wrongfully abandons the property before the expiration of

 Majority of leases contain an exculpation or indemnification clause

 A periodic tenancy is a definite term to be held over and over in

 A lease containing a provision that either party can terminate at will

 The lease contract should be oriented to:

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