Texas Land Lease Contract Defined
The purpose of a land lease contract is to provide strict rules and provisions that will govern the conduct of the parties and the use of the land. With respect to the land owner (the Lessor), the Land Lease Contract will typically (i) provide the sole legal right associated with such land, (ii) set forth strict and specific limitations on how the property may be used, and (iii) provide for legal remedies if the Land Lease Contract is not followed. Likewise, with respect to the Lessee, the Land Lease Contract will typically (i) allow the Lessee to legally enter upon such land , (ii) impose strict and specific limitations on how the land may be used, and (iii) provide for legal remedies if the Land Lease Contract is not followed.
More commonly, a Texas Land Lease Contract is a "ground lease." A ground lease is a long-term lease agreement for the leasing of the land only, typically for an initial period of 99 years. Ground leases typically provide for the Lessee to make improvements to the land and provides that all such improvements become the title of the Lessor; however, the landowner will still receive periodic ground rent payments.
Types of land lease contracts under Texas Law
In Texas, there are several types of land lease agreements that can be classified under two main categories: commercial and residential lease agreements. Other subsets of these categories exist, but most land lease agreements will be broadly distinguished as one or the other.
Commercial Land Lease Agreements
Commercial land lease agreements generally include leases to farm, cut timber, or extract minerals. Some commercial leases may extend to limited commercial use of structures and improvements on the land, such as oil well or pipeline leases. Lessor liability for a land characteristic is the most significant concern for the landowner entering into a commercial land lease agreement in Texas. An oil and gas lease, for example, typically contains even more warranties by the Lessor than a farm lease, because many more issues might affect the value and usability of an oil and gas lease than a farm or pasture lease. On the other hand, an easement, which is often impliedly or explicitly contained in commercial land lease agreements, is purely a personal right of use that does not involve possession of the property. When the commercial party enters the land, he does not take the full rights of the land as he does with a lease. With an easement, the commercial party is given the right to use the surface for a specified purpose, such as placing and operating a pipeline or making repairs to the surface. An easement does not convey an estate in the land, and it, therefore, is not subject to the Statute of Frauds.
Residential Land Lease Agreements
We are all familiar with residential leases, which are typically less than five years in duration. For the purposes of income taxation, these are treated as from month to month (that is, not as a lease for a period longer than one year).
Key Provisions in Texas Land Lease Contracts
It is critical that you understand the essential clauses of a land lease contract. Like most real estate transactions, a land lease requires that you satisfy certain legal issues. However, it is oftentimes between landlords and tenants most likely to overlook the fine print.
A well-written lease will have terms such as lease duration, the amount of rent, renewal options, penalties, and any necessary legal compliance issues. Here are some common terms you will find in a land lease:
Term of Agreement
The lease contract should explicitly state the length of term. It may be for a couple of months or it may be for two or three years or more. It is common to have two types of terms—fixed and month-to-month. The fixed term is the expressed length of time stated in the contract. With a month-to-month lease, the tenant will give 30 days notice to terminate the agreement. It is important to closely examine this term.
Rent
Though you may not think of the amount of rent as being negotiable it is. You will often see increases reflected every year, so be sure to pay attention to those details. When both parties sign the lease, the rental rate is set. After a period of time, the landlord can increase the rent. Additional clauses are sometimes added to explain how the new rate will be determined. It is not uncommon for the increase to be tied to the Consumer Price Index (CPI).
Renewal Options
It is quite common to set conditions for a renewal option. These options generally include an increase in the rental rate for the renewal period. Under certain circumstances, the tenant may have the privilege of not accepting the renewal.
Penalties
Another common clause in land lease contracts relates to penalties. Landlords often want to have a penalty specified in the event they do not collect the full rent when it is due. In some contracts, they want the right to reenter the premises and remove the personal property. It is important to consider the ramifications of these clauses before agreeing to them.
Compliance Issues
The landlord often wants a clause that gives them the right to terminate the lease if certain regulations and/or legal actions are put in place. These clauses could include changes in zoning, taxes, building codes, environmental regulations and/or other issues. It is important to consider how these issues could affect the use of the land.
Legal and Regulatory Issues
A well-structured land lease contract is not just a prudent business decision in Texas, it is a legal requirement. Both lessors (landowners) and lessees (tenants) must navigate state-specific regulations and follow industry best practices to avoid common legal pitfalls.
Governing Law: Texas state law primarily governs land leases, addressing not just commercial and residential leases but also addressing agricultural leases, oil and gas leases, mineral leases, and many more. Most detail-oriented business professionals will be aware that Texas law has some unusual quirks. For example, Texas is generally a "free title" state, which means that there is no period of time during which a deed can be "brought up to date." In this state, lessors can record their leases and establish a precedence on what might later be acquired by their lessees. In free title states, a property owner can sell down the chain as many times as they like, even if they quit paying taxes on the property.
Local ordinances and regulations: On top of the state lease requirements and parameters, the local government has ordinances and regulations that govern the use of land. This includes zoning laws that affect how the property is used or developed, codes related to code enforcement, building and safety, environmental regulations, and more. Ordinances and regulations are subject to change, so lessors and lessees are well advised to look into and discuss local ordinances before lease agreements are signed.
contracts 101: Most land lease contracts in Texas contain the standard "lawyerly" legalese to which most people are accustomed — leases usually go on for pages and may contain very lengthy clauses, such as a "force majeure" clause, commonly known as an "Act of God" clause. A few things to know about this clause in Texas: this clause protects the lessor as well as the lessee, and it should include information on which party will bear responsibility should an Act of God occur. Personal and commercial relationships can be strained without an Act of God clause in your contract, which lays out the responsibilities and expectations in the event of an emergency or catastrophe that affects operations, a natural disaster, or other incident such as terrorism. Other "standard contract" clauses to always have in land lease contracts in Texas include: duration and renewals, rent amounts, obligations of each party under the contract, breach of contract penalties, and dispute resolution provisions. There are also important limitations on changes made after a contract is completed that are specific to Texas.
