Front Page Titles (by Subject) CHAPTER 14: THE RENTING CONTRACT - Economics, vol. 1: Economic Principles
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CHAPTER 14: THE RENTING CONTRACT - Frank A. Fetter, Economics, vol. 1: Economic Principles 
Economics, vol. 1: Economic Principles, (New York: The Century Co., 1915).
Part of: Economics, 2 vols.
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THE RENTING CONTRACT
§ 1. Price of the separable use. § 2. Medieval land tenures and the usance of land. § 3. Land destruction and repair. § 4. The medieval rent-charge as a sale of income. § 5. Definition of the renting contract. § 6. Renting of agricultural land. § 7. Renting of urban real-estate. § 8. Renting of dwellings. § 9. Renting of real-estate for business uses. § 10. The renting contract in other cases. § 11. Buying the usance without the renting contract. § 12. Unsuitability of the renting contract in commerce. § 13. Definition of rent. Note on Various meanings of rent.
§ 1. Price of the separable use. Wherever there is a thing of value there is a chance that trade will occur between men, and that a price will result. In our discussion of price above (Chapter 7) we fixed our attention upon those cases where concrete objects with direct uses are traded as wholes, such as loaves of bread, apples, and horses. The owner of such a commodity must usually sell the whole object if he is to sell the uses that it contains. The price is built upon the valuations—in the minds of the various traders—of the totality of uses contained in the goods. Now the valuation of the uses separately—the conception of usance—makes possible the problem of price in a different form, that of the buying and selling of the separable uses, leaving the ownership of the durative agent unchanged. The simplest way to buy the uses of a thing would seem to be to buy the use-bearer outright—boat, horse, house, land, with all its uses. But the sale of the separable use may under some conditions be simpler and more advantageous to both parties than the sale of the use-bearer itself.
§ 2. Medieval land tenures and the usance of land. Doubtless the perception of this advantage led to multitudes of loose bargains for the use of personal belongings in earlier conditions of society;1 but the first great development of usance-trade was in the case of land. In ways and for reasons which need not be described here, land ownership in all the early civilizations was bound up with certain political rights and dignities. The land was not a personal possession, it could not be sold outright (in most cases); it must be passed on to the heir and successor of the landlord. The landlord got his income from those to whom the land-uses were granted. Even as late as feudal times in medieval Europe the whole social organization was built around land tenures.
Land and the things pertaining to it, such as ditches, houses, mills, cattle, and stock, constituted the wealth of the rulers and landlords. Land was granted to the vassal, or to the tenant or to the serf in return for produce, and for services, some military and some agricultural in character. The contract, expressed or customary, was known and carefully interpreted in all its items. The tenant was held strictly to his duty to keep the land in nearly undiminished fertility. A certain mode of using the land was enforced; certain limitations were placed upon the use of pastures, of forests, and of fields. Moreover, the tenant had an interest or equity in the land because the rent he had to pay was fixed by custom, not by competition, and always, probably, was less than a competitive price would have been. The landlord, therefore, could count in good part on the undiminished power of his land and stock from one year to another.
It would be a mistake to see in these early and medieval relations between a king and his vassals, and between land owners and the serfs on their estates, more than a vague and embryonic form of rent-contract. Political rather than economic relations were dominant; it was a time of status rather than of free contract.2 Originally in taking the land and pledging loyalty to his feudal superior, each vassal, high or low, assumed pretty definite obligations, some of a military, others of a political, others of an economic nature. But thereafter in the thought of that time there was but vaguely present the notion of contract in the modern sense as regulating the economic relations of the descendants, peasant and landlord, or landlord and his feudal superior. “Each man took his place in accordance with inherited and forced, rather than free, contracts.”3 But gradually there developed a more modern form of agreement between the owner of land and the tenant. Rent-payment by the tenant and wage-payment by the landlord for any work done on his domain by the peasants were counterparts in this development in which contract was gradually displacing custom, status, and inheritance.
