Requirements of a Valid Lease
A lease is a form of contract. To be valid, a lease must meet essentially the same requirements as any other contract:
- Capacity to contract – The parties must have the legal capacity to contract.
- Legal objectives – The objectives of the lease must be legal.
- Offer and acceptance – The parties must reach a mutual agreement on all the terms of the contract.
- Consideration – The lease must be supported by valid consideration.
Rent is the normal consideration given for the right to occupy the leased premises. However, the payment of rent is not essential as long as consideration was granted in creating the lease itself. Sometimes, for instance, this consideration is labor performed on the property.
Because a lease is a contract, it is not subject to subsequent changes in the rent or other terms unless these changes are in writing and executed in the same manner as the original lease.
The leased premises should be clearly described. If the lease is for part of a building, such as an apartment, the space itself or the apartment designation should be described specifically. If supplemental space is to be included, the lease should clearly identify it.
Possession of Premises
The lessor, as the Owner of the Real Estate, is usually bound by the implied covenant of quiet enjoyment. The covenant of quiet enjoyment is a presumed promise by the lessor that the lessee may take possession of the premises. The Landlord further guarantees that he will not interfere in the Tenant’s possession or use of the property. The lease may allow the Landlord to enter the property to perform maintenance, to make repairs, or for other stated purposes. The Tenant’s permission is usually required.
If the premises are occupied by a holdover Tenant or an adverse claimant at the beginning of the new lease period, the Landlord must initiate the eviction process to obtain possession in Illinois.
Use of Premises
A lessor may restrict a lessee’s use of the premises through provisions included in the lease.
Use restrictions are particularly common in leases for stores or commercial space. For example, a lease may provide that the leased premises are to be used “only as a Real Estate office and for no other purpose.” In the absence of such clear limitation, a lessee may use the premises for any lawful purpose.
Term of Lease
The term of a lease is the period for which the lease will run. It should be stated precisely, including the beginning and ending dates, together with a statement of the total period of the lease. For instance, a lease might run “for a term of 30 years beginning June 1, 2011 and ending May 31, 2041.” A perpetual lease for an inordinate amount of time or an indefinite term usually will be ruled invalid.
Security Deposit
Most leases require that the Tenant provide some form of security deposit to be held by the Landlord during the lease term. If the Tenant defaults on payment of rent or destroys the premises, the lessor may keep all or part of the deposit to compensate for the loss. Some state laws set maximum amounts for security deposits and specify how they must be handled. Some prohibit security deposits from being used for both nonpayment of rent and property damage. Some require that lessees receive annual interest on their security deposits.
In Illinois, Landlords who receive security deposits on residential leases of units in properties containing five or more units may not withhold any part of a security deposit as compensation for property damage unless they give the Tenant an itemized statement listing the alleged damage. This statement must be delivered within 30 days of the date on which the premises are vacated.
If the statement is not furnished, the Landlord must return the entire security deposit within 45 days of the premises being vacated. Any Landlord who is found by a court to have failed to comply with this requirement, or who has done so in bad faith, must pay the Tenant double the security deposit due plus court costs and attorney’s fees.
Illinois lessees are entitled to receive annual interest on their security deposits. Landlords who receive security deposits on residential leases of units in properties of 25 or more units, on deposits held for more than six months, are required to pay interest from the date of the deposit at a rate equal to the interest paid on a minimum deposit passbook savings account of the state’s largest commercial bank (measured by total assets) with its main banking facilities located in Illinois. Any Landlord who is found by a court to have willfully withheld interest on a Tenant’s security deposit must pay the Tenant an amount equal to the security deposit plus the Tenant’s court costs and attorney’s fees.
NOTE: CHICAGO’S SECURITY DEPOSIT RULES AND INTEREST RATES ARE GOVERNED BY THE CHICAGO RESIDENTIAL LANDLORD AND TENANT ORDINANCE.
A lease should specify whether a payment is a security deposit or an advance rental. If it is a security deposit, the Tenant is usually not entitled to apply it to the final month’s rent. If it is an advance rental, the Landlord must treat it as income for tax purposes.
Improvements
Neither the Landlord nor the Tenant is required to make any improvements to the leased property. The Tenant may, however, make improvements with the Landlord’s permission. In most residential properties, any alterations become the property of the Landlord. However, in many commercial leases, Tenants are permitted to install trade fixtures, those articles attached to a rental space that are required by Tenants to conduct their businesses. Trade fixtures may be removed before the lease expires, provided the Tenant restores the premises to their previous condition, with allowance for the wear and tear of normal use.
