A Brief Introduction About the Life Lease Agreement
Leases involve letting out of a property by its owner for a prolonged period to a tenant on rent. Life leases generally involve a prepaid lump sum from the tenant in order to secure the property. They then get access to the property, generally at a lower rate than the market price.
The agreement grants the right to use the property to the tenant until the term of the lease expires.
These arrangements are generally prominent in the case of non-profits renting out units for a specific group of people, for instance, for people aged over 55.
Who Takes the Life Lease Agreement – People Involved
The agreement is entered between the tenant and the owner of the property. The owner is generally an organization that lets out units of a certain property for use to a number of tenants. The tenant is the person who occupies said property and is generally not allowed to sublet the same. However, in the case of a life estate lease agreement, the tenant may treat the property as his own and rent it out, but only during his lifetime and cannot make any such transfers of life lease agreements to families, legal heirs, or others.
Purpose of the Life Lease Agreement – Why Do You Need It
The purpose of the agreement is to agree upon the terms of the life lease and to decide on the type of lease arrangement. From the point of view of the tenant, it helps in controlling the rent amount and protects him from fluctuations in the market value of the property. At the same time, it provides the owner with a prolonged term of regular income in the form of rents and generally includes a lump sum amount at the start of the term.
Further, the arrangement is generally offered by non-profit organizations, and they rent out the property and community space to persons meeting their criteria — for example, community housing for people over the age of 55.
Contents of the Life Lease Agreement – Inclusions in the Agreement
The general clauses to be contained in the agreement include:
- The name, personal details, and signatures of all parties involved in the agreement.
- The details of the property being let out.
- The term or duration of the agreement.
- The rights and obligations of each party towards the other and the property.
- The legal jurisdiction and validity of the agreement.
- The provisions for resolving conflicts that may arise pursuant to the agreement.
- The proceedings in the event of any violation of the agreement.
Additionally, in the case of this agreement, the following must be included:
- The type of lease arrangement and the method of valuation of the property.
- The details pertaining to the amount agreed as an initial lump sum payment and the periodic rent and maintenance amounts.
- A schedule for the payments, along with the due dates and amounts.
How to Draft a Life Lease Agreement? – Points to Consider While Preparing the Agreement
When drafting the agreement, it is important to keep the following in mind. The type of lease must be carefully selected. The duration of the agreement and the payment amounts follow this decision. The type of lease agreement depends on the entrance fee and the redemption value of the leased property.
The types of lease agreements are listed below:
- Zero Balance – The entire amount is prepaid. The amount is an estimate of the rent for the remaining life of the tenant. There is no redemption value in this case.
- Declining Balance – The amount is paid upfront based on life expectancy. However, in this case, the redemption value steadily decreases.
- Fixed Value – The amount that you pay at the time of entrance is the value you receive at the end of the lease term.
- Price Index – You pay an initial amount that is then indexed to reflect market fluctuations, and the redemption value is calculated.
- Market Value – The entrance and redemption amounts are determined based on actual market values at the time of each transaction.
When negotiating life leases, make sure to discuss and agree upon the following:
- The nature of the lease and the payment structures. This also enables the parties to plan their future obligations towards the property.
- The duration of the lease or the lease term.
- The rights of ownership, use, and transfer of tenancy of the property.
Benefits & Drawbacks of a Life Lease Agreement
The benefits of having such an arrangement in place are as follows:
- It provides an accommodation and community space to seniors, as seen prominently in life lease agreements in Ontario.
- It may allow for ownership at rates below the market value at the end of the lease term or on the fulfillment of certain conditions.
- The owner may provide spaces and rent structures based on the income levels of the tenants.
- In certain states, renting out such property may come with additional tax benefits for the parties involved.
However, we can also see certain disadvantages in these arrangements. They are as follows:
- The units of such properties may have restrictions on who can use the space. It may not be as freely marketable as general properties on rent.
- The tenancy of such properties is not transferable by the tenant. It ends when the tenant dies.
- The financing options for such properties are very limited and not easily available.
What Happens in Case of Violation
In the event of any violation of terms, the agreement can be referred for conflict resolution measures. In case of issues such as delayed payments, a certain amount of time may be given to the parties to rectify the same. In case of any prolonged issue or need for a change in terms, the agreement may also be modified. In case the issues cannot be remedied, the agreement is binding on all its parties and may be presented in the court for legal action.
The agreement is usually for the rent of units of a property and community space by non-profits to specific groups of people. As such, the agreement is entered into by default at the time of applications for such spaces. There are numerous benefits to having the arrangement, and its drawbacks are inherent to the nature of the property.