§ 3. Land destruction and repair. It has been seen that all economic agents, considered as wholes, are more or less consumptive, and more or less durative.4 In practice and in theory they may be treated as either the one or the other. They may be treated as consumptive by letting them wear out, while spending all their uses within a certain period; thus are used food, fuel, lubricating oil, lights, and sometimes tools and machinery. All their value is looked upon as transferred to, or realized in, the product, in that period. On the other hand some goods are given, by means of repairs, an artificial appearance of durability, so that the whole agent is treated as having the durability of the most enduring part of it. It was in this manner that agricultural land came to be looked upon as indestructible.5 As mere land surface, or location on the earth’s surface, it is, except for rare catastrophes, such as earthquakes, volcanic eruptions, and floods, well-nigh everlasting in the view of mortal man. But it is something more than mere location that makes land useful, whether used for agricultural, forestry, quarrying, or mining purposes. Used for these, and even for residence and commercial purposes, it is quite capable of being used up and destroyed as a use-bearer. It is in large part not nature but man’s art in the careful use of land that enables it to be looked upon as an indestructible agent, yielding a permanent series of uses. A form of contract came to be used in letting the land for hire, that called for the return of the land in as good condition as when it was taken. The tenant had to replace the elements of fertility which he used up. It is clear that the main thing he buys from the landlord is what we have called the usance of land; but as he usually takes something more (through failure to repair and because of inevitable depreciation) he pays for this an additional price included in the gross rent.
§ 4. The medieval rent-charge as a sale of income. It thus came about that land, tho not as an economic good indestructible, was nevertheless in many cases so managed as to yield a continuing income. In medieval times this income or rent was realized in products and services, not in money. The fruits of the soil were consumed on the spot instead of being sold as now. Land was thought of as a place on which the tenant could live and from which the landlord could draw an income. The medieval estates were so tied up by legal conditions that they could not be sold outright, so means were found of doing practically the same thing. The owner, in some cases, mortgaged the annual rental by selling a rent-charge upon it. A rent-charge was an annual sum payable (in perpetuity or until redeemed) out of the yield of an estate. Thus, in the Middle Ages, not the land itself, the mill, the market rights, the forest, etc., were subject to trade, sale, and contract, but merely the usufruct, as a whole or in part, for a definite period. The sale of rent-charges has now only a historical interest, as loans now are made in other ways, the land being pledged as security for repayment. After this brief survey of the old land tenures we turn now to the modern method of selling the use of wealth of various kinds under the form of the renting-contract.
§ 5. Definition of the renting-contract. The renting-contract is the agreement of a borrower to pay a specified price for the use of a thing and, at the end of a specified period, to restore it in good condition or pay for its repair. In practical business it is necessary to have definite agreements to prevent disputes, and whenever a thing is rented there is a contract, either implied by custom or formally made, orally or in writing. The terms are all specified; the duration, whether for a day or perpetual, or at the pleasure of either party; the rent, whether cash, share of the produce, definite or contingent on some events; taxes, insurance, and repairs, what and how much to be done by either borrower or lender. In the case of things other than land, many other details must be specified. Some of these details may be merely implied in a higher gross rent, which covers ordinary wear and tear, ordinary risk of breakage, fire, etc., and ordinary risks of every kind (e.g., rent of piano, of theatrical wardrobe), the borrower being liable, however, for unusual carelessness in use.
The form of the renting-contract is observed by men in estimating the uses of their own wealth where no contract exists. If they count the gross product of an agent as a netusance, it is bad bookkeeping. In many cases it is necessary, therefore, for owners to observe the form of the renting contract in order to determine the net yield of durable goods.
§ 6. Renting of agricultural land. The employment of the renting-contract is determined by its advantages and disadvantages under particular conditions as compared with other business methods. Even in the renting of land for agriculture, the difficulties of the contract are great. It calls for a personal oversight that is burdensome to the landlord and annoying to the tenant, to make sure that repairs are made, that straw and hay are fed on the place so that the soil may not be impoverished, to ensure the purchase of other fertilizer according to the agreement, and hundreds of other details. The practice of making long leases obviates some difficulties and aggravates others. If improvements made by tenants revert to the landlord at the expiration of the lease, as was formerly the case in Ireland, there is little motive for enterprise; and if tenants’ improvements must be bought by the landlord, there are many occasions for dispute. Under fairly unchanging conditions as to prices and markets, long-time leases may be equitable; but during the wavelike change of food prices in the nineteenth century long leases increased the hardships to tenants in all countries in Europe and America. Despite these drawbacks, agricultural lands with their improvements continue to be largely rented, both in Europe and America. Of the nearly 6,400,000 farms in the United States in 1910, owners occupied 62 per cent, hired managers ran 1 per cent, and tenants operated 37 per cent (24 per cent renting on shares of the produce, and 13 per cent for cash). There were 2.3 million farm homes rented in 1910. But in America and Australia, far more than in the older countries, land changes hands by sale, and many persons prefer to go into debt for land, giving a note, secured by mortgage, and paying interest on the loan, rather than to pay rent.
