Real Estate 2024 Comparisons

Real property law in the USA is primarily derived from the common law of the states and has been modified over time by statute. Certain aspects of real estate law are governed by federal law. For example, discrimination in real estate transactions on account of race, colour, religion, sex or national origin is prohibited by the Federal Fair Housing Act. Environmental issues affecting real property are typically governed by federal law.

The US real estate market, while typically volatile, is affected by various macroeconomic factors.

• Persistent High Inflation: While the rate of inflation in the USA has generally decreased, the inflation-affected cost of goods, labour, and real estate prices, remain at all-time major market highs. Rental prices remain high. The increased cost of labour and materials has also impacted the costs of owning and operating commercial real estate. Further, these factors have affected the ability of commercial tenants to operate profitably while paying the rents that landlords require. The combination of these negative factors has had an impact generally on the commercial real estate market, which has countered, somewhat, the upward inflationary pressure.
• High Interest Rates: High federal funds rates above 5% and mortgage rates over 7% discourage home upgrades and new construction, keeping housing inventories low and prices high.
• Geopolitical issues: Geopolitical events have become further inflamed in the past year. The war in Ukraine entered its second year and, beginning in October 2023, the Israeli-Hamas war and its spillover also affected global markets and political affairs. These uncertainties typically have a restraining impact on real estate pricing.
• Low Residential Inventory: Low rates of homebuilding and persistently high demand keep inventories tight. There was a 4.1% median home price increase in March 2024.
• Low Vacancies in Multi-Unit (Rental) Properties: Many large US cities have low vacancy rates in residential rental units, resulting from competition between potential renters leading to continued upward price momentum (although some smaller market cities have shown a cooling in prices as the rate as the rate of in-migration has slowed). For example, the 2023 New York City Housing and Vacancy Survey (released in 2024), indicated an all-time low vacancy rate of 1.4% of the city’s total rentable housing stock.
• Office Space: Office vacancies persist post-pandemic, with hybrid work leading to downsizing. Tenants that traditionally occupy large amounts of space in the tech, financial and legal sector have opted to downsize their space as leases expire. A survey taken at the end of 2023 suggested that upwards of 75% of commercial office tenants are considering downsizing their spaces; compared to 45% who were considering the move in 2022.
• Retail Space: The demand for commercial retail space depends on its location. However, the retail market has recovered far better than its commercial office space counterpart. Online purchasing, however, remains a competitive factor.
• Blockchain Developments: Blockchain offers transparency for real estate transactions, but adoption thus far has mainly been for retail trading. Major firms like Blackrock and Vanguard now offer Bitcoin ETFs for easy trading access.

The National Association of Realtors (NAR) (in Burnett v The Nat’l Association of Realtors) recently settled a landmark anti-trust litigation which accused real estate brokers of artificially inflating sales commissions. As part of the settlement, NAR agreed to eliminate long-standing commission regulations and the facilitate easier commission negotiation between buyers/sellers and their agents. It is hoped that the settlement will stimulate home sales by creating downward pressure on commission rates (as high as 6% of the sale price in large markets). It would not be surprising if further legislation springs from this development.

Property rights come in various forms:

• Fee simple ownership: Full ownership rights over the property, including selling, leasing, devising, or mortgaging the property.
• Leasehold ownership: Exclusive rights to possess the property for a set term, with tenant protections, including but without limitation, rules governing eviction and security deposits.
• Occupancy interest (licence): Permission to use the property for a specific purpose, which can be revoked at any time and cannot be transferred.
• Easement: A non-possessory interest allowing another to use the property for a specific purpose, which "runs with the land" and can be transferred.

States have enacted real property laws that set forth the requirements necessary to transfer title to real property. Typically, a transfer of ownership is completed upon the delivery by the seller and acceptance of the deed by the buyer. Recording a deed is essential to protect property rights, as unrecorded deeds may be deemed void against subsequent bona fide buyers. Local governments set the recording rules and procedures.

Many states and local governments have enacted laws that impose a transfer tax (known as a deed, stamp, or recording tax) on the sale of real estate. Some jurisdictions impose additional taxes, such as "mansion taxes," which are based upon the selling price of residential properties. 

Title to real estate may also be transferred pursuant to the common law principle of adverse possession, in which a trespasser may claim title to another’s land, or portion thereof, if certain conditions are satisfied. The conditions, typically set by state statutory law, generally require that a trespasser occupy the property in an "open and notorious" manner for a defined period of time.

Additionally, many states have property condition disclosure laws in connection with the sale of residential properties.

A lawful transfer of title to real estate is effected by first entering into a written contract of sale. Most US states have a so-called "statute of frauds," which requires that agreements pertaining to the sale of real property be in a writing that is signed by the parties.

It is common practice for buyers of real estate to obtain title insurance which insures the buyer against loss in the event that the seller did not have marketable title. It also protects the buyer from incurring expenses in connection with any lien that may be recorded prior to the buyer recording the deed.

As a consequence of the COVID-19 pandemic ("the pandemic"), many jurisdictions implemented new procedures to permit notarisations to be conducted remotely and allow for the electronic filing of documents. Many states have made these laws permanent.

A contract for the purchase of commercial real estate typically provides for a due diligence period in which the prospective buyer may engage in the following activities:

• inspection of the physical property, including an environmental inspection;
• review of financial information pertaining to both income generated by the property and the costs of operating the property;
• review of tenant leases;
• obtaining a title search and survey;
• review local zoning and land-use regulations; and
• judgment and lien searches

Sellers often require prospective buyers to sign non-disclosure agreements before providing the buyer with documents and financial information during the due diligence period.   

Representations and Warranties

Commercial properties are typically sold in "as is" condition and without representations or warranties regarding the state of title or the condition of the property. During a due diligence period, a prospective buyer usually purchases a title report to ensure that the seller has marketable title and to learn of any encumbrances affecting the property. Prospective buyers may also retain professionals, such as engineers, architects, and environmental analysts, to assess the property’s condition.

