Lease Rights Beyond the Property Line

Lease Rights Beyond the Property Line

Commercial Lease

A lease is an agreement between one party which owns real estate, (landlord or lessor), and another party who seeks to gain use rights to some or all of that real estate for a set period of time (tenant or lessee). The landlord remains the owner of the property, but gives up their right to use and control the space during the time it is being rented in exchange for the rental payment. A good lease should clearly describe the area being rented. This is especially important when the landlord continues to own area near or around the rented area that is not part of the agreement. The tenant’s right to use and control the rented area should be obvious, but in more complex leases the tenants may require additional limited rights and assurances relating to land outside of the rented area. These rights broadly take two forms: (1) agreement that the tenant will be able to do certain things on the outside land, and (2) agreement that the landlord will refrain from doing certain things on the outside land. Before signing such leases, tenants should ensure any special rights they need to areas outside of the confines of the rented space are clearly defined and landlords should clearly understand what rights they are giving up to areas outside the rented premises.

For residential leases (homes or apartments), when the tenant is renting less than a whole house or only a portion of the parcel the residence is located on, the lease should clarify any open questions about uses of parking spaces, common facilities and drive-ways/access rights. For example, if a tenant is renting the upper unit of a two story duplex, can they store items in the shared basement? How many cars can they and their guests park behind the house before it starts interfering with their downstairs neighbors’ rights? If the rented area is a unit in a condominium association, the parties should make sure they understand whether the rights to the common area amenities of the Association are assigned to the tenant as part of the lease or retained by the Landlord as the owner of the Unit.

In the commercial context (leases for business locations), leases in multi-site developments sometime contain “exclusive use” clauses, restricting the landlord from renting to any other provider of the same of similar service within some set amount of area. It is most common for larger “anchor” stores in such developments to secure the best protective provisions for themselves because they have the most bargaining power, but any party is free to negotiate for them. For example, when negotiating a lease for one of six spaces in a strip mall, a pizza restaurant might (wisely) add a clause to the lease that the landlord guarantees no other tenant in the strip will sell pizza. This ensures the location the restaurant carefully chose will not be spoiled by new competition during the term of the lease.

Landlords who grant these exclusive use clauses need to be very careful in reviewing both their current and future leases to ensure compliance. In the prior example, it will be simple enough for the landlord to reject future pizza parlors from the development, but what happens when another tenant, an arcade, who was leasing from the landlord prior to the pizza restaurant, starts selling pizza to their customers? If the arcade’s lease does not prohibit such activity, the landlord has no grounds to stop the arcade from using the space as they see fit. The pizza restaurant would, rightfully, consider the landlord to be in breach of their contract as they were promised the exclusive use for that line of activity. Here, the landlord inadvertently made promises in the lease they were unable to fulfill and put themselves into a Catch-22 scenario. The same example could also get complicated if, for example, a new restaurant comes in and signs a lease that prohibits “pizza” from their menu but then sells Wisconsin-style cheese fries or calzones. Hopefully both leases defined the restricted use more specifically than just the word “pizza” to avoid any dispute about whether the new menu items qualify.

Beyond blocking specific types of competition, use restrictions can be more general in order to develop a certain type of aesthetic to the area surrounding a tenant. For example, a fine clothing retailer may wish to see a protection against their neighbor being a government office such as a unemployment or welfare office. A religious entity likewise may object to bars or adult content being sold next to their rented place of worship.

Increasingly common in Wisconsin, and across the country, are “solar leases,” in which development companies lease large swaths of cleared land, typically farm fields, to install solar panels. These leases rarely cover the entire property of the landlord and therefore contain extensive and detailed terms about what the landlord can and cannot do on the remaining land which is not being rented. In addition to common use provisions, solar leases more uniquely include prohibitions against building or planting anything which will cast a shadow over the panels. Landowners need to be very careful when entering into this agreement to ensure they can either continue to make use of the non-rented area, or, that they are at least adequately compensated for the loss of options over it.

The specifics of the agreement need to be set in writing with careful and detailed drafting. Rights and restrictions should be clearly defined to avoid unnecessary grey areas that can cause litigation. Tenants should also make sure that their hard bargained for use rights cannot be easily disposed of with manipulative corporate structuring, especially when the restricted area is not part of the same building or parcel as their rented space. If, for example, a landlord owns two commercial buildings next to each other but as separate parcels, transferring one of the properties to a separate limited liability company may allow the landlord to dodge any promises made to not permit certain activities on “all properties owned by landlord adjacent to the rented space.” Finally, the understanding of the parties needs to be executed in a legally binding way. When a signed written agreement exists, separate verbal or informal written agreements can be difficult to enforce. The terms should be incorporated into the lease itself or added as a formal amendment.

