Most renters are familiar with fixed-term leases, the most common type of contract used for residential purposes. This type of lease binds the renter and the landlord to a set amount of rent every month for a specific agreed-upon period of time. Then, once the lease term is over, the rent rate might go up, but at that time the renter can opt out and move elsewhere if they don't want to pay more for the space.
Variety is the spice of life, however, and the rental agreement community is no exception to this rule. This is where a graduated lease comes into the mix.
It's not unusual for any deal involving money to have a fixed or adjustable rate option. This is a pretty standard choice when buying a home and deciding on a mortgage. So, think of graded leases as the renter's equivalent to the adjustable rate mortgage!
Also known as a graduated lease, graded leases differ from fixed-rate leases because they are usually longer in duration. Whereas a fixed-rate lease generally spans from a few months up to a year (sometimes two), graded leases usually have significantly longer terms. In fact, they can run for several years, even longer if the situation calls for it! It's worth noting at this point that graded leases that are exceptionally long in length are usually reserved for commercial situations, however.
The other thing that makes a graded lease unique is usually the true sticking point, however. Not surprisingly, it has to do with money.
If a person signs a graded lease, they're agreeing that the rent will go up at set intervals within the lease agreement. This could be every two months, once a year or something entirely different, depending on what the landlord writes into the lease.
The graded rent increase usually goes hand-in-hand with general real estate market conditions. In other words, if the market is really hot and property values go wild, the rental rate will increase more at the set interval than it would if the market is cool or stable. Many landlords see this as only fair, as property taxes usually increase when the property value goes up. This way, they're not left holding the bag, tax-wise.
Plus, operating costs can quickly spiral out of control (as is the current case with historic inflation), so this helps landlords cover those expense upticks. It's also an incentive for the owner not to sell the property for a profit, but to continue renting it out.
The vast majority of residential renters will not be presented with a graded lease option. If you are, however, make sure you fully understand the terms of the lease. How often will the rent increase? By how much? Can you break the lease if it gets out of control? Ask all of the questions to avoid being in a sticky legal situation down the road.
Most people who sign a graded lease are going to be affiliated with some sort of commercial enterprises, like stores or restaurants. Often, these leases are designed to help offset some initial startup operating costs but allow property owners to recoup money down the line. There is also a lot of variety in the lease length and terms, depending on the market. Landlords in really hot areas with lots of growth can command longer lease lengths at higher price jumps than in struggling economies.
Some explainers are often worked into a graded lease to justify rent hikes. Clauses can include the following:
Under this type of clause, the landlord can require the tenant to pay more toward expenses already folded into the rent, like maintenance, utilities and taxes.
This clause allows landlords to increase rent rates based on the economic index, which indicated whether real estate prices are on the rise, or not. If the real estate market is trending upward, landlords typically want to experience some of the benefits by getting paid more for their property.
Properties are appraised every year for property tax purposes. A reappraisal clause in a graded lease says that if the property appraises higher than before (and thus taxes usually go up too), the landlord can increase rent.
No matter what type of lease is involved, always read the details and ask tough questions. Know what you're getting into with a graded lease and hopefully you'll avoid unwelcome surprises later on.