Rent is Rent is Rent. Or, is it?

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Rent is such a simple thing. It is covered in every lease. Those who draft leases get told how much the rent will be and that’s it. After all, “rent is rent.” It’s just a number. So, why is Ruminations about to talk about rent? To find out, read on.

In olden times when leases were not much more than an exchange of money from a “tenant” to a property owner (landlord) for an interest in real property, i.e., for an estate of limited duration, things were much simpler, so to speak. In essence, a lease was a document of conveyance and the rent paid for the right to exclusive possession of the leased property for a stated term, much like the purchase price for a deed. [That’s all we are going to say, today, about the mix of conveyance theory with contract theory that underlies today’s leases.] [Read more…]

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The Rent Has To Start Sometime. So, Why Doesn’t The Lease Say So?

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Everyone knows that “the rent has got to start sometime.” So, why do we see leases where that might not be true? In the most common such scenario, rent will begin “X” days after the tenant gets all of the final and unappealable permits it needs to adapt the leased space for its intended use. If a landlord were planning to use the rent money for an around-the-world vacation trip, what should its booking date be? [Read more…]

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What Would Rent Insurance Be If There Were Such A Thing?

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So, the lease requires the tenant to carry a policy of “rent insurance” or requires the landlord to carry a policy of “rent insurance” or, worse, requires both of them to do so. What does that policy say and how does it work?

Trick question! You won’t find a rent insurance policy. You may find a commercial property insurance endorsement providing coverage for “rental value,” but don’t look for “rent insurance.” While you are at it, don’t call it: “rental interruption insurance,” “rent loss insurance,” or “rental income insurance.” Those are nice concepts, but lack any precise meaning. If you want to call it “use and occupancy insurance,” go ahead, but that form of policy is long, long gone. [Read more…]

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You Can’t Just Tell an Appraiser to Find The Fair Market Rental Value

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In a lot of deals, especially for long term leases, rent will be reset to “Fair Market Rent.” Following the convention, we’ll call that FMR. This could happen at renewal time or, typically with a long-term ground lease, every 10 or 20 years. Rightly concerned that crystal balls aren’t very good at knowing what the market will look like 10 years or more down the road, landlords and tenants, each for their own reason, often resort to resetting what would otherwise have been a continuation of some stream of fixed annual rent increases, say 3% a year or 10% every 5 years (yes, those aren’t the same increases). Effectively, the lease would say (and we paraphrase, not suggest usable lease language): “on the 10th (or 15th or 20th or 25th, etc.) anniversary of the Rent Commencement Date, Base Rent shall change to FMR. If by the 180th day before that anniversary, the parties have not agreed as to such a FMR, then each party shall designate a Qualified Appraiser, who shall [opine as to FMR]. If they don’t agree, then they shall jointly choose a third Qualified Appraiser… .” [Read more…]

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