The examples and considerations provided here are just a few of the more common terms and issues related to this topic. Almost always such rights/restrictions are highly unique and customized to the situation and the needs of the Tenant. Leases need to be reviewed carefully and the impacts of any such terms fully considered prior to execution. If you need assistance with a lease, please reach out to one of our experienced business attorneys.

Waste in Real Estate

Waste in Real Estate

The word waste provides rich imagery for a fertile imagination. Waste is associated with many unsavory expressions: “wasted, waste product, waste away, and go to waste.” From a legal standpoint, however, “waste” is a narrowly defined concept in property law. It means the “unreasonable conduct by the owner of a possessory estate that results in physical damage to the real estate and substantial diminution in the value of the estates in which others have an interest.” More simply, waste is the destruction of houses or lands by a tenant or holder of a life estate.Committing waste has significant legal consequences. Wisconsin law provides that, if an interference with land constitutes waste, “the court shall give judgment for double the damages found.” Wis. Stat. § 844.19(2). In practice, this statute is rarely used despite being a powerful tool for landowners to recover for damage to their properties. Some examples from case law illustrate the law’s application:

  1. A tenant for life who neglects to pay taxes that accrue after his tenancy commences is liable to an action for waste.
  2. Damage to carpeting and subflooring by a tenant in a residential lease.

In one notable case, Melms v. Pabst Brewing Co., the Wisconsin Supreme delineated the law of waste in a lawsuit concerning a mansion that was demolished. Captain Frederick Pabst (of Pabst Blue Ribbon fame) demolished the Melms’ mansion. Pabst wrongly thought he owned the mansion, but instead had only a life estate. (An estate held only for the duration of specified person’s life, usu. the possessor’s) He was sued for committing waste in tearing down the mansion. The Melms side argued Pabst should compensate them with an amount sufficient to cover the costs of rebuilding the mansion. Pabst argued he had done the Melms side a favor by demolishing the mansion as it detracted from the value of the land. Pabst argued that the mansion had no value because it was surrounded by industry and the best use of the land was for manufacturing. Ultimately, the Wisconsin Supreme Court held that Pabst did not commit waste. The Court poetically explained that:

The evidence shows that the property became valueless for the purpose of residence property as the result of the growth and development of a great city. Business and manufacturing interests advanced and surrounded the once elegant mansion, until it stood isolated and alone, standing upon just enough ground to support it, and surrounded by factories and railway tracks, absolutely undesirable as a residence and incapable of any use as business property. Here was a complete change of conditions, not produced by the tenant, but resulting from causes which none could control. Can it be reasonably or logically said that this entire change of condition is to be completely ignored, and the ironclad rule applied that the tenant can make no change in the uses of the property because he will destroy its identity?

After the Melms’ decision, the courts now assess whether the change to the property was economically advantageous. Although the law of waste is archaic in origin, it is still relevant today. Property owners whose interests are harmed by tenants should consider bringing a claim for waste if their property is substantially damaged by the unreasonable conduct of a tenant.

If you ever find yourself in a situation like this please contact our experienced attorneys, they have the expertise and drive to help you with your case.

Family Cabin LLCs

Family Cabin LLCs

We all know someone who has a family cabin “up north.” Family cottages, cabins, and hunting land are a common estate planning concern in Wisconsin. The current owners want to preserve a place full of fun and memories for future generations.

Unfortunately, the way these properties naturally pass under the law does not fit the needs of every family and that can lead to trouble. For example, picture the current owners of a cottage have four children, if the cottage were to pass to their children without any planning, the children would then co-own it as tenants in common. Each co-owner would own an equal share of the property. It sounds simple, but what if one child wants to sell the property immediately and another wants to keep it in the family for future generations?

Under a tenancy in common, each owner can transfer their interest in the property independently of the other co-owners. This can lead to complications when one co-owner dies, goes through a divorce or has a collection action brought against them by creditors. Additionally, a co-tenant may ask the court to partition the property. A partition action could result in the property being split into separate parcels or a forced sale. Even if all co-owners wish to continue to own the property together, the statutory framework for sharing property and its expenses leaves much to be desired.

Common planning tools for co-ownership of property include Trusts and Limited Liability Companies (LLCs). Both Trusts and LLCs can alleviate common ownership problems but, between these options, an LLC is more flexible and often better suited for long-term planning.