Commercial property will, however, typically makes the following contractual representations:

• that it has the lawful authority to enter into the transaction;
• that the "rent roll" and lease schedule (usually included as exhibits to the purchase contract) are true, complete, and accurate and that there are no obligations between the owner and tenants excepts as set forth in the leases or any amendments or modifications thereto;
• whether there is any dispute, threatened claim or litigation affecting the property or the obligations of the seller; and
• the status of any financing affecting the property.

When the sale of real estate involves transferring leases, the buyer generally requires the seller to obtain "estoppel certificates" from the tenants, which serve to confirm the terms and current status of the leases (important following the pandemic in which many leases were modified) and bars the tenants from asserting any claims that contradict what is stated in such certificates. Few new representations or warranties have resulted to specifically handle the effects of the pandemic. 

Buyer’s Remedies Against Seller for Misrepresentations

In commercial real estate, if a buyer discovers a material misrepresentation before the closing, the buyer can terminate the contract and seek damages. If the buyer discovers a material misrepresentation after the closing, and if such representation survives, buyer can seek damages, equitable relief, or, in limited cases, rescission. Representations and warranties made by the seller may not survive closing, but the parties can negotiate for some to last for a limited period, usually up to one year.

Representation and Warranty Insurance

Purchase representation and warranty insurance is uncommon, except in large REIT share sale transactions and in mergers and acquisitions, where the damages that may result from a misrepresentation justify the premium costs. 

Land use and tax law are two of the most important areas of law for an investor to consider when purchasing real estate. Investors need to have a comprehensive understanding of applicable regulations affecting the use and development of the property. They should also be aware of any pending or potential changes to the applicable zoning codes, such as whether an area may be "up-zoned," so that future developments may be larger than what is currently permitted.

It is also important to understand which federal and state tax laws apply to the investment property, how they are calculated, and if there are any "caps" on incremental increases, as tax expenditures directly affect investment returns. Investors should also consider whether the property benefitted from any deferred taxes based upon a land use exemption and whether the property, if acquired, would continue to be eligible for such exemption

Buyers of commercial real estate can be held liable to remediate contamination that arose prior to acquiring the property, but they can take measures to avoid such liability. Buyers typically hire professionals to conduct a Phase I Environmental Site Assessment during the due diligence period, in which current and historical uses of the property are analysed to assess whether or not such uses may have contaminated the soil or groundwater beneath the property. It is often recommended that a Phase II Environmental Site Assessment be conducted, in which soil and water samples are taken to be analysed for contaminants. If contamination is discovered, the property owner is responsible for the remediation costs pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), which is the main federal statute that regulates remediation of hazardous substances that pose a threat to the environment and to public health. Conducting a Phase I ESA prior to closing can be used to comply with the requirements of CERCLA’s safe havens for bona fide prospective purchasers and innocent landowners, in which liability for remediation costs can be reduced or eliminated.

A prospective buyer can ascertain the permitted uses of a parcel of real estate by examining the property’s certificate of occupancy (or comparable instrument) and by researching the applicable zoning code and land-use regulations.

It is common for developers to enter into specific development agreements with relevant public authorities in order to facilitate a project. For example, a developer may agree to contribute to a fund to help pay for investments in public infrastructure. These agreements can help developers obtain the necessary "buy-in" from elected officials and community groups needed to proceed with a project.

Federal, state and local governments have the right to exercise the power of "eminent domain," which permits the government to "take" private property, provided that the property is used for a public purpose or to benefit the public. The 5th Amendment to the United States Constitution requires the government to provide "just compensation" to private property owners for the "taking" of their land. Jurisdictions differ in what qualifies as a public use.

Most states counties and municipalitiestax real estate transfers based on a percentage of the purchase price. Sellers typically pay the transfer taxes, but the parties may agree otherwise. Certain types of transfers, such as transfers made pursuant to bankruptcy proceedings, may be tax exempt. Some states also impose a transfer tax for indirect transfers, such as when there is a transfer of a controlling interest in a company that owns real property.

Foreign investors can generally acquire real estate without restrictions, the USA Patriot Act prohibits US individuals and businesses from entering into real estate transactions with certain individuals, entities, and foreign governments. The US Treasury Department’s Office of Foreign Assets Control maintains a list of such restricted parties. There are several other federal laws and regulations that apply to foreign investments in real estate, including, but are not limited to, the Foreign Investment in Real Property Tax Act, the Agriculture Foreign Investment Disclosure Act of 1978, and the Tax Equity and Fiscal Responsibility Act of 1982. These laws generally impose reporting or disclosure requirements in which foreign investors report the real estate transaction to the appropriate federal agency by submitting information returns. Additionally, some states prohibit foreign investors from purchasing land and others limit the amount of certain types of land that can be acquired.

The Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) expanded the reach of the Committee on Foreign Investment in the United States (CIFUS), which is vested with the authority to prohibit foreign investments that it determines would adversely affect national security. CIFUS now has the authority to review the purchase or lease of controlling and non-controlling interests in real property acquired by foreign persons located in close proximity to sensitive government facilities, such as military bases and airports. If the parties to a real estate transaction believe that the transaction falls within CIFUS’s purview, they should, but are not required to, file notice with CIFUS to seek its approval.

The commercial real estate private lending market is very large, with about USD4.69 trillion dollars in outstanding commercial and multi-family mortgage debt. The sources of capital are diverse and encompass traditional lenders, such as large financial institutions, as well as private debt funds and real estate investment trusts (REITs).

Private debt funds, which lend short-term capital to potential real estate investors, are backed by private equity. Interest received from the debt is then distributed to the fund’s investors. Private debt funds grew following the 2008 financial crisis during which traditional lenders were struggling and more stringent rules were created, to apply to borrowers.