Accessibility
The federal Fair Housing Act makes it illegal to discriminate against prospective Tenants on the basis of physical disability. Tenants with disabilities must be permitted to make reasonable modifications to a property at their own expense. However, if the modifications would interfere with a future Tenant’s use, the Landlord may require that the premises be restored to their original condition at the end of the lease term at the Tenant’s expense. The Landlord can require that an amount to cover the restoration be held in an escrow account.
Maintenance of Premises
Many states require a lessor of residential property to maintain the dwelling units in a habitable condition. Landlords must make any necessary repairs to common areas such as hallways, stairs, and elevators, and they must maintain safety features such as fire sprinklers and smoke alarms. The Tenant does not have to make any repairs but must return the premises in the same condition they were received, with allowances for ordinary wear and tear.
The Illinois Supreme Course first confirmed the concept of an implied warranty of habitability in residential tenancies in 1972. Since then, Illinois courts have repeatedly confirmed and amplified the warranty. A Landlord must deliver and maintain throughout the duration of the lease any residential leasehold free from defects that would render the use of the dwelling “unsafe or unsanitary” and unfit for human occupancy. Nothing may be present on the premises that could seriously endanger the life, health, or safety of the Tenant.
The conditions that violate the implied warranty of habitability vary depending on the state and jurisdiction where the premises are located. Generally, a Landlord can be in violation by failing to provide access to:
- Drinkable and hot water
- Heat during cold weather
- Working electricity
- A smoke detector
- A working bathroom and toilet
- Removal of rodent or insect infestation
- Building code violations
A Tenant must give the Landlord notice of a defect and reasonable time in which to cure it. As a remedy, the Tenant may choose to
- Move out and terminate the lease if repairs are not made within a reasonable time
- Stay and repair the problem him/herself and deduct the repair costs from the next month’s rent (repair costs cannot exceed one month’s rent)
- Sue for any damages resulting from the defective condition
The obligation to pay rent for damaged or destroyed premises differs depending on the type of property and the lease. Usually, residential Tenants are permitted to reduce their rent payments in proportion to the amount of space they are unable to use. Likewise, Tenants who lese only part of a building, such as office or commercial space, generally are not required to continue to pay rent after the leased premises are destroyed. In fact, in some states, if the property was destroyed as a result of the Landlord’s negligence, the Tenant can recover damages.
Assignment and Subleasing
When a Tenant transfers all his leasehold interests by leasing them to another person, the lease has been assigned. The new Tenant is legally obligated for all the promises the original Tenant made in the lease.
When a Tenant transfers less than all the leasehold interests by leasing them to a new Tenant, the original Tenant has subleased (or sublet) the property. The original Tenant remains responsible for rent being paid by the new Tenant and for any damage done to the rental during the lease term. The new Tenant is responsible only to the original Tenant to pay the rent due. Assignment and subleasing are only allowed when a lease specifically permits them. In both assignments and subleases, details of the new arrangement should be in writing.
In most cases, the sublease or assignment of a lease does not relieve the original lessee of the obligation to pay rent. The Landlord may, however, agree to waive the former Tenant’s liability. Most leases prohibit a lessee from assigning or subletting without the lessor’s consent. This permits the lessor to retain control over the occupancy of the leased premises. As a rule, the lessor must not unreasonably withhold consent. The sublessor’s (original lessee) interest in the Real Estate is known as a sandwich lease.
Non-Disturbance Clause
A non-disturbance clause is a mortgage clause in the Landlord’s mortgage document, stating that the lender agrees not to terminate the tenancies of lessees who pay their rent should the lender foreclose on the Landlord’s building.
Options
A lease may contain an option that grants the lessee the privilege of renewing the lease (called a renewal option). Some leases grant the lessee the option to purchase the leased premises (called a purchase option). This option normally allows the Tenant the right to purchase the property at a pre-determined price (sometimes) within a certain time period, either during the lease or a short time after the lease has expired.
The lease might also contain a right of first refusal clause, allowing the Tenant the opportunity to buy the property before the Owner accepts an offer from another party. Although it is not required, the Owner may give the Tenant credit toward the purchase price for some percentage of the rent paid. The lease agreement is a primary contract over the option to purchase.
