What is a Mid Term Lease Agreement?
For a residential tenancy agreement to be classified as a ‘mid term lease’, the residential tenancy must be expected to have a duration between 3 months and 5 years. In other words, the lease is not for a short term or a long term. Short term residential tenancy agreements run for 3 months or less – for example , a weekend renting a cabin in the bush or on the coast. Long term residential tenancy agreements run for more than 5 years. A tenancy agreement that runs for 1 year to 5 years is classified as a mid term residential tenancy agreement.
If a lesser duration than this 3 month period is agreed by the parties, it is classified as a short term arrangement.
The Act will presume that the parties intended to enter into a mid term residential tenancy agreement if they fail to make this plain and the duration of the tenancy is 3 months or more.
Advantages of Mid Term Lease Agreements
Mid term lease agreements, as the name suggests, lie between long term commercial lease agreements and short term commercial lease agreements. The Huddersfield Landlord and Tenant Guide provides a comprehensive overview of the different types of lease agreements, but puts mid term agreements firmly under a separate heading. Mid term agreements blend the best of both worlds, incorporating the flexibility of short term leases with the security of long term commercial agreements.
Flexibility
For tenants, mid term lease agreements can be very flexible. For example, a tenant leasing commercial office space can take on additional space quickly, without the commitment of a long term agreement. Suppose A Ltd rents out the office space that it does not need to its client B Ltd. This could be in order to build a business relationship between A Ltd and B Ltd, or it could simply be to get B Ltd into the space with the least amount of downtime on A Ltd’s part.
Cost-Effectiveness
The security offered by mid term lease agreements is much more cost-effective than that offered by the alternatives. Suppose A Ltd enters into a 12 month commercial tenancy agreement with a rental rate of £5000 per month; instead of A Ltd having to pay £60,000 up-front for the whole year, it can now pay £45,000. If A Ltd’s financials change and it can no longer meet its commitments at the end of the 12-month period, it will have given up only £45,000 rather than £60,000. Likewise, the landlord of the rented space also benefited from the reduction in monthly payments. The same property would not have rented for £5000 per month for 12 months if being offered on a lease agreement basis; rather, it would likely have rented for around £6000 per month for the same duration.
Stability
Landlords also benefit from mid-term lease agreements because they can advertise them as offering longer durations than standard short-term agreements; they can use them as an opportunity to test the water with a new tenant whilst retaining the option to increase rent the following year.
Essential Aspects of a Mid Term Lease Agreement
Key components of a mid term lease agreement should include:
• Rental amount – how much the tenant pays the landlord to occupy the space
• Length of tenancy – how long the individual is allowed to stay in the commercial space
• Amount of notice a tenant has to give a landlord before vacating
• Amount of damage deposit a tenant has to place on file with the landlord, especially important for any purely furnished office rental agreements
• Any utilities (i.e. electricity, water etc.) that are included or excluded from the rental amount so as not to incur any extra or unexpected charges
• Property maintenance responsibilities: the lessor typically takes care of the basic integrity of the building, but the lessee generally is required to repair any inside damage
• Landlord rights: in general, landlords are not allowed access of rented property without notice; however, some landlords might have grounds to allow access without notice for suspicious activity, plumbing problems etc.
• Tenant rights: tenants are entitled to fair treatment and maintenance of the space to which they are leased to, as well as enjoyment of the space without landlord interference (unless allowances are granted)
• Renewal terms: common to many pure space leases, it allows tenants to either renew or extend the agreement
• Lease termination clauses: grounds upon which a landlord can terminate a lease agreement, as well as tenant rights and responsibilities regarding a termination or early termination request
• A signature section: as with any other commercial lease agreement, both parties should include signatures allowing of validity to the contract.
Common Mistakes in Mid Term Lease Agreements
Challenges and potential pitfalls of mid term lease agreements include:
1. Failure to obtain the landlord or landowner’s consent
The most common problem is inadequate language in the lease agreement regarding third-party consents. For a mid term lease to be enforceable against the owner of the property, the landlord must lease the property and consent to the use and the activities of the subtenant on the property. If the lease terms or implied or express covenants limit the use of the property, for instance, to certain kinds of activities, the landlord must approve. Similarly, landowners who lease property (eg, farmers who lease land to tenant farmers) must consent to the lease agreement for the subtenant (possibly the farmer’s competitor) to undertake specified activities on the property. If the landlord does not consent, the lease may not be enforceable and the subtenant’s occupancy may be tenuous. This problem is more common for agricultural mid term leases than for commercial mid term leases.