REITs are publicly traded companies set up to own and operate large commercial properties. REITs are funded through the sale of securities to investors.

Lenders typically require commercial property owners and developers to put up the property being acquired or developed as collateral on the loan. The borrower may also be required to provide a personal guarantee, meaning that the borrower will be personally responsible for the debt, if the collateral is insufficient to cover it.

Foreign lending activity is generally not restricted in the USA, however foreign lenders may be required to obtain licensure in the states where the lending activity occurs. Depending upon the circumstances, national security clearance may also be required.

The recording of a mortgage usually requires the payment of mortgage fees and taxes, which vary from state to state. For example, in New York City, the mortgage recording tax requires purchasers to pay 1.8% on mortgage amounts under USD500,000 and 1.925% on mortgage amounts exceeding USD500,000.

In order for a security interest to attach to collateral, the debtor entity must enter into a security agreement with the lender and provide proof that it has clear title to the collateral. The mortgage or deed of trust then must be publicly registered where the land is located in order to establish the security interest in the real property.

When a borrower is in default of a loan secured by a mortgage on commercial property, the lender may pursue a "foreclosure" of the mortgage. The foreclosure process varies from state to state. In New York, for example, all foreclosures are judicial foreclosures (requiring a lawsuit to be commenced).

In many states, liens follow the "first in time, first in right" rule, meaning that whichever lien is recorded first will have priority when the funds from a foreclosure are paid. However, there are exceptions. For example, judgment liens typically have a lower priority than mortgage liens. Also state law may prioritise certain types of liens, such as tax liens.

Foreclosure actions may take about 15 months to be concluded.

During the pandemic, various states placed a moratorium on evictions and foreclosure actions. However, these moratoriums have expired, and normal activities have resumed.

When a new creditor wants to become the senior lender, the existing lender must consent to "subordinate" its superior claim, which is achieved through a subordination agreement defining the creditors' priority. While subordination may seem disadvantageous, it can be advantageous, such as when a lender agrees to subordinate its mortgage to a construction loan to improve the property's marketability. Some buyers consolidate and extend existing and new debt ("consolidation and extension") over the property.

Generally, a lender holding or enforcing security over real estate is not liable under environmental laws, provided that it does not participate in the management of the property or participate in, create or make the environmental issue worse and obtains an exemption under CERCLA.

A borrower’s insolvency does not affect the validity of a mortgage granted to secure an obligation. However, the filing of a bankruptcy petition has the immediate effect of staying the foreclosure process. A lender can seek relief from the automatic stay to enforce its security interest, if it shows "cause," such as the debtor having no equity or uninsured property. If granted, the lender can proceed outside the bankruptcy.

States and municipalities typically leverage taxes on newly recorded mortgages. See 3.4 Taxes or Fees Relating to the Granting and Enforcement of Security for an example of the recording taxes imposed by New York State and the City of New York.

In January 2023, the Mezzanine Debt Bill, introduced in the New York State senate, imposed a tax on the creation of mezzanine debt and preferred equity on borrowers owning real estate. The bill (currently in committee), if passed, would require a secured party to pay a mortgage recording tax prior to having the right to enforce the security interest.

Local governments create zoning codes to regulate property use and building construction. "Bulk Provisions" set height, setback requirements and lot coverage limitations for buildings on individual parcels of land. Some localities have formal processes in which the public’s input is included in the decision-making process with respect to proposed zoning changes, disposition of government owned real estate, and site selection for capital projects (sanitation garages, fire houses, libraries, etc). Additionally, localities sometimes enact development plans to achieve specific purposes, such as enhancing public access to parkland or limiting how proximate certain types of businesses, such as bars, can be to schools or religious entities.         

Many states and local governments use model building codes from the International Code Council to establish minimum construction related standards and procedures. Local jurisdictions may adopt stricter regulations than model codes to protect against known environmental hazards, such as earthquakes, or to meet stricter energy efficiency goals. Local governments can also designate landmarks and historic districts to regulate building design and appearance.

Local governments typically enact zoning codes that regulate the use and bulk of individual parcels of real estate. Additionally, jurisdictions may have independent review boards or appeals boards that have authority to grant a property owner a variance or special permit to either develop or use a parcel of land in a manner that does not conform with local land-use regulations. 

If a development complies with zoning codes, it can proceed "as-of-right." If not, then a developer may apply for variances, special permits, or seek modifications to the zoning code in order to proceed, which typically involves a public hearing. To build larger than the zoning allows, developers may seek to acquire "air rights" from other properties to increase the allowable building size.

Decisions made by local land-use boards and legislative bodies regarding zoning and land use are generally appealable by commencing a judicial action within the appropriate locality. However, jurisdictions typically establish high standards of review on appeal, such as whether a determination was made in an arbitrary or capricious manner or whether it was "fairly debatable" and supported by substantial evidence. 

It is common practice for developers to enter into agreements with local governmental authorities or agencies to facilitate the approval of proposed development projects. Agreements may provide that a developer make improvements in public transit infrastructure or create privately-owned public spaces in exchange for the right to "overbuild" the property. 

Permits or certificates are required to use and occupy a building (see 7.7 Requirements Before Use or Inhabitation). Inspections and resolution of any issues are required before their issuance. Owners that open up their buildings to the public without the necessary permits or certificates in place may be subject to fines and other actions. 

Real estate investments in the USA may be held in virtually any type of legally recognised business entity. Entity structuring has three main components: compliance, legal and tax. Generally, most real estate owners or investors prefer using either a limited liability company (LLC), a “subchapter S” corporation, or a limited partnership, as their entity. The issue of choosing the type of business entity to be utilised should be explored with knowledgeable professionals such as an attorney and an accountant.

