Legal Question in Real Estate Law in Illinois

30 Year Prepaid Lease Up for Sale
My mother passed away in 2000. She was a real estate worker and her and a co-worker owned buildings together. Before my mother passed away, she bought out one unit in a six unit building for a 30 year lease. She prepaid all funds for the term of the lease. Now, 6 years later, the owner wants to sell the building. He wants to buy out my unit from me. What are my rights and how much am I entitled to get back from the prepaid amount of the lease?

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Asked on 8/14/06, 9:55 pm

2 Answers from Attorneys

Bryan Whipple Bryan R. R. Whipple, Attorney at Law

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Re: 30 Year Prepaid Lease Up for Sale

First, if the property is in Illinois, you will need a response from an attorney licensed there. I'm a California lawyer, and my answer is based on CA laws and precedents, which in the area of very long-term leases might differ from the laws of California.

If the events transpired in California, the prepaid lease would give the tenant the rights set forth in the lease (possession, etc.) for the full term, and without regard to who was the owner of the fee. In other words, a buyer takes ownership "subject to" the rights of lessees.

It would be better for the lessee if the lease were recorded, just like a deed. Most states permit recording long-term leases; and while not required (in most states), recording is a darn good idea, especially when there is uncertainty as to whether the main tenant's possession will be obvious, i.e., there may be subtenants or others in apparent possession, or the place may just be empty. Recording a lease gives notice to the world of the lessee's possessory rights.

Now, since the owner (or, more likely, the new buyer) wants sole possession free from the 24 years remaining on your mother's lease, and want to "buy out" your 24-year claim, you are confronted with the issue of hom much to ask.

My advice is to forget about what your mother paid in the first place, 6+ years ago. Focus entirely on what 24 more years of possession and use of those premises is worth in today's market.

The answer as to what 24 more years of the lease is worth is a fairly sophisticated exercise in prognostication and application of the prognoses to a process of discounting future cash flows to a present value. The person doing the analysis will have to forecast future rental values, future inflation, and an appropriate discount rate based on risk and alternate opportunities. In other words, this is MBA stuff.

Whatever the owner is offering is probably too little. Ideally, retain a large Chicago law firm that has several lawyers who also have MBAs in finance from Northwestern, Chicago, Illinois or other good schools and still know how to apply the financial stuff they learned. It'll be worth it.

Answered on 8/14/06, 10:40 pm

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