A Brief Introduction About the Reappraisal Lease
What is reappraisal?
When it comes to assessing something or someone in a different way, it is known as a reappraisal. The reappraisal definition says that when a second or fresh appraisal or assessment of anything is made, it is known as a reappraisal. In such contracts that are drafted for lease rental agreements, there is a provision for adjustment of the rate of rent, which is based on a periodic independent assessment of the value of the property. There is no standard frequency of the appraisal, and it differs from contract to contract. As a rule of thumb, when the renewal for the tenancy agreement takes place, the property value is reviewed.
The appraisal clause is more common in long term ground leases, which are over a year and where the possibilities of a change in the value of the property are higher. Both the parties to the contract can gain or lose from such agreements. If the property values are falling consistently, the tenant gains, and the landlord loses. If, however, the property prices go up, then the landlord gains and the tenant is under pressure.
Who Takes the Reappraisal Lease – People Involved
When it comes to long term leases, the rental is likely to change due to changes in property values. So, the landlord and the tenant in such cases opt for such contracts for a reappraisal of the property and hence, rentals.
Purpose of the Reappraisal Lease – Why Do You Need It
Property values are not constant and tend to fluctuate over the long term; they could either go up or down. It would be important for both the landlord and the tenant to ensure that the rental mentioned in the agreement is set according to the fair market value of the property.
If there is no reappraisal agreement, then in case of rising property prices, the landlord will lose, and it will be unprofitable for them to continue. In a falling property price market, the tenant would lose as they would be paying a higher rent. In both cases, the parties to the agreement would want a termination of the agreement regularly. Instead of this, with such a lease, the property value is reappraised, and both parties have no dispute as the rent is based on a proper appraisal.
Contents of the Reappraisal Lease – Inclusions
A comprehensive lease agreement should contain the following information:
- The names of the parties to the contract, the tenant and the landlord
- The effective date of the agreement
- The consideration being paid by the tenant and the due date for the same
- The description of the property being let out
- Tenure of the agreement: The start and the end date
- Reappraisal clause: The frequency at which the property will be reappraised and by whom
- Termination clause: Premature termination would require notice to be served to the other party
- Dispute resolution clause: Settlement of disputes by arbitration or litigation
How to Draft the Reappraisal Lease – Points to Consider While Preparing the Agreement
Here are the points to be considered while drafting a reappraisal lease:
- Eligibility to contract: Are the tenant and landlord over 18, of sound mind and not under the influence of drugs
- Consideration for the contract: The rental payable by the tenant as well as the due date. The date of reappraisal should also be mentioned
- Terms of the contract: The contract should be fair to both the tenant and the landlord
- Dispute resolution clause: If there is a dispute between the two parties, whether arbitration or litigation will be followed, attorney fees and jurisdiction of resolution
- Termination of contract: For premature termination of the contract, the parties should serve sufficient notice
- Governing laws: The contract should adhere to the laws of the state
- Signatures and dates: The last page of the contract should be reserved for this
Negotiation Strategy
In a lease, the landlord should draft the agreement and share it with the tenant. The tenant should review all the clauses in the agreement and negotiate the clauses that they want to be changed. Both parties should then sign the reappraisal lease.
Benefits & Drawbacks of the Reappraisal Lease
Benefits:
- Protection of interest of both parties: The landlord is aware that they will be charged fair rent as the property is reappraised regularly. The tenant also feels that they are paying a reasonable rent
- Gains for both parties: In a rising property price market and high rentals, the landlord will gain. When the property prices are falling along with the rent, the tenant will benefit.
Drawbacks:
- The loss for both parties: In a rising market, the landlord will lose out on high rentals and higher income. The tenant will pay a higher rent and bear a higher cost in a falling market
What Happens In Case of Violation
When the rent is due for revision, the landlord sends a rental appraisal letter is sent to the tenant. If the tenant does not respond, then the landlord will take legal action.
Here are the remedies available for both parties:
- Monetary damages: The injured party is paid compensation for the lost profits
- Restitution: The injured party will be restored to the pre-contract position(1)
- Rescission: The contract is declared null and void due to fraud
- Reformation: The court will draw up a fresh contract without any inequity
- Specific performance: The party violating the contract has to fulfill the obligation
A reappraisal lease is important for long-term lease rentals so that changes in property prices and hence rentals can be incorporated. There should be a termination clause if any party feels that the contract is not fair. Disputes should be resolved using a dispute resolution clause.