LLCs are popular among real estate investors for their "pass-through" taxation, limited liability, and flexibility in operations and profit distribution. They also offer easier transferability of ownership compared to other entities and have minimal recordkeeping requirements.

S corporations are tax-designated entities under the Internal Revenue Code, suitable for real estate investors aiming to quickly profit from property flips. They offer limited liability and asset protection, but have limitations compared to LLCs, such as a 100-shareholder limit and a single class of stock. S corporations also require more formal management and record-keeping than LLCs and limited partnerships.

High-end commercial real estate investments are often structured as limited partnerships, with a general partner (GP) managing the partnership and limited partners (LPs) contributing capital, but not participating in management. The GP has unlimited liability, while LPs are only liable for their invested capital.

Limited liability limited partnerships (LLLPs) are a newer type of business entity that shield the general partner from personal liability, but are not yet widely used or recognised in all states. With 31 states and some territories allowing LLLPs, there is less legal precedent for LLLP related litigation, making outcomes less predictable.

While other entity types (C corporations or general partnerships) may be used for owning real estate in the USA, they are less commonly used than the types of entities discussed above, although C corporations are typically used when the "investor" is a 401(k)-retirement fund.

LLCs are formed by filing a Certificate of Formation (or Articles of Organization) with the state’s secretary of state (or similar agency) and paying a fee. They are governed by an Operating Agreement covering economic rights, management, and member rights like transferring interests or handling interests in the event of death or disability.

If the LLC has one member, the member manages the entity. If the LLC has multiple members, then the entity may grant one member "day-to-day" control over the business (the Managing Member), or the entity is "manager managed" where the entity is either managed by a non-member manager or by a board of directors or board of managers, that may delegate day-to-day authority to officers, as with a corporation.

Corporations, including S corporations, are typically formed by filing a Certificate of Incorporation (or Articles of Incorporation) with a state’s secretary of state (or similar agency) and paying a filing fee. They are governed by bylaws for directors and shareholders, and often require annual (or more frequent) meetings of the shareholders.

Limited partnerships are typically formed by filing a Certificate of Limited Partnership with a state’s secretary of state (or similar agency) and paying a filing fee. Limited partnerships are governed by a limited partnership agreement which outlines each partner's roles and responsibilities, as well as how they share in the profits.

REITs invest in real estate, leasing and collecting rental income. REITS are subject to complex tax rules and regulations, they may provide significant tax advantages for their investors. A REIT must be formed as an entity that is taxable (federally) as a corporation.

It must be governed by directors or trustees, and its shares must be transferable. Investors receive profits in the form of dividends or as "appreciation," upon the disposition of assets purchased by the REIT. REITs are commonly investment vehicles available throughout the USA, and they can be classified as either public or private, traded or non-traded. Publicly traded REITs, which are regulated by the US Securities Exchange Commission (SEC) are easy to liquidate. Private REITs which are not traded on in the securities markets, are therefore, generally less volatile, and not as easy to liquidate. Private REITs may sell securities to qualified institutional investors and to sophisticated so-called "accredited" individual investors. Investing in US REITs can be a beneficial investment approach for certain foreign investors. Foreign investors may benefit from investing in US REITs as they may receive ordinary dividends, capital gains, and return-of-capital distributions, and through tax planning, they may reduce their US tax liability.

Some states have no minimum capital requirement for business entities, while others may require a small amount like USD1,000. There's no minimum capital requirement specifically for real estate entities. However, lenders and other third parties may impose their own capital requirements. Inadequate capitalisation of the entity could expose owners to personal liability, by piercing of the "corporate veil."

State laws govern LLCs, corporations, and limited partnerships, setting default rules for governance and operations, unless the entity’s owners have provided otherwise in their governing agreements. For example, state laws may require that a certain threshold of votes be met for the entity to approve certain matters or transactions.

LLCs provide their members with a great deal of flexibility with respect to how the entity is structured, managed and operated, whereas S corporations (and C corporations) have stricter governance requirements and offer less flexibility. In limited partnerships, the general partner(s) provides the governance and management function, while the limited partners typically have limited voting and control rights over the entity’s affairs.

Effective 2024, a new federal law, the Corporate Transparency Act requires the disclosure of certain basic information regarding the ownership of entities that have been formed in the USA.

Forming and organising a business entity in the USA varies by state, costing several hundred dollars for filing documents and for using a filing agent. Some states require publication of formation documents, which adds additional filing costs. Maintaining an entity involves the filing of annual reports, the payment of additional small filing fees, and franchise taxes, with accounting compliance costs varying based on entity type, income, assets, and the entity’s state of operation.

The most common arrangements to occupy and use real estate for a limited time without buying it outright include leases, ground leases, licence agreements and easements.

A lease is a contract outlining the terms under which the tenant or lessee is permitted to use and occupy the premises and providing that the landlord will receive regular payments for a specified period of time. Leases are commonly used to rent retail space or occupy an office or residences. 

A ground lease (or land lease) is an agreement in which a tenant is permitted to develop a parcel of real property during the lease period, after which the land and all improvements are turned over to the property owner. Typically, ground leases involve leasing land for a long period, often between 50 and 99 years, to a tenant who will develop, construct and operate a building on the property during the lease term. Ground leases are typically financed by tenants in a manner similar to how property owners utilise mortgage financing.

While a lease grants possession of real estate, a licence grants only the right to engage in specific activities, typically for a limited, sometimes brief, duration. Examples of licences include a right granted to a vendor to sell its product(s) on the licensor’s property, a right to hold an event such as a concert, on licensor’s property, or to place a vending machine thereon.

An easement is a legal right that allows the holder of the easement to use property that it does not own or possess, for a specific purpose. For example, an easement may allow a utility provider to enter onto a property in order to install or maintain electrical infrastructure. Some easements are said to "run with the land" so that they continue, or "run with the land," upon the property’s transfer. Other easements are referred to as being "in gross," meaning that the easement is "personal" to the holder and does not "run with the land" upon the property’s transfer.

