What is a Lease?

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Definition:

A lease is a contract permitting one party to use another’s property over a specific period of time in exchange for rent payments, and sets terms and conditions for the rental.

🤔 Understanding a lease

A lease is a contract under which one party pays rent to the other for the right to use the other party’s property for a specific period of time. The property could be a house or apartment that the renter (known as a lessee) can live in, or shopping or office space in which they can run a business, or a car that they can drive. The lease sets out the agreement’s terms, including the length of time the lessee can use the property, how much the lessee must pay the property’s owner (known as a lessor), the rules for how the property can be used, and what rights and obligations each side has. Leases are legally binding, so violating the contract’s terms can lead to penalties.

Example

Let’s imagine a young professional named John, who’s moving to Washington, D.C., for a new job. John isn’t ready to buy a condominium or a house, so he finds a studio apartment he can rent for $1,800 a month. The landlord sends John a lease that lays out the dates of the rental, the $1,800 monthly rent, what expenses he’ll have to cover, any restrictions on how the apartment can be used, what the landlord’s rights and obligations are, and what will happen if either party breaks the lease. Both parties sign the lease. Now, John has the right to occupy and use the apartment for the length of the lease as long as he abides by the conditions of the contract.

Takeaway

A lease is kind of like a gym membership . . .

When you have a gym membership, you’re paying for the right to use the gym’s equipment and facilities, and take classes. The gym must ensure everything is usable, and you must follow its rules. Violating those terms could lead to penalties - the gym might have to refund the member’s money; the member could lose their membership. Similarly, in a lease, a lessee pays to use a lessor’s property, and if either doesn’t fulfill their obligations, there may be consequences.

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What is a lease?

A lease is a legal agreement that allows one party, the lessee, to occupy and use the property of another, the lessor, in exchange for paying an agreed-upon amount as rent. Leases are most commonly used in real estate, but they can also be used for automobiles or other property.

A lease documents the rights and responsibilities of both parties, who pays for what, and what happens if either party breaks the terms of the lease. Leases are legally binding, so neither party can simply change their mind and walk away without consequences after signing.

Leases can be used either for residential properties, like apartments and houses, or commercial real estate, such as office space and storefronts. Typically, leases are used when renting properties for extended periods of time, a year or more, as opposed to rental agreements used for shorter periods, such as month-to-month rentals. But this is not a hard and fast rule. Month-to-month lease agreements do exist.

Commercial leases are often longer than residential ones. In New York, for instance, commercial leases typically last 3 to 5 years, or 5 to 10 years for retail properties. Some can be much longer. In contrast, it’s common for residential lease terms to be just a year or two, sometimes less.

Although every lease will have different rules and conditions, they all must adhere to local laws, and landlords are generally responsible for making sure a property is livable and all facilities are functioning properly, no matter what the contract says. In some states, landlords are legally obligated to make repairs to malfunctioning appliances and equipment, even if it’s not explicitly stated in the lease contract.

What does a lease accomplish?

A lease grants the lessee leasehold rights to a piece of the lessor’s property in exchange for rent payments. It also sets out the terms and conditions of the rental.

Like all contracts, a lease protects the parties by clearly outlining their rights and obligations. By doing so, it prevents misunderstandings that could lead to trouble.

For example, if a rental is advertised as “all-inclusive” without further clarification, there’s room for misunderstanding: Does that mean utilities are covered by the rent? How about snow plowing? Internet access? Phone service? A lease agreement clarifies points like these to avoid conflicts.

A lease doesn’t transfer ownership of the property. The landlord or other lessor still owns the property, and possession of it reverts to them when the lease ends. Some auto leases do have an option for the driver to buy the car outright at the end of the lease.

What should a lease include?

Every lease is different, but all real estate leases should include the following:

  • The tenant’s name, and potentially their contact information
  • The landlord’s name, address, and contact information
  • The rent amount, when it’s due, and how it should be paid
  • The location of the leased property, and its mailing address if they’re different
  • The period of the lease - when it starts and ends
  • The terms for renewing the lease
  • How many people are permitted to live on the property, if it’s a residential property
  • Whether a security deposit is required, and how much
  • The procedures for moving in and moving out
  • The landlord’s responsibility for repairs and maintenance of the property
  • What utilities are provided and who pays for them
  • The availability of parking
  • How snow and trash removal work
  • Sublease rights - i.e., whether the tenant is allowed to lease the property to someone else
  • What happens if either party breaks the lease

Auto leases will also typically include the purchase options in case the lessee wants to buy the car when the lease is up, how many miles can be driven over the lease period, and how much the lessee will be charged if they exceed that mileage.

If the landlord anticipates needing to make any repairs or to enter the property for any reason (to show it to a potential buyer, for example), that should also be stated in the lease. Many states also require landlords to disclose the presence or recent removal of lead paint.

How is a lease different from a rental agreement?

The primary difference between a lease and a rental agreement is the duration of the lease term and the rent protection it provides.

In a lease, the rent is guaranteed to stay the same for the entire lease period. In a city with rapidly increasing rents, this can be a very desirable perk: You could sign a lease for two years and lock in the same rent for the entire time. However, you might be legally bound to pay rent for the entire time, even if you later decide you want to move somewhere else.

Rental agreements are typically used for shorter terms, like month-to-month, and don’t provide that kind of rent protection. In a month-to-month rental, the contract is renewed every 30 days, so the landlord can increase rent every month since there is no fixed term. On the other hand, rental agreements provide tenants more flexibility: They can leave at any time, since they’re not locked into a longer-term lease.

What makes a lease official?

Many states require leases to be in writing. When that’s the case, it becomes official once both parties sign the contract.

However, there is often no specific action that makes a lease official. In some states, verbal or oral leases can be considered official, especially if the lease term is less than a year.

What happens if you break a lease?

If you break a lease, you may be subject to eviction from the property (or repossession, if the lease is for property like a car), or monetary penalties via a lawsuit. You might have to forfeit any security deposit you paid at the start of the lease. Failure to live up to the terms of a lease can hurt your credit score and make it harder to rent another property, since you likely won’t be able to use the landlord in the broken lease as a reference.

That said, it is possible to break a lease legally. In certain states, you can break a lease if:

  • You are a victim of domestic violence
  • You are an active military member who is being transferred to another station
  • Your landlord has not ensured the property is livable
  • The landlord broke the lease agreement
  • The lease was never legal in the first place, e.g., if the landlord didn’t have the legal right to rent the property

If a landlord breaks a lease, the tenant can take legal action against them, to seek monetary penalties. If the tenant is being evicted as a result of the landlord breaking the lease, the tenant may also be able to take legal action to stop the eviction.

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