§ 7. Renting of urban real-estate. The class of wealth that is now proving to be, on the whole, best usable under the renting-contract is land and buildings in urban locations. On the whole the difficulty of ensuring the durative character of city real-estate (land and building taken together) is less than in the case of agricultural real-estate. The land being used solely as solid surface, standing room, and not at all as a source from which the chemical elements of fertility are extracted, is (except in the most rare cases of floods and earthquakes) subject to no such physical deterioration. The buildings, however, make up a large part of the value of urban real-estate, and in many cases they are subject to depreciation and to dangers. The greatest of these dangers, that from fire, can be guarded against by insurance and thus converted into a regular cost of maintenance. Damages by rough usage may be offset by higher charges to the tenants. Rentals charged to careless classes of tenants, or to careless individuals, often are fixed higher than rentals to careful tenants. By these means and by careful oversight, tenements and residences, which have a large measure of consumptiveness, can be treated as durative agents more easily than can agricultural lands.
§ 8. Renting of dwellings. There are in many cases strong reasons why it is to the interest both of the owner and of the tenant to bargain for the transfer of the usance rather than of the fee-simple (complete right of ownership) of city residences. With many changes in the modern citizen’s business and social conditions, thousands of families are often absent for a time from their regular place of residence, and while letting their own houses to tenants, they become tenants in the houses of others. Often the tenant may be a rich man who could easily buy the house, if hiring it were not more advantageous. Every year many thousands of winter homes of owners are let in summer while the owners are away, and many thousands of summer homes usually occupied by the owners are let where the owner is prevented by ill-health, or by business plans, or by travel from occupying the home himself, or is led by the desire for a change to go to some other place for the summer. The uncertainty of employment for professional, clerical, or manual workers, makes the buying of a house of doubtful wisdom in many cases, even where it would be financially possible. There are thus millions of families that are not would-be buyers of houses, but are nevertheless buyers of the uses of houses. There were 8.4 million homes other than farm homes rented in 1910 in the United States (that is homes in cities, villages, and the country districts, not occupied by one operating a farm). This demand is far beyond what can be met by the chance vacancies of owners’ regular dwellings, and it offers a field for a very safe kind of investment under their personal oversight for persons of small or moderate means.
§ 9. Renting of real-estate for business use. The renting-contract has marked advantages in the hiring of shops, stores, and office-buildings in cities. There the land has a well-nigh absolute durativeness, and the buildings may be built of very durable materials. Merchants often find it of advantage to move into larger quarters as business grows, or into a different neighborhood as the center of trade changes. Moreover, as active business men they often can keep their funds invested to better advantage in their business than by putting them into the purchase outright of a store-building, as the rate of yield on real-estate investments is usually less than that in commerce and manufacture.6 Many small mercantile businesses require only a small space, less than could be bought or built on to advantage in a large city, and many agents and professional men need merely office space. This large and regular demand for shops and offices calls forth the enterprise of investors to construct and maintain suitable buildings to let for these purposes. Hundreds of millions of dollars of the funds of life insurance companies, collected from policy-holders, are invested in this way, as well as funds of educational institutions and of business corporations. Thus it happens that many corporations with millions of capital are in the larger cities tenants in offices owned by other corporations which own office buildings, such as the Times Building, the Metropolitan Life Insurance Building, the Singer Building, the Woolworth Building, the Equitable Building, in New York City. The very size of such office buildings and their conspicuousness in public attention give to the offices in them an advantage in convenience of access and for advertising purposes greater than is possible under other circumstances.
The rapid changes that are going on in America bring about most varied conditions of ownership and tenancy in regard to urban industrial real-estate. Manufacturing on a small scale is often started in rented buildings even in small towns, and in the large cities this is more common. But the larger manufacturing firms and companies usually own the building and land in which their manufacturing is done. The special character of the machinery used and of the buildings required make this the better plan. Even then, however, the need of expansion often leads to the hiring of additional land, buildings, and offices. The extent to which the renting of real-estate for business purposes is practised now is thus in the aggregate enormous.