Commercial leases generally include gross leases, net leases, percentage leases, variable leases and ground leases. Gross leases, which are typically described as either "full-service" or "modified" are primarily used for office or retail space. In a "full-service" gross lease, the tenant receives one invoice covering the base rent, utilities, insurance and tenant’s share of taxes and common area maintenance costs; and the landlord pays all such amounts to third parties, as necessary. A "modified" gross lease typically occupies the middle ground between a gross lease and a "triple net" lease, where the tenant pays base rent, utilities, and a portion of operating costs.

Triple net leases are long-term agreements where tenants pay most operational and maintenance expenses for commercial buildings, warehouses, or industrial spaces. Landlords are typically responsible for external structural repairs.

In a "double net" lease, the tenant typically pays the landlord the base rent together with tenant’s pro rata share of real estate taxes and insurance; and the landlord is responsible for the costs of common area maintenance and making structural repairs. 

In a "single net" lease or "net lease," the tenant pays the landlord the base rent and tenant’s pro rata share of real estate taxes; and the landlord is responsible for paying the various other building expenses and making structural repairs.

In a "percentage" lease, which may be used for a retail business, the tenant pays a lower base rent plus a percentage of gross revenues earned at the demised premises.

In a "variable lease," the rent structure changes over time. For example, in an index lease, the base rent amount is tied to a particular "index" such as the Consumer Price Index; whereas in a "graduated lease," the base rent increases according to a pre-determined schedule. 

In a ground lease (see 6.1 Types of Arrangements Allowing the Use of Real Estate for a Limited Period of Time), a tenant is permitted to develop a parcel of real property during the lease period, after which the land and all improvements are turned over to the property owner.

Commercial leases in the US are freely negotiated without rent regulation, unlike some residential leases, which may be subject to state or local regulation (such as "rent control" or "rent stabilisation" in New York City). During the pandemic, federal and state governments implemented eviction and foreclosure moratoria to protect tenants. For example, New York City's "Guaranty Law" prevented landlords from suing guarantors of retail leases for defaults during the pandemic. The Guaranty Law was later invalidated for violating the US Constitution. COVID-19 regulations varied widely by jurisdiction (states) and between residential and commercial tenants, but most have expired as the pandemic subsided, though court dockets relating to landlord-tenant disputes remain backlogged.

As commercial leases in the USA may be 80 pages or even longer, it is difficult to summarise their terms here. However, four important issues are noted below.

Length of Term

Commercial leases often have terms of between five and ten years. Although term negotiated will vary based on the property type and class, its location, and the landlord’s requirements Retail tenants, which often are franchised businesses, typically require an initial term of not less than ten years (as it is common for franchise agreements to have an initial term of ten years).  Commercial tenants have no right to renew the lease unless such a right is negotiated and reflected in the lease as an "option".

Maintenance and Repair

Commercial leases typically make tenants responsible for maintaining and repairing the leased premises, while landlords are responsible for making exterior and structural repairs. For multi-tenant properties, landlords maintain common areas and charge tenants based on their "proportionate share" of the total square footage.

Frequency of Rent Payments

Rent payments are generally paid on a monthly basis throughout the entire term of the lease, and they are usually due on the first day of each month. Most leases provide for the payment of late fees if the rent is not received by a certain date (ie, the fifth day of the month). Sometimes ground leases call for a significant "up-front" rent payment when the lease commences, followed by scheduled payments throughout the term. 

COVID-19 Pandemic Issues

The COVID-19 pandemic and government shutdowns led landlords and tenants to examine their respective lease rights and obligations regarding rent related payments. While some parties negotiated lease modifications, many disputes ended up in court. Force majeure clauses often did not help tenants, and business interruption insurance policies typically did not cover pandemic-related losses. No standard has been established for allocating financial risks from similar future events.

Rent payable will vary throughout the duration of the lease.

In commercial leases, base rent is negotiated prior to entering into the lease, and the lease typically contains a schedule of base rent due under the lease. As commercial leases usually have an initial term of between five and 20 years, it is not unusual for rent increases to be implemented on a percentage basis (eg, 3% of the then-applicable amount) on an annual and cumulative basis, at one or more intervals during the initial term. If the lease provides for one or more options to renew, increases to the base rent are often negotiated in advance and set forth in the lease.

However, while rent increases are often determined cumulatively, on a percentage basis, over the prior amount of annual rent due, sometimes the landlord does not want to negotiate the new base rent for a renewal term (which may commence many years in the future) at the time that the lease is entered into, and requires that the new rent be "fair market" as determined prior to the effective date of the renewal period. Such lease provisions often provide that, in the event that the parties are unable to agree on the "fair market" rent, they will use a neutral mediator to help them reach an agreement, and that if the issue is unresolved, then an arbitrator with local real estate industry experience will determine the "fair market" rent after reviewing both sides’ evidence.

Some leases utilise so called "baseball arbitration" where the landlord and tenant submit their evidence, which may include an "expert’s report," and a "number" as to what the rent should be, and the arbitrator selects one side’s number, as opposed to awarding a "compromise" between the two proposed numbers. This incentivises the parties to be reasonable or risk losing the arbitration. The lease may authorise the arbitrator to award attorneys’ fees to the successful party in the arbitration.

No states in the USA charge a VAT (Value Added Tax) on rent. However, certain local jurisdictions impose sales or occupancy taxes on base rents, particularly if the length of the lease exceeds a certain length of time.   

When signing a commercial lease, the tenant usually pays the first month's rent and a security deposit. This deposit serves as "security" for the landlord in case the tenant defaults on payments, or damages the property without repairing same. The deposit amount is usually negotiable, but not always, and often ranges between two to six times the monthly rent.

