What Is a Lease?
Why Is a Lease Needed?
Leases can vary from one or two pages to 10-plus pages. Keep in mind that a long lease doesn’t necessarily indicate a good lease. They also may include different information, depending on the state or the lease: Some states or municipalities require certain sections, and some landlords include certain clauses or terms that other landlords might omit, depending on their preferences and the rental’s intentions.
What Does a Lease Require?
- Names of the lessee and lessor
- Duration of the lease and the start date
- Renewal details — for example, is there a required notice for non-renewal? Does the lease transition to month-to-month after a year?
- The address of the piece of property or any other identifying features, such as serial number or VIN
- Security deposit requirements
- Any restricted uses.
Most landlords will require a security deposit, which is typically put in an escrow or separate bank account — this is required by some states, like New York. The deposit is owned by the tenant but held by the landlord until the premises are surrendered in good condition. But landlords can’t pull from the deposit for any minor reason. Ordinary wear and tear is expected and not something the renter is expected to cover.
Some states have even more stringent security deposit rules, so make sure to check with a legal expert familiar with local laws. Landlords may need to provide the name and account number of the bank where the security deposit is withheld and pay interest on the money. They also might need to prepare a list of the property’s pre-existing conditions and prior damage. Otherwise, the landlord could be penalized and required to forfeit the security deposit. Without this list, there is no easy way to determine whether the lessee is liable for damages.
Is Renters Insurance Required?
Renters policies provide “named peril” coverage, meaning the policy states specifically what you are insured against. Common coverage areas are:
- Water damage
- Personal property
- Fire, lightning, or wind
Lease vs. Sublease
The subletter remains liable to the original landlord, and must abide by the original lease terms, including paying any remaining rent payments and operating expenses. In a down market, the original renter may require a lower rent payment from the subletter than the initial lease agreement and agree to pay the differential.
However, if market prices have increased, the renter may be able to secure more rent from their subletter. Some commercial leases stipulate that any overages in rent be shared with the landlord, but in residential real estate, it is generally illegal to charge the subletter more than the original payment amount in the renter’s lease.
Car rentals are other types of sublease. Here, a lessee or vehicle owner leases the car via a third party for a specified period. While these types of agreements are uncommon, they are a growing travel industry trend as an alternative inexpensive cost for travelers and locals.
How to Get Out of a Lease
Not sure if you need to evict? Watch out for these 10 common lease compliance issues.
Residential vs. Commercial Leases
In addition to rent, some commercial leases require the lessee to cover the landlord’s operating costs in addition to paying taxes and insurance.
There are four key types of commercial leases:
- Single-net leases, which require the tenants to only pay rent and taxes
- Double-net leases, where tenants only pay rent, insurance and taxes
- Triple-net leases, which are common for major companies like McDonalds, require the tenant pay rent, all property taxes, maintenance costs and insurance
- Gross leases, where the tenant pays only the rent and the landlord covers other maintenance expenses.
Many major companies, such as Starbucks and Whole Foods, commonly use triple-net leases and ground leases.