§ 10. The renting-contract in other cases. There has always been a strong motive for the renting of smaller objects of movable wealth, rather than their purchase outright, wherever the user has a need of an agent in an unusual place, or a temporary need of an exceptional nature. The traveler wishing to cross the stream needs the boat but once, and many other travelers will pass the same way having the same single-time need. Usually the payment in this case is in the form of a fee for both the boat and the ferryman’s services. The farmer would like to have an extra horse for a few days each year and can afford to pay well for its use, but could better go without the horse those few days than have the expense of keeping it throughout the year. He may gain greatly, however, if he can hire a horse at such times.
A hack or a taxicab is hired by the hour, a carriage from the livery stable by the day, a bicycle, a sewing machine, a type-writer, by the day, week, or month. Boats, guns, tents, jewelry, even diamond engagement rings, yield their joys under the renting contract. People frequently hesitate between the renting and the purchase of a piano, and in some cases renting is the more convenient and desirable way of securing its use. The purchase of a dress-coat or of a masquerade-suit to be worn but once, involves for some persons a needlessly large expense, when for a moderate sum the temporary use may be had, and the article may then be returned, little the worse for wear, to the accommodating clothier.
§ 11. Buying the usance without a renting-contract. When the owner or his employee has charge of the agent and directs it, there is usually not a renting-contract, altho the purchaser is buying the usance. When the use of the machine is a minor element, the transaction takes the form of hiring the man’s services, while he furnishes the needed machines. Thus the cabman, the truckman, the ferryman, the bootblack, the carpenter, are hired and paid for their labors along with the use of the wagon, horse, boat, brushes, and tools. These cases are midway between the hiring of a material use-bearer and the hiring of a laborer, having something of the nature of each. A case of the same kind on a large scale is seen in transportation by railroad or by steamship, where the passenger is getting by one payment a great complex of uses, of fuel, engines, machines, car or ship, services of engineer, seaman, conductor, or captain. It is a step further to the case where the customer buys the product of a factory. The sale of the yard of cloth is the sale of the raw materials, the uses of building, engines, looms, and the labor of various employees, all combined in one product. In some cases the usance (as of craftsmen’s tools) is sold under a labor- or wage-contract; in other cases (as of boats and trains) it is sold under a transportation contract, the price becoming chargeable as the usance is given; in other cases (as in manufacturing and mercantile business) the price of the usance is included in the contract of sale of products which the uses of agents have at an earlier time helped to produce. In none of these cases is there a renting-contract, for possession of the agent is not delivered to the buyers of the use, and the owner continues to be responsible for the repair and operation of the agent. It is merely a matter of convenience, reflected and fixed in custom, whether sale of usance shall be under the renting-contract or under some other form. With more or less of difficulty and of advantage its use might be extended to the borrowing and lending of many classes of goods where it is not now used.
§ 12. Unsuitability of the renting-contract in commerce. The renting-contract has always proved to be unsuited to most transactions of commerce and manufactures. As these classes of industry were developing rapidly in cities near the end of the Middle Ages and throughout the sixteenth, seventeenth, and eighteenth centuries, borrowing and lending in the form of or in terms of money was more and more employed, and in this respect there was a striking contrast between city industries and agriculture, where the renting-contract was almost universal.
The materials and appliances needed for manufacture and commerce are so manifold, and are so varying in quality, that the renting-contract is very cumbersome and difficult to enforce. A merchant embarking on a trading journey would find great annoyance in renting a ship and a stock of goods. He must agree to repay the loan in goods of the same kind and quality as those received, a contract most difficult to interpret and execute, and giving occasion to costly tests and countless disagreements. It was much easier for the merchant if he had not means enough for his enterprises to get others to go in on shares (a very common method) or to obtain a loan under the interest contract, i.e., either a money loan, with which to buy the goods, or an agreed price in money for all the goods borrowed. With the growth of industry and commerce, wealth increased in towns, more and more taking the form of goods which could not conveniently be rented, such as ships, wagons, tools, and stocks of merchandise.7
§ 13. Definition of rent. Let us now consider the term applied to the payment made under the renting-contract. The word rent comes from the Low Latin renta from renda, or rendita, in turn from redditus, that which is given, yielded, given back or returned. The French rendre (English render), to give or return that which belongs to one, was used very early. Chaucer used “rente” as income: “Cattle had he enough and rente,” “cattle” probably meaning chattels (goods, wealth) and “rente” meaning income. The larger incomes of that time were derived as payments from vassals or tenants of estates. Rental is a collective term for a number of rents; the total yield of an estate was called its rental, and a list of the various sources of income, including all payments due from tenants in money, produce or services, constituted its rent-roll.