In many commercial leases, landlords maintain common areas like lobbies, parking lots (repairs, snow removal) and gardens (landscaping), and charge CAM (Common Area Maintenance) fees to Tenants, based on their proportional share of the total leasable space. However, some leases include these CAM expenses in the Tenants’ base rent.

Most commercial leases provide that the tenant is responsible for arranging and paying for its utilities and telecommunications (other than for water, for which the landlord may bill the tenant based upon the tenant’s usage of water as read by a "meter"). Usually, most utility costs for the common areas of the building are billed to the tenants (in addition to the base rent), based upon their respective proportionate shares.

While landlords purchase and maintain their insurance with respect to the property, it is standard for commercial leases to require each tenant occupying a portion of the property to purchase and maintain, at its own cost and expense, specified levels and types of insurance. Where a single tenant occupies the entire property and is responsible for the various operating costs of the property, say for example, under a so called "triple net" lease, the tenant, and not the landlord, is responsible for purchasing and maintaining all necessary and appropriate types of insurance. Property insurance provides protection against claims resulting from injuries and damage to people and/or property, and which covers a variety of events that could cause damage to the property, subject to certain specific exclusions, such as floods or earthquakes, that may be covered under separate policies.        

Commercial tenants are usually required to purchase and maintain business interruption insurance. During the pandemic, however, insurers took the position that losses attributable to government mandated shutdowns were not covered under their business interruption policies. In most litigations throughout the USA, courts largely sided with insurers’ decisions to disclaim coverage.

Commercial leases typically contain a "use" clause which describes tenant’s permitted use of the premises. The scope of this clause is negotiated between the parties and is frequently influenced by their respective bargaining strengths. Leases usually specify certain prohibited uses or activities. Local land use and zoning laws may impose further restrictions on the tenant’s use of the premises. Retail tenants sometimes seek to negotiate an "exclusive use" provision, where the landlord agrees not to lease another premises located in the shopping mall to a competing business. Sometimes, with a strong tenant (financially), that restriction may extend to surrounding locations also owned by the landlord.

Commercial leases typically require the tenant to obtain the landlord’s written consent before the tenant is permitted to alter or improve the demised premises. Usually, leases also require that all plans, drawings and specifications, be submitted to the landlord for its approval, and that the tenant ensures that all work be performed in a good and workmanlike manner and be free from defects. Tenants may try to negotiate that the landlord’s granting of consent will not be "unreasonably withheld, conditioned or delayed," rather than being in the landlord’s "sole discretion."

Residential tenancies (apartment rentals) in urban areas are often regulated with rent control or rent stabilisation, lease renewals, the prohibition of discriminatory practices, and health and safety rules are often regulated, varying by jurisdiction. Commercial leases are subject to common law (including "nuisances"), as well as a variety of regulations including, for example, building codes, zoning laws, land use regulations and health and safety laws, all of which vary by jurisdiction. Also, the Americans with Disabilities Act (ADA), a federal civil rights law that prohibits discrimination against individuals with disabilities, guarantees accessibility to buildings and public properties, including commercial properties and multi-family residential properties.

During the pandemic, various eviction and foreclosure moratoria were put in place to protect both residential and commercial tenants. However, virtually all pandemic related regulations to assist tenants have expired. 

A tenant’s failure to pay rent, or its insolvency, will typically enable the landlord to terminate the lease and commence proceedings to evict the tenant. However, if the tenant files for federal bankruptcy protection, an "automatic stay" is triggered and all creditors of the tenant, including the landlord, are required to immediately cease all collection enforcement or eviction efforts against the tenant. Notwithstanding this, the landlord may be permitted to continue pursuing an eviction if it obtained a judgment of possession prior to tenant’s filing for bankruptcy. Under the federal bankruptcy code, the commercial tenant must choose to either assume or reject an unexpired lease. If the tenant assumes the lease, it must continue performing under the lease and must pay any amounts that are owed. If the tenant rejects the lease, the landlord is permitted to take back possession of the premises, and it may make a claim for damages as provided for in the bankruptcy code. 

Landlords typically require tenants to tender a security deposit (usually cash, but sometimes a letter of credit) in order to protect them against a tenant’s failure to meet its obligations, including the payment of rent and additional rent. The amount of lease security is often negotiated, and will vary, but may be twice or three times the monthly base rent. Landlords often require commercial tenants to provide a personal guaranty by one or more principals of the business to guarantee the tenant’s lease obligations. Tenants often negotiate to have tenant’s principal(s) provide a less onerous personal guaranty called a "Good-Guy Guaranty" whereby the Guarantor is responsible for the payment of all rent and additional rent until the tenant has vacated the premises and turned it over "broom clean" to the landlord, and tenant is required to provide the landlord with advance written notice of tenant’s date of vacatur. But the terms of the Good Guy Guaranty have become more onerous, as advance notice of terminations and extensions for liability beyond "vacation" of the premises have become more prevalent.

Generally, when a tenant "holds over" after the lease expires, they no longer have a right to continue occupying the leased premises, and the landlord can either bring a proceeding to evict the tenant, or it can acquiesce for a period of time and continue collecting rent. In some instances, local rent laws require landlords to provide renewal leases to certain "rent stabilised" residential tenants. Commercial leases typically provide for a significantly higher "holdover rent" (eg, 1.5 times or even twice the amount of base rent) which applies after the lease has expired. If the tenant defaults in paying the rent, the landlord will usually release to itself, an appropriate amount of the security deposit that it is holding. Landlords also seek to protect themselves against a "holdover" tenant through their enforcement of personal guarantees that are often entered into by the tenant’s principal(s).