What is an LLC?
An LLC is a business entity with one or more owners, known as members. When an LLC is set up for a shared family property, the LLC holds the property rather than the individual owners. The LLC operates according to an Operating Agreement, which outlines the rights and obligations of the members, how the LLC will be managed, and how decisions will be made.

Benefits of an LLC for Shared Family Properties:

Management of the Property
The Operating Agreement may lay out a framework for scheduling the use of the property, how the property will be maintained and decorated, and how shared expenses will be allocated and paid. The agreement may also determine who has a vote in these decisions. An LLC may also appoint a manager to be responsible for making sure that financial matters are managed, for example, they may propose a budget to the members and ensure that bills are paid.

 Provisions for Exit Strategies and Nonpayment
Sometimes a person inheriting a property would rather sell their interest. The Operating Agreement can provide these members the option to sell their interest back to the LLC according to an affordable structure. Additionally, the agreement may also address those members who do not contribute to shared bills or assessments. Provisions may include restricting the use of the property until payments are made.

 Restrictions on Transfer of Ownership
As discussed above, under a tenancy in common, an owner may transfer their interest in the property to another person or file a mortgage against their interest. The Operating Agreement may restrict owners from encumbering the property. It can also dictate permitted transferees. This means that an owner can be kept from transferring their property to someone outside the family as may otherwise happen at their death or divorce.

Tax Planning and Gifting
Family cottage LLCs may be used as a vehicle for gifting to avoid gift and estate taxes. LLCs allow for the gifting of units of ownership over several years. This can provide an opportunity to transfer interest in a way that avoids gift and estate tax.

 Liability Shield
As the name suggests, a limited liability company also can provide owners with a certain degree of liability protection from certain occurrences.

 Overall, LLCs can be individually tailored to suit unique scenarios for shared family properties. They can provide a great deal of flexibility for change as the need arises and offer many different protections for the owners of a property. If you are intersted in setting up an LLC for your family cabin please contact one of our experienced business attorneys.

Comparing Commercial and Residential Leases

Comparing Commercial and Residential Leases

Most individuals must navigate a residential lease at some point in their lives – typically for an apartment to live in before potentially purchasing a home later in life. In contrast, the majority of people will never need to negotiate or enter into a commercial lease – used for renting space to run a business. For those who do, it is important to understand the differences between the types of leases to avoid inadvertently making a bad deal. On the other hand, a business owner who has become familiar with commercial leases and then decides to invest in and rent out residential property should bear in mind the special rules for residential leases to avoid a costly mistake.

All states have some differences between laws governing residential and commercial leases based on the public policy position. While commercial tenants are presumed to be savvy parties operating a business and capable of negotiating and bargaining on an even playing field with their landlord, the average residential renter is unsophisticated and vulnerable to being taken advantage of by better positioned landlords. After all, renters tend to be younger and in a worse position financially than someone who needs to rent a space to operate their privately owned business. A commercial tenant is viewed as another equal player in the economic marketplace who is capable of, and therefore responsible for, the consequences of any contract they choose to enter into.

Wisconsin state law (primarily Wisconsin Statute Chapter 704) is a set of general rules that apply to all leases but that can be altered by contract (i.e. the lease), and then special rules for leases creating residential tenancies. Residential tenancy is further governed by state regulatory code (ATCP Chapter 134) providing more specific rules for residential landlords to follow. The list below highlights some of the major rules applying to residential leases in Wisconsin:

  • Requirement to provide a check-in sheet at the start of a lease which the tenant can make notes of any conditions existing on the premises (Wis. Stat. 704.08).
  • Requirement that leases must contain specific language notifying tenants of certain rights of domestic abuse victims (Wis. Stat. 704.14).
  • Required special notice procedures to remind tenants of deadlines related to automatic lease renewals (Wis. Stat. 704.15).
  • Minimum habitability standards that are generally waivable for commercial leases but required in residential leases (Wis. Stat. 704.07).
  • Certain provisions, when included in residential leases, make the lease void and unenforceable (Wis. Stat. 704.44). The ten provisions listed act as a sort of “guard rail” on the terms of residential leases keeping certain one-sided terms from being imposed on any renters in the state. The prohibition on such terms are not universal, and it is important to review any form leases obtained that are not Wisconsin specific for inclusion of these terms.
  • Strict rules on the receipt of, accounting for, and return of security deposits. (ATCP 134.06).
  • The requirement to highlight and separate out certain terms as “NONSTANDARD” making them easier for tenants to see (ATCP 134, throughout).

