I am not ready to buy and want to lease first: How do leases work?

by Quatro Legal Real Estate Team | Jan. 3, 2024 | Article, Real Estate

Most of the time, when investors have problems with leases, they originate from either a poorly drafted lease agreement, the non-existence of one or—and this is very common—not reading or understanding the terms and conditions contained in the lease agreement. The first thing to do when leasing a property is to execute a clear and simple written lease agreement and understand the terms and conditions that will govern the lease relationship.

The basic lease clauses that a lease agreement must contain are the following:

  1. Full identification of the parties that will be lessor and lessee. It is important to confirm that the lessor has the legal right to rent the property.
  2. Identification of the property with its registration number as recorded in the Public Registry of Costa Rica, area, location, general description, and survey, among other relevant information.
  3. Use that will be given to the property, whether residential, commercial, or agricultural, including all the activities or uses that will be restricted or prohibited.
  4. Rent amount due, either in local or foreign currency, and the exact dates or days on which it needs to be paid to the lessor. The lessor has the obligation to issue a receipt for the rent. Also, it is important for the parties to include any other amount that needs to be paid, such as public utilities, maintenance fees, condominium fees, etc.
  5. Term of the agreement, which may not be shorter than three years, unless it is a short-term rental which is governed by specific rules.
  6. The amount of the deposit to cover any damages to the property, unpaid utilities, and in some cases, unpaid rent at the end of the lease.
  7. The possibility of assigning the lease to a third party or subletting the property.
  8. The lessor’s inspection rights and related terms.
  9. Conditions in which the property is received by the lessee.
  10. Addresses for notices or communications.

Lease agreements are regulated in Chapter VII of the “Ley General de Arrendamientos Urbanos y Sub-Urbanos N 7527” or Articles 56 to 69 of the “Lease Act”.

  1. Rental price, place, and date of payment. The most basic rule is that the rental price can be freely negotiated by the parties and paid in cash or any type of security. It must be paid on a monthly basis, unless the parties agree otherwise. Many problems arise regarding the payment date. Tenants have the right to pay rent within seven natural days after the payment date agreed to by the parties. The payment obligation starts on the date the tenant is placed in possession of the house or apartment and finishes on the date it is returned to the landlord. Rent is to be paid at the place agreed to by the parties, whether a physical address or bank account. If the parties did not come to an agreement, it is to be paid at the address of the leased asset.
  2. How to proceed when payment is constantly late. If payments are delayed beyond the seven natural days granted by law, the landlord’s acceptance thereof is considered tolerance and is not to be construed as a change to the payment date, unless both parties agree otherwise in writing. If payments are late, the regulation does require the landlord to serve notice to the tenant informing him/her that no late payments will be accepted, and that legal action will be taken if rent is not paid within the legal term. This communication is a requirement to be able to successfully file for eviction due to late payment. Many lawyers fail to inform their clients about this important fact and end up losing a simple eviction case due to noncompliance with this formality.
  3. Advanced payment. Another important rule that is sometimes overlooked is that the Lease Act clearly states that in housing rental agreements, the landlord may not request more than one month’s rent in advance. Often, landlords sign contracts, hand over possession of the house or apartment, and later cannot enforce an agreement made on this issue, even with a contract in place.
  4. Rent payments in foreign currency. It is common for rent to be negotiated in a foreign currency. However, it is important to know that rent may be paid at any time in colons, under the condition that it is paid using the sales exchange rate established by the Central Bank of Costa Rica on the payment date. Payment in colons is not to be construed a breach of contract, even if many landlords dislike this practice.
  5. Public utilities as part of the rent payment obligation. Payment of public utilities is considered a unique and indivisible part of the rent payment obligation. Noncompliance with this obligation is cause for eviction. However, the tenant and landlord must agree on who is to pay the utilities. If no agreement is made by the parties, the tenant is required to pay all utilities except the basic water rate, which is to be paid by the landlord. If the landlord fails to pay the utilities, the tenant has the right to pay them and deduct the corresponding amount from the rent for the following month. Non-payment of utilities by the tenant is cause for eviction since payment is considered part of the rent payment obligations.
  6. Liens on the tenant’s assets in case of noncompliance of rent payments. If a tenant fails to pay rent, the landlord has the right to establish a lien and to retain all legally attachable assets in the house or apartment belonging to the tenant, the tenant’s spouse, the tenant’s children or the tenant’s parents. It is presumed that the assets in the house are owned by the tenant unless documentary evidence is submitted to demonstrate otherwise. The landlord also has the right to require that any assets taken off the property be returned. This must be done in court and will require legal counsel.

There are many other provisions that a lease agreement could include based on the complexity of the lease relationship. It is always important to seek legal advice to avoid any unfortunate situations.

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