2. Co-tenancy exceptions
Some agreements provide that if a subtenant occupies space for a certain period of time, the subtenant obtains certain rights associated with the space. In some circumstances subtenancy may convert to tenancy, where the subtenant becomes subject to the terms of the master lease, including obligations for the payment of rent. A farmer who occupies the space for certain period of time under a sublease may acquire rights under the master lease. A commercial retail tenant may negotiate a co-tenancy clause in a commercial lease. A co-tenancy clause allows the commercial tenant to occupy space at the center at which it is located for a period of time for a minimum rent if an "anchor" tenant, such as a national store chain, is not fully operational in the center .
3. Subordination clauses
Subordination clauses allow a lease agreement for an attractive space to be subordinated to another lease on the same space. For example, a hotel owner may negotiate a management agreement with a hotel operator for the operation of a hotel. The operator needs flexibility to sublease rooms during slow seasons, but wants to ensure that the management agreement will continue if the owner decides to lease the property to another hotel operator. In this case, the management agreement may be subordinate to the lease to a tenant who is not an affiliate of the owner.
4. Failure to agree on conduct of the parties
This issue is particularly important in commercial real estate leases, where the conduct of the landlord and tenant can have a significant impact on the success of the enterprise. Landlords and subtenants should reach agreement on the conduct of the parties (and any third parties) for the duration of the agreement. For example, in a hospital or medical setting, a landlord entering into a lease with a physician group may want its affiliate, such as a hospital, to provide certain services (such as laboratory services or affiliate physicians as practice partners). The physician group, in response, may want patients to have the option of using other providers for the same services. Does the hospital or any affiliated physicians thereby have implied exclusivity? What are the in-patient admission guidelines? If there is a dispute, how will the parties resolve the dispute? By arbitration, mediation, or court adjudication? The number of choices seems vast.
Legal Requirements and Compliance
Like all other documents, legal considerations must be upheld and adhered throughout the drafting, execution and enforcement of mid term lease agreements. Depending on the locality, there may be several real estate laws and regulations that apply to the relationship between landlord and tenant, some effective at protecting or restricting the other party. For instance, when setting a security deposit amount, the agreement must comply with the local laws regarding security deposits in residential leases. And if a dispute arises, the courts will always look to the statutory requirements first, so it is not wise to attempt to skirt the law as a landlord or tenant.
Many common law principles also apply to mid term lease agreements, particularly when it comes to reasonable accommodation and limitation-of-liability issues. For example, the common law claims of waiver, estoppel and equitable relief also come into play, where one party’s reliance upon the other’s promises can estop that party from claiming a loss or right of action (i.e., the landlord allowing the tenant to stay in occupancy of premises for longer than the agreed term without a renewal may claim an estoppel to the right to claim possession because he landlord waived the right of lease termination). Likewise, equitable relief (specifically, specific performance) may require the landlord to comply with other parts of the agreement that were initially disregarded in order to prevent unjust enrichment.
Choosing to Use a Mid Term Lease
Finding the right lease term is often key to ensuring that all parties are satisfied with the result. These time commitments, however, are not always a one-size-fits-all option. There are many reasons why a mid term lease agreement may be more appropriate. For example, when leasing commercial properties like retail stores or office space, a mid term period lasting anywhere from six months to two years may be desirable. This can make up for the lengthy time it can take to negotiate the lease in the first place.
Savvy landlords recognize that tenants have many different reasons for wanting shorter lease terms. Not only is this true for economic reasons, but also as a means of flexibility and opportunity should better options become available. A business may want to test a market in the eyes of investors, so a mid term lease can provide some time to judge its viability. New businesses, particularly in areas that may be facing economic downturns, may not want to tie themselves down to a long-term lease if their ability to continue to business is in question. Of course , longer leases can provide visibility and profitability for landlords, but a mid term option can provide a greater ability to test new markets or validate the continued occupancy of a given property.
A mid term lease can also be appropriate for an existing business that is looking to confirm its continued profitability in a certain location before making a longer-term decision. This can be particularly true for a business that is relocating from another area within the same city or state. In these cases, there may be great uncertainty as to the potential success of the expanded business model.
While most commercial lease agreements are categorized as being for either one-year or five-year periods, mid term leases can be valuable to all parties. Businesses expanding into new areas can explore new opportunities and spaces, and landlords can offer new businesses favorable economic terms that can open the door to better long-term tenants and more consistent revenues.