A lease is a contract between a lessor, who own a property, and a lessee, who is paying to temporarily occupy or use that property. This contract creates an agreement that both parties must abide by.
Learn how leases work and why you need one.
What Is a Lease?
A lease is a contract allowing a lessee to use the property of the lessor in exchange for specified payments and according to certain rules. Both the rules and the payments are outlined in the lease.
One of the most common types of leases is between a landlord and a tenant for rental property. What is included in a lease will vary depending on the type of lease and needs of both the lessor and lessee.
A lease is meant to protect both parties by letting each side know their responsibilities and obligations. The laws that govern leases differ from state to state.
How a Lease Works
Leases can be informal documents drawn up between the lessor and lessee. However, most leases are standardized legal documents.
There are certain basics that every lease should include, such as:
- The length of the agreement
- The monthly or yearly rental payment
- The procedures for collecting this payment
- Penalties for late or missed payments
- The obligations of the lessee while leasing the property
- The obligations of the lessor for maintaining or repairing the property
- Conditions under which the lease will be considered broken
- The signatures of everyone involved
Many leases will also include restrictions on the use of the property. For example, a car lease will limit the number of miles the vehicle can be driven per year. A lease for a rental apartment may restrict the property from being used for business or retail.
The sections required in the lease will vary depending on the type of the lease and the requirements of the state where it is signed. There also will be clauses that some lessors see as essential while others will omit.
Leases can be anywhere from one page to twenty pages, depending on the amount of information covered. The more in-depth your lease is, the better protected you likely are, though length does not guarantee that a lease is well-written or comprehensive.
If the lessor or lessee breaks any term of the lease, the lease is no longer binding. The offending party may be subject to legal action and financial penalty for breach of contract.
In the case of a rental property, the lease should be signed by the landlord or the landlord’s agent, as well as by all tenants over the age of 18. Otherwise, parties that do not sign the lease can argue that they are not obligated to abide by its terms.
If you are a landlord putting together a lease, you should consult with your real estate attorney and use your own prior experience when constructing your lease. If you are a lessee, you should know the local laws governing leases and landlord-tenant agreements so you know what your rights are.
Types of Leases
Different kinds of properties may be leased out to tenants.
- Residential leases, such as apartments or homes
- Commercial leases, such as retail or office spaces
- Car leases
- Industrial or land leases, including space for cell phone towers, parking spaces, or farmland
- Advertising space leases, such as billboards
Consumer leases also fall into one of two broad categories.
- Open end lease: A lease in which the amount owed when the lease ends is based on the residual and realized values of the property. If the realized value is less than the residual value, the lessee may be required to pay all or some of the difference. If the realized value is greater than the residual value, the lessee may be entitled to a refund.
- Closed end lease: Any lease other than an open end lease.
Lease vs. Rental Agreement
While the two terms are often used interchangeably, a lease and a rental agreement are not the same type of contract.
|Agreement over a set term, usually one year||Short term contract, often 30 days|
|Original terms cannot be altered unless both parties agree||Terms can be changed by either party providing a written notice of the change|
|Does not automatically renew||Automatically renews unless terminated in writing by either party to prevent renewal|
|After expiring, may become month-to-month or may require a new lease to be signed||Usually requires 30 days advance notice of changes to terms|
Do I Need a Lease?
A lease protects both lessors and lessees by outlining their obligations and responsibilities toward each other and toward the property. Without a formal lease, it can be difficult to seek legal protection in the case of disputes, damage, eviction, non-payment, or other conflicts.
For example, many states have tenant protection laws in place if a landlord's property goes into foreclosure. But these laws may not apply if there is no formal lease between the landlord and tenants.
Anyone who is involved in renting property, either as the lessor or lessee, should have a signed lease in place to protect themselves.
There are many lease forms available online, and these can serve as a starting point for putting together a document. However, every state has specific laws for everything from fair housing to security deposits that need to be followed exactly.
You should have an attorney go over your existing lease or help you to prepare a new one. A thorough and legally accurate lease will protect you from misunderstandings and disputes.
- A lease is an agreement between a lessor, who own a property, and a lessee, who is paying to temporarily occupy or use that property.
- This contract allows a lessee to use the property of the lessor in exchange for specified payments and according to certain rules.
- A lease is meant to protect both parties by letting each side know their responsibilities and obligations. Without a formal lease, it can be difficult to seek legal protection in the case of disputes, damage, eviction, non-payment, or other conflicts.
- Leases must be drawn up according to the laws and requirements of the state where they are enacted.
Consumer Financial Protection Bureau. "What Should I Know About the Differences Between Leasing and Buying a Vehicle?" Accessed Dec. 2, 2020.
Consumer Financial Protection Bureau. "CFPB Consumer Laws and Regulations Consumer Leasing Act," Page 3. Accessed Dec. 2, 2020.
Consumer Financial Protection Bureau. "What Should I Do if the House or Apartment I’m Renting Goes Into Foreclosure?" Accessed Dec. 2, 2020.