In addition to these special rules contained in the Wisconsin state statutes and regulations, certain municipalities also have local ordinances imposing additional requirements. It is important to review any local laws that may provide further restrictions on residential leases.

For Example: Outside of strictly defined differences in legal rights and requirements, residential and commercial leases tend to vary in other ways. The following are typical differences:

  • Commercial leases are generally longer. Typical residential leases are either month-to-month or annual. Such short terms are certainly possible for commercial leases, but three to five years with options to review for longer is more standard. Generally, commercial tenants will want short terms with many options to review, while commercial landlords will want the opposite.
  • Commercial leases more commonly involve the tenant making significant alterations to the property. It is rare for residential tenants to take out walls, install new equipment, etc., but commercial leases often allow tenants to modify the space to suit their business needs. The responsibility for and ownership of these changes should be defined in the lease.
  • Commercial leases tend to have the tenant take on more responsibility for maintaining the property and paying ancillary costs, like property taxes. A common subset of commercial lease is the “triple-net” lease, where, in addition to rent, the commercial tenant pays all of the property taxes, insurance and maintenance costs. Residential tenants pay rent and often pay the cost of utilities, but rarely are asked to directly pay for property taxes, maintenance or insurance costs.

For renters entering into a commercial lease for the first time, understanding the protections they may have benefited from without knowing about it in the course of their residential tenancies is important to fully review and potentially negotiate their commercial leases, where such protections do not apply. No one should ever sign a contract, like a lease, without carefully reading it first. Commercial tenants are exposed to the possibility of terms so burdensome the legislature banned them in the residential setting and thus need to review the lease carefully. For first-time landlords of residential properties, keeping these special rules in mind may be helpful in avoiding a costly mistake. Terms they may have grown accustomed to as “typical” in the commercial setting cannot just be inserted into a residential lease without first ensuring compliance with applicable laws.

In conclusion, whether you are entering into a commercial or residential lease for the first time you should be aware of the laws and rules in your state and local municipality. Please contact one of our experienced real estate attorneys if you have questions.


Update On Private Roads, Joint Driveways and Easements Article

Update On Private Roads, Joint Driveways and Easements Article

This article was written in November 2018, now there are some important updates to share.

Many properties in Wisconsin have some form of shared access. It can be as simple as a portion of the driveway crossing the neighbor’s property to more complicated scenarios where an access road crosses multiple properties and provides access to numerous lots. Sometimes a “private road” may have been created when the land was subdivided.

As statutory and zoning requirements have become more sophisticated (and developers more aware), it is now more common to see properly-drafted legal documents describing road access rights and obligations at the time new lots are created. However, this is certainly not always the case. In addition, there are many joint driveways, access roads, and private roads that were created when the statutory and zoning requirements were not as stringent.

Where neighbors are friendly and know each other well, informal arrangements regarding shared access often work for years without problems. Of course, if an owner dies or moves away, the dynamics may change. However, even where the parties continue to get along, the lack of a formal arrangement may become an issue if an owner desires to obtain a mortgage on their land. Most banks that offer long-term, fixed-rate financing sell their mortgages in the secondary market. This is true even if the bank continues to service the mortgage. For the bank to be able to sell mortgages, they must comply with certain requirements. Those requirements can differ depending on whether the bank uses organizations created by Congress to buy mortgages such as Fannie Mae and Freddie Mac, or some other source to access the secondary mortgage market.

Why does all this financial mumbo-jumbo matter for shared access? Fannie Mae requires a legally enforceable agreement or covenant for the maintenance of any privately owned and maintained street that addresses: (i) responsibility for payment, (ii) default remedies if someone does not comply with his or her obligations, and (iii) an effective term of the agreement, which often is perpetual and binding on future owners. Without a recorded agreement, the bank will not provide financing. UPDATE unless there are default statutory provisions that provide basic rules regarding maintenance and repair of private roads.  Wisconsin Act 99, passed in 2021, created Wisconsin Statute Section 710.20 that now satisfies this requirement!  That new statutory provision provides, with certain exceptions, that “the beneficial users of a private road or driveway shall contribute to the reasonable and necessary costs of maintenance and repair of the private road or driveway”.  According to that statute, if there is no written agreement, “the beneficial users shall contribute to an equitable share based on the amount and intensity of each beneficial user’s actual use in proportion to the amount and intensity of all beneficial users’ actual use.”

