One way commercial real estate investors can bring in capital is by renting out spaces they own to tenants. Depending on the asset type and the owner’s stake in the property, these tenants can be startups, manufacturing companies, small business owners or even young families.
No matter the situation, landlords and tenants alike need to agree to the terms of renting the space. These tenants are often put on year-to-year lease agreements — also known as leasehold estate tenancies for years. However, year-long leases are just one way landlords come into a relationship with tenants, and not all relationships have to last a full year.
What Is Tenancy for Years?
A tenancy for years is an estate lease agreement that lasts a specific amount of time, with opportunities for renewal at the end of each lease. These fixed-term tenancy contracts have clearly defined beginning and end dates and a specified rent payment that both the lessee and the lesser must agree to. While the lease expires if neither party renews by the final date, both the landlord and the tenant have the right to terminate it at any time as long as prior notice is given.
Tenancy for years is the most common form of leasehold estate tenancy seen in commercial real estate. Multifamily apartment leases are a good example of year-to-year tenancy. However, not all year-to-year agreements must last a full calendar year. As long as the landlord and tenant agree to a specific period of time with precise beginning and end dates and rent amount, these types of leases can last weeks, months or years.
What’s the Difference Between Tenancy for Years and Other Types of Leasehold Estates?
Tenancy for years is one of four types of leasehold estate tenancies. The other three are periodic tenancy, tenancy at will and tenancy at sufferance.
Periodic tenancy is a form of lease holding that allots a definite amount of time for an agreement to exist and automatically renew. Also called tenancy from period-to-period, this agreement can also be terminated by the lesser or the lessee as long as prior notice is given.
Neither party needs to agree to a specific beginning and end date. These timeframes are most flexible in periodic tenancy than in tenancy for years. There’s no limit to how many times the lease can be renewed, and the period can be for any ordinate or time: week to week, month to month, or in some cases day to day.
This form of tenancy is common in fee simple real estate, including commercial markets.
Tenancy at Will
While periodic tenancy and tenancy for years both require predetermined timeframes, tenancy at will exists without any set renewal schedule. Lessers and lessees in a tenancy at will circumstance are both free to terminate the lease “at will,” no matter how much time has passed since the origins of the lease.
This form of tenancy is also known as estate at will. While rare, this agreement can be found in freehold estates when an owner decides to sell their property and needs tenants to vacate quickly.
Tenancy at Sufferance
Tenancy at sufferance is the only form of tenancy that exists in the wake of another form of tenancy expiring. This tenancy is the result of one party, namely the landlord, terminating a tenant’s lease, with the tenant refusing to remove themselves from the property. If the tenant no longer has legal permission to use the property, the landlord can evict them at any time.
Example of a Tenancy for Years Lease Agreement in CRE
Tenancy for years lease agreements are very common in commercial real estate. They can be found in all sorts of landlord-tenant relationships and asset classes. An artist renting a downtown loft will sign a year-to-year lease if they plan to rent that space for at least a year.
However, a self-storage facility in a college town can also create tenancy for years leasehold agreements for individuals looking for storage for weeks, months or years. Both of these agreements exist as long as a predetermined period of time is agreed to prior to the tenant’s move into the property, including a move-in and move-out date.
How Can a Tenancy for Years Benefit Me?
While any form of leasehold estate lays out the details of a landlord-tenant relationship, agreeing to a tenancy for years ensures both you and your tenant have a fixed amount of time to your professional relationship. Using predetermined timeframes can help you, as an investor, anticipate the needs of the property and your stakeholders in the coming months and years. It’s also a good way to bring in ideal tenants to make your real estate investment successful.