To lease or to buy? That is the question

(Editor’s note: This is the first of two parts that examine lease and purchase contracts for homebuyers.)

Borrowing from Shakes-peare’s Hamlet, “To lease or to buy — that is the question. Whether ‘tis nobler in the mind to suffer the slings and arrows of outrageous rentals, escalation and landlords, or to take arms against a sea of troubles, and by opposing end them by buying your own property.”

The question of whether a person should lease or buy real property is common. The primary consideration for most is the cost and benefit of either. It would also be helpful to aid a prospective property lessor or buyer to know the basic legal principles and distinction between these two special contracts.

In a contract of lease of things, one of the parties binds himself to give to another the enjoyment or use of a thing for a price certain, and for a period which may be definite (like a year or 25 years) or indefinite. However, no lease for more than 99 years will be valid. A lessor retains ownership rights over the property. Possession, use and enjoyment of the property however are vested on the lessee for the duration of the lease period.

What kind of real properties may be leased? Alienable lands (agricultural lands), private lands and/or improvements thereof, condominium units, buildings, are among the properties that may be the subject of a contract of lease.

The parties to a lease are the lessor and the lessee. The lessor is obliged to 1) deliver the thing which is the object of the lease; 2) to make necessary repairs during the lease to keep the thing suitable for use, unless a contrary agreement is stipulated; and 3) to maintain the lessee in the peaceful and adequate enjoyment of the lease for the duration of the contract. The lessor is also not allowed to alter the form of the thing leased in such a way as to impair the use of the thing.

The lessee on the other hand is obliged to 1) pay for the lease price; 2) to use the thing as a diligent father of a family, devoting it to the use stipulated; and in the absence of a stipulation, to that which may be inferred from the nature of the thing leased, according to the custom of the place; and 3) to pay the expenses for the deed of lease.

As a rule, the lessor is obliged to shoulder necessary repairs. The parties may agree, however, that the lessee will shoulder these repairs. The lessee should advise the lessor within the shortest possible time if necessary repairs should be made.

During the lease, in case of urgent repairs to the property, the lessee is obliged to tolerate the work despite it being annoying or a part of the premises cannot be used. Urgent repairs should be the obligation of the lessor. If the lessor fails to repair, the lessee may order the repair at the lessor’s cost, sue for damages, suspend the payment of rent or ask for rescission of the contract.

Useful improvements made by the lessee in good faith, which are suitable for the use of the property without altering the form or substance of the property, should be paid by the lessor to the lessee at the end of the lease period. The lessor should pay one-half of the value of the improvements at the time. If the lessor refuses to reimburse the amount, the lessee may remove the improvements, even if the property may suffer some damage due to the removal. The lessee should be careful not to cause more impairment than necessary to remove the improvements.

With regard to ornamental expenses, the lessee will not be entitled to reimbursement, but these may be removed, provided there’s no damage to the property, and the lessor does not choose to retain them by paying their value at the time the lease is extinguished.

A lease made for a determinate time ceases on the day fixed, without need of a demand. If the lessee is allowed by the lessor to continue enjoying the property for more than 15 days after a lease expires, it is understood there is an implied lease. The new period may be either year to year if annual; month to month, if monthly; week to week if weekly; and from day to day if rent is paid daily.

Now during the period of the lease, may a lessee assign a lease and sublease? As a general rule, the lessee cannot assign a lease without the consent of the lessor except where there is a stipulation to the contrary.  The reason for this is because an assignment of a lease creates a novation where a substitute debtor steps into the lessee’s position. On the other hand, a sublease is a separate and distinct contract wherein the original lessee becomes a sublessor to a sublessee. In such an event, the sublessee is bound to the original lessor for all acts that refer to the use and preservation of the property leased as stipulated in the original lease.

Again, one of the key distinctions between a contract of lease and contract of sale is that ownership rights are retained by the lessor. The lessee then has limited rights as to disposition, use, improvements and alienation. The lessee has the right to possess, use and enjoy the property subject to these limits. Therefore, if  one wishes to have absolute dominion over a property, he or she must consider acquiring the same by purchase or sale.