Pitfalls to avoid: Landowners should not insert provisions into lease agreements that violate state or federal anti-discrimination laws. Short-term lease contracts can expose both parties to legal liability; they also tend to overlook important legal particulars that both parties should review with their counsel.
Tips for negotiating a land lease contract
Negotiating land lease contracts is an art rather than a science, and like any skilled trade it takes time, experience, and lots of interaction with all of the vested parties to get right. While there is no "perfect deal" or "best way" to negotiate a land lease contract, there are some helpful tips that will help you get to a mutually acceptable deal as quickly and efficiently as possible. The key is to strike the balance between what you need, what is important to you, what is best for your project, what your project can afford, and what (if anything) you can live with for a lower price. With that in mind, we will discuss a few strategies – in the context of negotiating with landowners on one side and lessees on the other – to get you started. While landowners play a critical part in the negotiation process, it was still necessary to reach out to the lessees to begin the discussion. In this case, the Lessee was a developer looking for a location to build a new retail site. As the leasing agent, we worked with our client to negotiate the terms of the deal before approaching the Landowner with an offer to lease a portion of its property. As the leasing agent for a retailer, the first thing that we needed to do was to identify the site our client wished to locate at. We could then approach the Landowner with a proposal to lease the property with our client’s parameters (terms of the lease, rental price, and other important factors for our client). Lucky for us, the Landowner was receptive to the proposal presented and so began the negotiation process. For the landowner, however, we must first remember that they are under no obligation to lease their property to you or anyone else . They are looking to make a business deal that is going to benefit them, and they will not be shy about letting you know. Another important factor we must keep in mind is that the landowner will not be the only party interested in renting our client’s property, so getting to a deal sooner rather than later is usually best so as to not cause the landowner to rethink his offer. With negotiations, we are often dealing with high dollar figures and competing interests. When you consider the market size and potential for development where the property is located, it is easy to see why the landowner would want to retain the right to develop the entirety of the property. The landowner does not want to be limited by a lease with respect to his own use and development of the property. If land is leased a developer may be able to get away with limiting some of the landowner’s rights and expanding theirs. For example, we were able to negotiate language into the lease that formed around what we believed to be the best deal available, from both a Lessee and Landowner perspective. For instance, we were able to show the landowner that our client would be willing to spend more per square foot than they could ever spend as the developer for the property. Contracting land is not like signing a lease with your apartment manager. Lot sizes are often measured by the acre and cost as much as an entire residential home, and the consequences of entering into a bad deal have far reaching consequences. When negotiating a land lease contract, whether you are the landowner or the lessee, be sure to consult an attorney who has experience with similar deals and who understands the market in your area.
Common Land Lease Issues and how to resolve them
It is not unusual for a dispute to arise in a land lease contract. Areas of contention include responsibilities for routine maintenance or repairs of the property, requirements for how the land can be developed, conduct on the land and termination of the contract. However, it is also important to remember that provisions related to the revenue generated by the land used for solar, wind or mineral development can become causes for disagreement.
The methods available to deal with the dispute will depend on what remedies the contract provides, or if not included, upon the parties’ mutual consent. Among other options, the lease may provide for mediation or arbitration of any disputes that arise. A neutral third party evaluates the evidence, performs an analysis and renders a decision. Either the parties or the mediator or arbitrator can facilitate the process, which may be binding or non-binding. Any number of other processes are also available, including arbitration, mini-trials, rent review boards or a formal lawsuit through the courts.
If no provision is included in the contract or negotiations to determine the method of resolution fails, and litigation becomes necessary, the plaintiff must file the complaint in a court of appropriate jurisdiction. If the amount of damages claimed surpasses the minimum amount required, they can file the suit in either a state district court or a federal district court. If the amount at stake does not meet this threshold (generally $75,000), the action can only be maintained in a court that has concurrent jurisdiction.
Suits between citizens of different states that do not exceed $75,000 also satisfy the requirements for federal diversity jurisdiction. A Texas citizen can file a lawsuit in federal court if they choose, and countless litigants have done so. In such a case, although the federal court will apply Texas law to the substantive issues, the federal rules of civil procedure will apply to the litigation process. Be aware that the federal courts often have a stronger preference for enforcing the arbitration provisions of the FAA than does the Texas Supreme Court.
If you are a landowner entering a land contract – and especially one that will last a long time – or the party desiring to use or develop the land, you should spend time understanding the potential areas of conflict and address them as best you can in the contract itself. That document will govern resolution of the conflict and its costs when they do arise, so clarify all ambiguities up front.
More sources of information
For further guidance on Texas land lease contracts, Texas law has great resources. Below are links to some homegrown administrative agencies , and a few nonprofit organizations. The Land Board administers some state-owned public lands where common school land leases occur. The Railroad Commission is responsible for managing mineral leases on source of funds for the Permanent School Fund. The Texas Elections Division within the Secretary of State’s office is the best first-stop resource for questions about mineral leasing on state-owned land. Nonprofit organizations like the Texas General Land Office, Texas Land and Mineral Owners Association, and the Texas Association of Landman provide education and opportunities for networking.