While the new statutory provisions help fill a void for Fannie Mae purposes, having a well-drafted agreement in place can also provide owners with peace of mind that their property can be transferred or sold as part of their estate without undue complications.  A properly drafted agreement may also help minimize disputes between neighbors.  If you own a property with shared access or are thinking about buying a property with shared access, call one of our real estate attorneys to find out what you can do to protect yourself and your investment.

Please click here for the 2018 Article

Landlord Lag Time in Wisconsin

Landlord Lag Time in Wisconsin

The benefit to renting over owning is avoiding unexpected repair costs, in contrast, it can mean having to wait for the landlord to make repairs. Who is responsible for making repairs and how long a landlord can take to make a repair depends on the issue. While a landlord is required to “promptly” make repairs for issues that affect the habitability of a living space, Wisconsin law does not provide a set amount of time in which a landlord must make repairs.

Of course, it is best if you never have to deal with a leaky faucet or a glitchy thermostat. If you tour a space and find things in need of maintenance or repair, you should make note of any problems and request that the landlord fix them. Any promises made by the landlord to a prospective tenant regarding cleaning, repairing, or improving the unit should be made in writing and specify a date or time-period in which the fixes are to be completed. Apart from being legally binding, having a set date for the fixes can create a sense of urgency for the landlord and peace of mind for the tenant.

A Landlord’s Responsibilities

It can be difficult to spot defects in a unit before living in it. Fortunately, landlords do have a responsibility to disclose to tenants any documented or uncorrected building code violations that pose a threat to a tenant’s health or safety if the landlord is aware of them. This requirement of disclosure only covers the following habitability conditions:

  • If the unit lacks hot or cold running water;
  • If the heating system is not in safe operating condition or is incapable of maintaining at least 67 degrees in living areas;
  • If the unit is not served by electricity or components of the electrical system are not in safe operating condition;
  • If there are structural or other conditions on the premises that could pose a substantial health or safety hazard; and
  • If the plumbing or sewage disposal facilities are not in good operating condition.

All of the above listed systems (heating, plumbing, electrical, and structure) are within the landlord’s sphere of responsibility. Additionally, the landlord must maintain common areas like hallways and laundry rooms in good condition. While a tenant is usually responsible for unreasonable damages the tenant themselves caused, a landlord still has a duty to innocent tenants in these situations to maintain the common areas. A landlord must also provide and maintain carbon monoxide and smoke detectors.

A Tenant’s Responsibilities

As mentioned above, a tenant is responsible for repairing or paying for the repair of damages caused by the themselves or their guests. To prevent damages to the unit, the tenant must keep the thermostat set at a reasonable temperature that will prevent freezing of pipes and keep the unit in a safe and sanitary condition. Part of keeping the unit in sanitary conditions includes maintaining a level of cleanliness that prevents infestations. If pest infestations are caused by the actions or inactions of the tenant, the tenant may have the duty to remediate the problem or pay for the remediation and repairs.

A tenant is also responsible for minor repairs to keep the unit in good working order, like changing lightbulbs or replacing batteries in smoke detectors.

A Timeline for Repairs

Repair or replacement of a non-working smoke detector, with batteries, is one of the few fixes that the law places timeline on. When a landlord is given notice of a faulty smoke detector, they have five days to fix it. Landlords are not given a set amount of time to fix other defects.

Remedies for Tenants

  • Wisconsin Statutes do provide some remedy to tenants if the landlord does not promptly make repairs to defects that affect habitability of a unit. A tenant may break their lease and move out if a unit becomes untenantable. A unit is untenantable if the conditions that exist are so poor as to affect the tenant’s health, safety, or impose an undue hardship on the tenant. If the tenant must move out, the tenant is not responsible for the rent payments after the unit became untenantable. Even if the tenant does not move out, rent abates, meaning it is decreased by an amount proportional to the amount the tenant is deprived of the full, normal use of the premises. As a tenant, the problem with these remedies is that they may not result in the desired repair of the unit. It can also be difficult to quantify when a premises became untenantable or what dollar amount of rent abatement corresponds with an unrepaired defect.
  • It is preferable for a tenant to work with a landlord to have repairs made on a reasonable schedule. Creating a paper trail is an important step. Tenants should request repairs in writing to keep track of what the issue is and how long repairs are taking. If the landlord does not make repairs in a reasonable timeframe, the tenant may consider contacting the local building inspector or the Wisconsin Department of Safety and Professional Services.

If the landlord still refuses to make repairs, please contact one of our experienced attorneys who can help you take the right steps in pursuing remedies like rent abatement. The Tenant Resource Center may also be able to provide information or support.