What Is a Lessor and Lessee?
In a lessor lessee agreement, the individuals or companies involved function in the roles of lessor and lessee, respectively. The lessor is the entity that grants the lease, generally owning or controlling the property for which the lease is set up. This entity is essentially the property owner or supervisor of the area being leased or rented. This may be an individual, another corporation, or a municipality or government department that is issuing permission to use a land or property for a specified period of time.
The lessee, on the flip side, is the person or business that has committed to the use and possession of the property being offered by the lessor. The individual or business must pay a monthly or annual fee to the lessor , and subsequently is under obligation to take care of and preserve the property. Generally speaking, this is legal and morally bound to be a mutually beneficial situation for the lessor and lessee. The owner of the property gets a specified sum of money and possible use of the property after the lease expires, while the lessee gains the use of the property, particularly if they could not do so without the money generated through the leasing agreement.
The lessor possesses and the lessee pays to occupy. This is the underlying philosophy behind the lessor lessee agreement.
Essential Components of a Lessor Lessee Agreement
Lessor lessee agreements generally contain a broad range of components, which together form the contract between the lessor and lessee. The most commonplace elements of a lessor lessee agreement include: 1) terms of lease, 2) rental, 3) maintenance, and 4) termination. The terms of lease include the actual term for which the property is being leased and the duration of that term. In addition, terms of lease often extend to any prerequisite agreements, such as an agreement although these are relatively rare. Rental components of a lessor lessee agreement will detail how payments are to be made once the agreement is executed. Depending on negotiation, rental components can outline any stipulations as to the frequency, method or amount of payments. Some lessor lessee agreements include specific responsibilities for both the lessor and lessee in respect of the maintenance of the leased property. The responsibilities generally include essential upkeep of the property as well as requirements for periodic inspection throughout the duration of the lease. Lessor lessee agreements will spell out the conditions under which a lease may be terminated. In addition to establishing the length of a lease, the termination provision may also expressly state the conditions that must be met for either party to terminate the lease before the expiration of its term.
What to Look Out for When Signing a Lessor Lessee Agreement
A lessor lessee agreement is a unique document filled with lots of opportunities for pitfalls and a myriad of legal considerations from both sides. Here are a few things that we suggest you look for. The first thing to be careful about is the forms themselves. We have seen some really poorly written, professional looking forms that are severely lacking in protection for the business owner. Generally speaking, a lease agreement is a contract. This means that, just like any other contract, the agreement is binding on both parties only if they both agree to the terms. If the terms are not favorable to your business and you sign it anyway, you may not have recourse.
Like any other contract, you should look for legal protections. These protections include disclosures on the risk of loss and insurance coverage for the business. If the equipment is damaged or lost or stolen, the lessor can get the equipment back, but you are still out. For most businesses, especially large businesses with multiple locations, this can pose a serious problem. While it is possible to replace the equipment, you will be without the equipment during the time it takes to replace it. Delays cost money. That is why it is important to make sure you and the lessor are both protected and have appropriate responsibilities in a write off, loss, or theft situation. In such a scenario, the lessor should provide replacement equipment. Insurance also protects your business, particularly because it provides for quick replacement without waiting on the lessor.
From a legal standpoint, it is also important to have a workable dispute resolution clause. A common problem we see in these agreements is that they require you as the business owner to bring a lawsuit in a far away state in a different court. Given that lawsuits are extremely expensive and take time, you should always have a local forum to bring any claims regarding a lease agreement.
What Are the Benefits of a Lease Accord in Place?
The advantages provided by a well-structured lessor lessee agreement cannot be overlooked. From a lessor standpoint, a clearly drafted agreement provides significant financial security. While no agreement can guard against every eventuality, an agreement with a reasonably well-defined term will prevent the lessor from unknowingly surrendering the property during negotiations for renewal. A typical concern from a lessor’s perspective is whether an agreement will automatically renew (or extend) if the parties fail to come to agreement prior to the expiration of the term. Also, because most lessor lessee agreements involve a lessor moving from one lessee to another, the lessor is far less likely to bargain for a term which is easily terminable by the lessee. The lessor’s protection from such scenarios will always be an important component of any lessor lessee agreement.
