22. Mho owns inzprovements on leased premises? ---- A. familiar rule of the law of landlord and tenant provides that upon the termination of the lease all permanent improvements revert with the estate to the landlord. This rule has been the stumbling block in some of the old railroad leases. Thus the New York Central bad a lease of almost 500 years' duration of the Harlem Itiver Railroad's property, when it be came apparent that to meet the competition of other suburban roads the Central would have to electrify the Harlem's property. Tho the lease had a long pe riod still to run, the Central did not care to make the necessary expensive improvements on its landlord's property. It therefore undertook to purchase the stock of the Harlem. This stock was receiving 8 per cent dividends under the lease and was worth between $150 and $200 a share. But the Central found that the Harlem stockholders would not part with their stock except at fancy prices, frequently demanding as much as $500'a share.
A fair solution of- this problem has been accom plished by modern leases, which provide that all im provements shall be paid for with the proceeds of se curities of the landlord. Since the tenant agrees to meet the interest or dividend charges on these securi ties during the term of the lease it pays an increased rental for the property whenever the bonds or stock are issued, but the landlord assumes the capital obli gation for which it is compensated thru its ownership Pf the added property.
23. Lease as a means of manipulation.—Leases have sometimes been used by corporations to avoid some of their obligations. An example will make the method plain. In 1890 the National Cordage Com pany offered $5,000,000 preferred stock to the public and agreed in a by-law not to create any bonded debt, except with the consent of holders of record of at least eighty per cent of their preferred stock. In 1891 the company wanted to raise $6,000,000 to buy certain competing properties. A subsidiary issued its bonds for that amount, and leased its properties to the National Cordage Company. The rent paid by the Cordage Company consisted of 8300,000, this be ing the amount of interest on the bonds and an annual sinking fund payment of 8225,000. Then the parent company guaranteed payment of both principal and interest. Thus the National Cordage Company avoided its obligation to its preferred stockholders while it obtained actual control of the properties and in effect paid for them with an issue of bonds.
24. Other possibilities for quanipulation.—Some times leases have been used to kill competition. For example, a railroad will lease a dock in order to take terminal facilities from a competing steamship line. When the lease terminates, the dock company finds that its property has been abandoned and is worth less as dock- property. In carefully drawn leases, clauses are always inserted that the leased property shall be kept in operation and that the lessee shall not build or operate competing properties. Cove nants are also included whereby the lessee promises to keep the property in good repair and to permit the lessor to make reasonable inspection of the properties to see that they are being satisfactorily maintained. But merely to repair property is not sufficient. It must be maintained as a going concern. And so
clauses are usually inserted that the properties "will be as well fitted for independent use and operation by the lessor as at the inception of the lease." 25. Duration of lease.—A lease may be made for any term of years. Frequently leases have been made for 999 years or for 99 years, renewable forever. De fault clauses provide that the lessor may recover pos session of its property upon breach of any of the lessee's covenants. At the termination of the lease, the lessee is required to "surrender the real and per sonal estate demised under and by virtue of (the) indenture . . . in the like good order and condition in which they are at the inception of (the) lease . . . with all improvements thereon and additions thereto, the amount of money, materials and supplies to be surrendered or accounted for to the lessor to be equiv alent in value to the amount on hand at the incep tion of (the) lease." 26. Effect of a we have seen, the lessor ceases to be an.operating company. In fact, it may lease all of its operating property including its cash and accounts receiva.ble. Hence all obligations aris ing out of the operation of the property rest on the tenant. _Moreover, the tenant is required to make all repairs, and while, under the law and in the absence of specific contract, the landlord is bound to pay taxes and insurance, this burden is usually shifted to the tenant by clauses contained in the lease.
27. Advantages of a lease of prop erty does not require the payment of any large sum of money except such as can be obtained thru the op eration of the leased property, this form of intercor porate relation commends itself as a means of avoid ing rearrangement of finances. No new securities need be sold, no promoters' profits or bankers' com missions need be paid.
Leases of parts of properties have frequently been made by small public service corporations under cir cumstances that may be outlined as follows: A sub urban gas or electric company has a distributing sys tem reaching in toward a city. Afterward the terri torial jurisdiction of the city is enlarged and part of the distributing system falls within the new city bound aries and thus comes within a territory where rates are so low that the company cannot afford to distrib ute its service. The larger metropolitan system will then lease this property for a rent sufficient to meet the capital obligations of the smaller company repre sented by the leased property. Thus the company does not lose its fixed investment and avoids operating on a losing basis.
28. Disadvantage of chief disadvantage of the lease is that it is either inflexible and creates a rigid plan of compensation for the use of property that thru unforeseen circumstances may become worth less or immensely valuable, or, if it is flexible, it may open the door for manipulation and litigation. There is generally a disposition on the part of the tenant to treat the property with less consideration than its own property, and on the part of the landlord a fear that it is not being fairly treated. Certainly the in ducement to improve the property is stronger when it is owned than when it is leased. That leases are used less now than formerly, is strong evidence that the disadvantages are serious.