Most leases provide that the tenant cannot assign or sublease any portion of the premises without the landlord’s prior written consent. Landlords usually condition their consent on the assignee:

• being bound by the terms of the lease;
• having a certain net worth; and
• providing a personal guaranty (of some kind) by its principal(s).

An issue often arises as to whether or not the tenant and the lease guarantor(s) will be released from their respective obligations once the assignment takes effect. Tenants often seek a modification providing that the landlord’s consent will not be "unreasonably withheld, delayed or conditioned." Tenants may also negotiate a revision providing that the landlord’s consent is not required for certain transfers (ie, transfers between existing principals, to a principal’s family member, or to an affiliated entity). Some franchisors require their franchisees to include a provision in a lease rider indicating that the landlord will be deemed to have consented to an assignment (or sublease) of the lease to the franchisor, its affiliate, or to another franchisee (either existing or newly approved).       

Generally, a landlord will terminate the lease when the tenant fails to cure a default, whether monetary or otherwise. Leases commonly provide that the lease may be terminated, without having an opportunity to cure, upon certain triggering events including, for example, if the tenant files for bankruptcy, is insolvent or permits an illegal activity to be conducted at the leased premises. Leases may also permit either or both sides to terminate the lease if a casualty occurs to a significant portion or the entirety of the premises and it is incapable of being restored within a defined time period.

Leases do not typically require registration or execution formalities (unlike other real estate documents, such as deeds). Most states do not require that a lease (or memorandum of lease) be recorded as a public record. Indeed, landlords sometimes prohibit the tenant from recording the lease (or a lease memorandum) or because the landlord does not want its lease (or its key terms) to be publicly available.

If the landlord terminates the lease in accordance with its terms (eg, following a default that was not timely cured or following a default that was not curable), the landlord may commence a court proceeding to evict the tenant. The process to evict a tenant varies widely depending on the jurisdiction and whether the tenancy is residential or commercial. (The eviction process for commercial tenancies moves much more quickly). While many jurisdictions passed eviction moratoriums (and sometimes even foreclosure moratoriums) during the pandemic, virtually all such tenant protections have expired as of the writing of this article.

No federal, state or local government has authority to terminate a lease that is entered into by private parties. However, governmental authorities may have a right of eminent domain which permits them to "take" property for public use and pay "just compensation" to the owner. As a "taking" would render moot any lease at the premises, leases typically provide for their termination, with no further obligation by either side, under such circumstances.

In the event of breach and termination, landlords’ remedies vary based upon the applicable jurisdiction. For example, a landlord’s potential "double recovery" of rent (ie, for the unexpired portion of the lease and collecting rent after it has re-let the premises) will vary based on applicable law, and may be permitted, for example, where the prematurely vacating tenant chooses not to engage in the discovery process in the litigation (to find out whether the landlord has re-let the premises). Landlords are often precluded from using "self-help" to evict tenants (for example, by locking the tenant out), as opposed to going through the court eviction process. Self-help evictions are illegal in most states and usually result in a lawsuit by the tenant. Landlords who perform self-help evictions can face damages, fines, criminal charges and possibly, jail time. 

As discussed in 6.16 Forms of Security to Protect Against a Failure of the Tenant to Meet Its Obligations, landlords typically require tenants to tender a security deposit (usually cash, but sometimes a letter of credit) in order to protect them against a tenant’s failure to meet its obligations, including the payment of rent and additional rent.

There are various structures used to price construction projects. They include:

• Fixed Price: General contractors may agree to complete the project for a pre-determined fixed price, regardless of any additional costs or changes to the work.
• Cost-Plus: Under a cost-plus pricing structure, the general contractor is reimbursed for the costs of the project, plus a percentage above cost. Cost-plus pricing structures are typically used when the scope of the project is unclear, or if numerous project changes are anticipated.
• Time and Materials: This structure is typically used for small projects and where the amount of work is unclear. The general contractor is paid for the actual cost of labour and materials, plus an additional fee or percentage for profit.
• Unit Price: This cost structure is typically used for projects with repetitive units of work (eg, roads or utilities). The general contractor may be paid based on a square footage or "per unit" basis.
• Guaranteed Maximum Price: Under this pricing structure, the general contractor agrees to be reimbursed for the actual cost of the project up to a maximum "capped" price.

Responsibility for design and construction of a project can be handled in a variety of ways, but the following methods are most typical:

• Design-Bid-Build is the traditional method of construction where the owner hires an architect or engineer to design the project. General contractors then bid on the project. The lowest bidder typically wins and is responsible for completing the project according to the plans. Other factors, such as the general contractor’s reputation (good or bad) may, however, play a part in the selection process.
• Design-Build is when the owner hires a single design and construction firm to complete the project.
• In Construction Manager at Risk, the owner hires a construction manager to oversee the project from start to finish. The construction manager is responsible for managing the design phase. After the design phase is completed, then the construction manager steps into the role of a general contractor and completes the project.
• Integrated Project Delivery is an approach used in highly complex projects in which the owner, architect, general contractor and other parties work collaboratively to develop the design and construction plan.

There are various devices which can be used to manage and mitigate construction risk on a project, all of which may be subject to various legal limitations and exclusions. For example:

Contractual indemnification provides for one party to defend, indemnify and hold harmless the other party from certain losses or damages. For example, a contractor may be contractually bound to indemnify the owner from personal injury suits by workers and subcontractors related to the contractor’s negligence.

Warranties are promises by one party to the other party regarding the quality or performance of the workmanship and materials used in the construction. For example, a contractor may warrant that its work will be free from certain defects for a period of time following the completion of the work.

Limitations of Liability provisions limit the amount of damages that one party can recover from another party. For example, a typical limitation may be that the contractor’s liability for the owners lost profits or business interruption are limited.

Damage Waivers typically provide for one party to agree to waive its right to recover for certain type of damages where a breach of contractor or other event causes damage. Its is typical during the course of each stage of design and construction, for a contractor to request the owner to sign damage waivers related to work which has been completed, inspected and accepted by the owner.