The word rent has continued to be used popularly as the amount paid by one person to another for the use of material things which must be returned to the owner after the time of use agreed upon. We speak of the rent of a house, boat, etc., using the word as a synonym for hire. In the European languages the word is used generally in that sense, tho with various shades of meaning. In French la rente means the income from any kind of property; but corporate securities and national bonds particularly are called les rentes (probably because they are a form of investment yielding a permanent income), and one who has a fixed income from rents is called a rentier. In German the term Rente is used more broadly than in English, as an income of any sort, Grundrente meaning the rent of land, and Capitalrente (like Capitalzins) the income usually in English called (according to conditions) either dividends or interest.
With this usage and the problem in view, we may define rent as the price paid for the temporary possession and use of a more or less durative agent which is to be returned to the owner at the end of the specified period. Thus broadly understood, rent as a contractual payment includes not only the price of the true usance, but usually also something more to cover repairs, wear and tear, services of the owner in preparing and taking care of the use-bearer, collecting the rent, etc. It is useful to distinguish between the whole payment, the gross rent and the true, or net, rent which is that part of the payment that is left, after making due allowance for all the other items of cost. Net rent is the estimated price of the net usance.
In the next chapter we have to examine how the general principles of price are exemplified in the problem of rent.
Various meanings of rent. Various other meanings have been given to rent as used in economics which may be called to the student’s attention that he may be on his guard against misunderstanding. The English economists from Adam Smith on restricted the meaning to the most striking of the cases of rent, as seen in their day, and defined it in the words of Ricardo as: “The price paid to the landlord for the use of the original and indestructible qualities of the soil.” Most of the landlords of England did not themselves cultivate the soil, and their incomes were paid to them by tenant farmers. Where lands were cultivated by the owners, there was a value in the use of the land considered logically apart from the value in the cultivator’s own labor and from other costs; in other words, there was a usance-value in the land, and economists, having no name for this, widened the application of the word rent to include this as well as the price paid to a landlord. But they did not widen it to include the usufructuary value of other agents, and thus they contrasted rent with interest from money loaned, with the income (called by them profits) from agents employed in commerce and manufacture, and with wages of labor. The authority of this definition of rent has rapidly waned since criticism has shown its accidental origin and its illogical limitations. When it was recognized that there was a difference between the usance of an agent to the owner and the price paid to him by another for its uses, the attempt was made to call the former economic rent and the latter contract rent. But this has proved to be confusing and has never gained a place in popular usage. In business practice the term rent is rarely if ever applied to the usance, but only to a contractual payment for the use. In the attempt to remedy the lack of logic in the definition some economists have widened the term to indicate any advantage secured in exchange (the margin of advantage), using such expressions as consumers’ rent, producers’ rent, buyers’ rent, sellers’ rent, and thus have lost all touch both with the original economic definition and with popular usage. Our analysis puts an end to this variation and inconsistency, by its identification of the separable use as the object of valuation. Thus usance and rent are seen to be the value and the price aspects of the same problem.
[1 ]See on the lack of definite notions of price among fellow-members of tribes in primitive society, selections from Herbert Spencer and from Sir Henry Maine, in the “Source Book in Economics,” pp. 3-14.
[2 ]For a description of the conditions prevailing in England just before the Norman Conquest in 1066 see Cunningham, “The Growth of English Industry and Commerce,” vol. I, p. 10 ff. The conditions, as he says, are “difficult to describe in modern terms, as these connote distinctions which only emerged at a later date.”
[3 ]Cunningham, idem, p. 129.
[4 ]Review in general ch. 11 on Consumption and duration.
[5 ]See especially ch. 11, secs. 7, 8.
[6 ]See ch. 26 on Enterprise.
[7 ]This simple difference in practice created and long fostered an illusion in the minds of economists, that land-rent was an income of a peculiar nature, governed by quite different laws from those that govern the income yielded by the machines, tools, and other agents in manufacturing and commerce. Various curious explanations of this contrast were given, all resting on the notion of some inherent differences in the kinds of goods, rather than in the form of contract. Traces of this notion still appear in the classification of wealth into land and artificial agents (often called capital) and in the assumption that rent and interest must in the very nature of things proceed from different classes of goods.