From a lessee perspective there are a number of issues which make it imperative for the lessor lessee agreement to be well defined. A primary concern for any lessee is limited liability. Limited liability is important to a lessee because a business generally has a number of members all of whom cannot and should not be expected to sign without limitations on personal liability . Even when individuals are willing to sign on behalf of a business as personal guarantors, the amount which they can guarantee should be limited to the assets which they actually have and control. Otherwise, the lessor likely will squeeze the lessee for payment from any of the lessee’s financially willing member/guarantors.
A second important component for any lessee is ease of property management once the agreement is in place. An agreement should take into account lease expenses. Specifically, the agreement should consider whether the lessee will be responsible for any taxes such as sales tax, personal property tax or income tax. The lessee should also consider whether the lessee is responsible for any insurance, maintenance or upkeep of the property and whether the lessee has any responsibility to provide written notice of any defects to the lessor within a reasonable time period. Likewise, the lessor should consider whether any such notice requirements properly limit any deductions or offsets which the lessee may be entitled to make to the cost of rent.
Common Pitfalls and How to Avoid Them
The lessor and lessee relationship can be fraught with difficulties. In addition to the obligation of the lessee to pay rent, common issues include property damage and/or destruction. Each of these issues is addressed below.
Common Issue #1: Non-Payment of Rent
A common issue for lessor lessee agreements is the failure of the lessee to timely pay rent. It is important to understand how the lessee not paying rent impacts the lessor.
Lease terms cover the situation in which the lessee fails to timely pay rent. One option is that the lessee must not only pay the rent owed, but must also pay the lessor’s attorney’s fees. As a practical matter, the lessor can reasonably expect the lessee either to pay the rent when demanded or to negotiate a payment plan. Of course, if the lessee refuses to pay rent and attempts to avoid a judicial hearing before being evicted, notice to allow the lessor to obtain a court-ordered judgment is required. In this scenario, an award of attorney’s fees is typically awarded to the landlord when it finally prevails.
Common Issue #2: Damage to Leased Premises
Lessor lessee agreements typically obligate the lessee to return the property in the same condition that it was when the lease agreement was entered into. So, as a result of the lease agreement’s terms, any damage caused by the lessee would typically be repaired by the lessee itself. Although lessor lessee agreements typically address this issue, your attorney should address the time frame involved in restoring the property and make sure that issue is included in the lessor lessee agreement.
Advice On Negotiating a Lease Agreement
Negotiating a fair and satisfactory lease agreement requires strategy, communication, and a clear understanding of your priorities. Here are some tips for both lessors and lessees to consider when negotiating a lease or renewal:
- Prioritize for the Lease Term — Start by establishing your top "must-haves" for the term of the lease before negotiations begin. This will help you stay focused during discussions and will provide a framework for the negotiations to proceed. Be willing to compromise on areas that are not as important to you, but require flexibility from the other party as well.
- Research Market Standards — Understand the current market rates and trends for the type of property you’re leasing or renting. Having this information readily accessible can help you determine what a fair and competitive rate looks like. You can compile data from market reports, local real estate listings, or by hiring a professional appraiser to evaluate the rental value of the property .
- Establish Trust — Trust is key to a successful negotiation. Communicate openly and honestly with the other party, and ensure that both objectives are understood. Building a rapport with the other party can go a long way in establishing mutual respect and will help facilitate an amicable negotiation process.
- Be Flexible and Creative — Be open to creative options when discussing the terms of a lease. If one party requires a specific term, analyze the overall objectives and see if there’s a creative solution that can benefit both parties. Ask questions and be receptive to ideas that the other party may have.
- Seek Professional Help — Enlisting the assistance of an attorney can lead to a quicker, more efficient process. Experienced attorneys can provide critical advice throughout the negotiations and can help to answer any questions you might have during the process. Additionally, having legal representation can help you to avoid costly mistakes.