Schedule-related risk is a significant issue for construction. However, there are various ways to mitigate the risk.

Construction agreements typically contain liquidated damages provisions in which the owner may receive stipulated compensation if the project is delayed and there are additional costs and expenses incurred as a result of the delay.

Parties may also build in stipulated rights to extend time frames under certain circumstances with or without additional compensation. For example, if certain unforeseen site conditions occur (eg, bad weather delaying construction), the contractor may have the right to extend its deadlines.

The Parties can also avoid delays through regular communication, during which they devise contingency plans, such as reallocating resources and adjusting schedules.

Typical examples of additional security include the following.

• Performance or completion bonds are a form of surety bond that guarantees the contractor will complete the project on time. If the contractor fails to do so, then the surety company will cover additional costs required for the developer to finish the project.
• A Letter of Credit is a financial instrument issued by a bank that guarantees payment to the project owner if the contractor fails in its performance. In the even to a default, the owner may draw upon the Letter of Credit to pay for the project’s completion, as needed.
• Parent Guarantees are provided by the contractor’s parent company (if it has one), guaranteeing the performance of the contractor.
• Escrow accounts may be used to hold funds by a third party escrowee until the contractor meets certain conditions or milestones, after which the funds are released to the contractor.
• A third-party surety is a company that provides a guarantee of performance on behalf of the contractor (eg, a surety bond, letter of credit, etc).

Contractors and designers may file "mechanics liens" to preserve their right to seek compensation if the owner fails to pay their fees. In the commercial context, mechanics’ liens are typically filed by contractors who have not been paid for work related to the project.

Mechanics liens create a "cloud on title" which appears on the public record and may impair the ability of the owner to sell, transfer or mortgage the property until the debt is paid and the mechanics lien is discharged or "bonded" by the contractor, frequently a precursor to litigation.

A Certificate of Occupancy (COO) must be issued by the local or municipal authority before project can be used for its intended purpose.

The issuance of a COO is subject to various requirements such as an inspection or review of final plans prepared by a licensed architect or engineer.

For example, in New York City, the construction work, plumbing, elevator (if applicable) and electrical systems must be inspected and "signed-off" prior to the issuance of a COO.

Frequently, the project’s "expediter" will seek to help to shorten the time frame when the issuance of the COO has been delayed.

The USA does not impose a Value-Added Tax (VAT) on the purchase and sale of real estate. Certain jurisdictions impose a sales and use tax on commercial leases, see 8.3 Municipal Taxes.   

There are two commonly used methods to mitigate transfer taxes in connection with the acquisition of large real estate portfolios. One technique is to sell equity interests in an entity that owns the real estate as opposed to transferring the real estate outright. However, this option is not available in states that impose transfer taxes on such indirect transfers of a controlling interest in an entity owning real estate. In states and local governments that impose a mortgage recording tax, the use of a Consolidation, Extension and Modification Agreement (sometimes in connection with a spreader agreement) may be used to reduce mortgage recording taxes by giving the borrower a credit for previously paid mortgage recording taxes and including the existing mortgage with the new financing (consolidation) rather than paying off the existing mortgage and including the amount of the prior mortgage in the new mortgage (presumably for a larger amount), on which a recording tax must be paid.

Some jurisdictions impose taxes on commercial leases. Florida imposes a statewide sales and use tax on tenants of 4.5% on the total rent charged under a lease or license to use commercial real property. Florida provides tax exemptions for certain types of real property, such as agricultural land, and tax exemptions for use by certain entities, such as non-profit organisations and qualifying governmental entities. New York City imposes a “commercial rent tax” with an effective tax rate of 3.9% on the annual or annualised gross rent of USD250,000 or more paid by certain commercial tenants located south of 96th Street in Manhattan.

There are three main types of withholding taxes that apply to foreign investors:

• The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), which imposes a tax on gains from the sale of real property by foreign sellers, requires that the buyer serve as a "withholding agent" to pay the tax on the seller’s behalf. A buyer is obligated to withhold 15% of the sales price paid to the seller, unless the seller certifies non-foreign status proof of no gain from the transfer. 
• Any US partnership that generates income in connection with a US trade or business ("effectively connected income" or ECI) must pay a withholding tax on any ECI that is allocated to a foreign partner. The tax withholding rate is 21% if the foreign partner is a corporation and 37% if the foreign partner is a non-corporate taxpayer. Also, a buyer of an interest in a partnership that is engaged in a US trade or business is required to withhold 10% of the purchase price paid to the foreign seller.
• Foreign individuals must pay federal income tax on gains at a maximum rate of 20% if the real property was sold after a holding period of at least 12 months or a maximum rate of 37% if such property was held for less than 12 months. Foreign corporate sellers are subject to income taxes equal to 21% of the gain from the sale of the real property, regardless of how long the property was held. Foreign corporations may also be subject to a "branch profits tax" at the rate of 30% (or less, if provided in an applicable treaty) of the after-tax earnings from a US trade or business, to the extent that such earnings are not reinvested in the US branch assets. 

The US tax code provides owners of real estate with certain tax benefits.

• Real estate investors are permitted to depreciate the costs of buying and improving a building (excluding the land) in order to reduce taxable income over a certain period of time. However taking such deductions reduces the owner’s cost basis in the property.
• Section 1031 of the federal tax code permits owners of real estate held for investment to defer paying capital gains tax if the proceeds from a sale are reinvested in a "like-kind" property within a specified amount of time. This tax benefit is particularly useful when selling heavily depreciated property.
• The federal tax code also provides for a capital gains tax exclusion in connection with the sale of one’s primary residence. The exclusion is USD50,000 of profit for an individual, or USD500,000 of profit for married couples, filing jointly.