B. An Overview of Economic Interests and Issues:

The Landlord’s investment interest would at first glance appear to be consistent with maximizing net income after all expenses. It might be thought that the Landlord would attempt to have the Tenant bear as many of the identifiable economic burdens and risks inherent in the leasehold relationship. The Tenant’s interests, on the other hand, would appear to be passing as many of the risks and costs to the Landlord. The focus of most lease negotiations is who should be these risks and costs.

At the same time, it should be evident that the Landlord knows the Tenant cannot assume economic risks and pay costs as rent or otherwise that exceeds the Tenant's revenues of operation. The Tenant's continued viability is of considerable concern to the well being of the Landlord. The Landlord's analysis of the Tenant's economic capacity and ability to bear the risks and costs of the leasehold estate are primary to the Landlord's interest, as well as to the Tenant's interest. The correlative of this is the Tenants knowledge that the Landlord cannot be expected to survive if there is a failure to recover sufficient revenues to pay the costs of ownership.

All costs of holding and operating the Property and Premises must be accounted for in the leasehold economic analysis. If the Landlord assumes all costs, the lease is said to be a "gross" lease. That is to say, if the rent the Tenant pays the Landlord includes all these costs then the lease is deemed to be a "gross" lease. On the other hand, if the Tenant is to bear the cost of these same items, it is said to be a "net" lease. The real question is to determine first, whether all the costs are accounted for and second who in fact bears to actual burden of the expense. If the Landlord passes the cost on to the Tenant in a gross lease through full compensation in the leasehold rental obligation, then the net amount left to the Landlord after payment of expenses should reflect the net profit of the Landlord. If this amount is what the Landlord needs and expects, then the Landlord is satisfied. If the amount the Landlord receives from the Tenant does not cover all the Landlord's expenses and leaves the Landlord with a loss in owning and operating the property after receipt of the rent, then the Landlord might well not be satisfied. On the other hand, if these costs are passed onto the Tenant through some form of obligation to pay Landlord's specific expenses, then they are part of the total rent the Tenant pays. So, what is the issue and what are the objectives of both sides?

Who has the responsibility for the following:

1. Structure and structural repairs and replacements
2. Maintenance of the Property
3. Maintenance of the Premises
4. Waste disposal
5. Insurance
6. Real Estate Taxes?

Assignment: Select any one issue involving the gross or net lease and allocation of economic risk or allocation of interest to you. Find a case on point and download the case. Prepare a one-paragraph summary of the major facts of the case and prepare a two-paragraph summary of the major facts of the major legal issues in the case and the holding(s) of the court. Submit the case for posting atleast two days prior to the scheduled class to permit the others in the class to persue the summaries and cases prior to the class.