What Is a Lease?

A lease is a legal agreement between a lessee (or renter) and lessor (or property owner) to use an asset or property for a period of time in return for lease or rental payments. Residential residences are the most common lease type, but commercial real estate, such as retail or office spaces, are leased, too. So are cell towers and billboards.

Why Is a Lease Needed?

Leases explain each party’s responsibilities and obligations and outlines their protections — like renters being protected from illegal evictions. The terms of the lease ensure that the landlords will be regularly compensated in the form of rent. 

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?

While specific clauses can vary, generally, a basic new lease includes: 

  • 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. 

(Investors should pay attention to the 25 most crucial lease clauses.)

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? 

Some properties require proof of renters insurance before signing the lease. This isn’t a legal requirement, so as landlord, the choice is up to you. Renters need HO-4 insurance, which is commonly referred to as renters insurance. This is similar to condominium coverage, or a HO-6 policy. 

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
  • Smoke
  • Theft
  • Vandalism.

Lease vs. Sublease 

A sublease is similar to a lease, but instead of the property owner assigning the lease to a renter, the renter assigns the lease to a third party — also known as the subletter.

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

Breaking a lease early may result in penalties — and renters still may need to pay rent, even after leaving, depending on the terms of the lease. Landlords need to be careful when breaking a lease early, too: It’s illegal in most states to lock a tenant out or remove their belongings. A court order is required for eviction.

Not sure if you need to evict? Watch out for these 10 common lease compliance issues.

A tenant who breaks the lease without negotiating with the landlord first can face a civil lawsuit, a derogatory mark on their credit report, or — in some cases — both. But tenants and landlords can absolutely negotiate for an amicable way to end a lease early, which might mean forfeiting the security deposit. 

The renter can also terminate the lease without fault if the landlord does not fulfill their contractual obligations — like not making reasonable and timely repairs. 

Residential vs. Commercial Leases

Residential leases are for homes, apartments, and related properties. Commercial leases include office, retail, and manufacturing facilities.

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: 

  1. Single-net leases, which require the tenants to only pay rent and taxes
  2. Double-net leases, where tenants only pay rent, insurance and taxes
  3. Triple-net leases, which are common for major companies like McDonalds, require the tenant pay rent, all property taxes, maintenance costs and insurance
  4. Gross leases, where the tenant pays only the rent and the landlord covers other maintenance expenses. 

A ground lease, or land lease, is another common type. With this agreement, the tenant develops the property over the lease term. Once the lease is completed, any improvements made by the tenant are the property of the owner. These leases are common for long-term commercial properties. 

Many major companies, such as Starbucks and Whole Foods, commonly use triple-net leases and ground leases. 

Lease vs. Rental Agreement 

While “rental agreement” can be used as an alternate term for a lease, these agreements typically last for a much shorter term. Rental agreements may last for a month or two; a traditional lease lasts for one or two years. When the lease is over, it may either be renewed or transition to a month-to-month agreement.

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Related terms
Sublease
Lease from one tenant (lessee) to another (called subtenant or sublessee). The agreement between the landlord (the lessor) and the first lessee remains in force and governs the terms of the sublease.
Security Deposit
A security deposit is a paid amount of money to the landlord meant to ensure that rent will be paid and other responsibilities of the lease performed (e.g., paying for damage caused by the tenant). The laws surrounding these deposits vary from state to state.
Amenity
An amenity is a desirable or useful feature or facility within a property structure. Amenities are typically features that are highlighted and pitched to renters when they are looking to rent at a certain complex. Amenities can also be found within gated communities or other areas that have an HOA when talking about single family homes, townhomes, or condos. Examples include a pool, workout room, on-site laundry facilities, etc.