The Leasehold Estate

The following is an excerpt from my program titled 'Phillips on Land Title Examination.'

I now introduce you to the leasehold estate. The leasehold estate is a way for a person or entity, known as the lessee, to obtain a right of possession in blackacre, short of actual ownership. The leasehold estate terminates upon the expiration of the specified lease term, or, in the absence of a specified term, upon reasonable notice by either party. Here’s how it works.

Owner: Dave Phillips in fee simple absolute.

On May 1, 2011, Elton John approaches Dave Phillips with the intent of leasing blackacre. Elton’s manager and Dave agree to a lease term of one year, beginning June 1, 2011 and expiring May 31, 2012.

The execution of such lease agreement creates new interests in blackacre, which are:

Owner: Dave Phillips in fee simple absolute.

Lessor: Dave Phillips.

Lessee: Elton John.

The lessor is the person or entity leasing the property out. The lessee is the person or entity possessing the property under the lease. In a traditional lease, it is usually the owner of blackacre that acts as lessor.

I must say, there is nothing particularly difficult regarding the leasehold estate. A lease is a contract between the lessor and the lessee, which contract allows the lessee to possess blackacre. The terms of the lease, as agreed to by the parties, will control the relationship throughout its term.

There are three leasehold estates recognized in Michigan, which are: 1) The Estate for Years; 2) The Tenancy at Will; and 3) The Tenancy at Sufferance. For the title examiner, the distinctions are almost irrelevant. This is because a leasehold estate, of any form, will be set out as an exception to title. That being said, I am a professional. As a professional, I feel it important for you to grasp the basic differences between the leasehold estates. Let me take each in turn.

The Estate for Years:

An estate for years can be defined as: A leasehold estate for a fixed period of time. Interestingly, the time period does not have to be measured in actual years. An estate for years may be for a period of one week, or a period of one year, or any variation thereof. In an estate for years, it is not the duration of the lease, rather the fixed period of time that qualifies the lease as an estate for years.

In most instances concerning a residential lease, this period will be for one year. However, in a commercial lease, this period is often greater than one year. A commercial lease may range from three to ten years, or even longer. Just remember, for an estate for years to be created, the lease itself must be for a fixed period of time.

In the example I used above, Dave and Elton had created an estate for years, as the lease was for a period of exactly one year.

The Tenancy at Will:

A tenancy at will can be defined as: A leasehold estate with no specified duration, which leasehold is terminable by either party at any time. A tenancy at will can be found with or without an actual lease agreement. For instance, an actual lease agreement may be silent on duration, with the ability of either party to cancel the lease at any time, typically with a 30 day notice. The tenancy at will may also be found without any lease agreement at all. For instance, Mike Smith may take possession of blackacre with the consent of Dave Phillips, the true owner. Dave and Mike agree, orally, that Mike’s possession will continue until either party decides to terminate.

In a residential setting, the tenancy at will occurs more often than one might think. I have personally been a party to a tenancy at will. The tenancy at will can function very effectively when both parties are on good terms with one another. For instance, the owner may decide to terminate the lease arrangement once he finds out that keg parties are a common occurrence on the premises. But who knows, maybe the owner would enjoy the festivities during football season. Oklahoma Sooners, baby! Just remember, the tenancy at will can be created with or without an actual written lease, and it is terminable by either party at any time; usually with reasonable notification to quit.

The Tenancy at Sufferance:

The tenancy at sufferance, although recognized as a leasehold estate, can be more accurately described as a "fictitious" estate. It is an estate created for the purpose of dealing with a tenant that won't vacate. The tenancy at sufferance can be defined as: A leasehold estate which is created by the holding over of a tenant at the end of a valid lease term. The typical scenario is this: Dave Phillips, lessor, and Mike Smith, lessee, enter into a one year written lease, which lease qualifies as an estate for years. At the end of the one year period, Mike Smith refuses to leave. At this moment, Mike Smith is considered a hold-over tenant and the tenancy at sufferance is created.

Question: What is the relevance of the tenancy at sufferance?

Answer: The tenancy at sufferance, once established, creates significant rights in the original lessor. The original lessor, Dave Phillips in our example, may either 1) evict Mike Smith, or 2) hold Mike Smith to an additional term of one year. A court may or may not agree with Dave’s position to hold Mike to another year, but, historically, the tenancy at sufferance would give Dave such a right. The bottom line is this: the tenancy at sufferance swings the pendulum in the original lessor’s favor. In either scenario, Dave’s interest will ultimately be protected.

The Memorandum of Lease:

As we know, a lease is a contract between the lessor and the lessee. Oftentimes, the parties do not wish to record the entire lease agreement. They desire the contents of the lease to remain private. In lieu of recording the entire lease, parties will often record a Memorandum of Lease. Like the memorandum of land contract, the memorandum of lease allows the public to receive record notice of the existence of the lease, without disclosing the terms of such lease.

A lease will affect either residential or commercial property. A potential lessee of either residential or commercial property will often seek title insurance. Similar to the land contract vendee, the potential lessee is looking for assurance that the land they are seeking to lease will not be fraught with danger and potential litigation.

dave