What is a Lease?

A lease is a contract outlining the terms under which one party agrees to rent property owned by another party. It guarantees the lessee, also known as the tenant, use of an asset and guarantees the lessor, the property owner or landlord, regular payments for a specified period in exchange. Both the lessee and the lessor face consequences if they fail to uphold the terms of the contract. It is a form of incorporeal right.

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Lease

Understanding a Lease

Leases are legal and binding contracts that set forth the terms of rental agreements in real estate and real and personal property. These contracts stipulate the duties of each party to effect and maintain the agreement and are enforceable by each. For example, a residential property lease includes the address of the property, landlord responsibilities, and tenant responsibilities, such as the rent amount, a required security deposit, rent due date, consequences for breach of contract, the duration of the lease, pet policies, and any other essential information.

Not all leases are designed the same, but there are some common features: rent amount, due date, lessee and lessor, etc. The landlord requires the tenant to sign the lease, thereby agreeing to its terms before occupying the property. Leases for commercial properties, on the other hand, are usually negotiated in accordance with the specific lessee and typically run from one to 10 years, with larger tenants often having longer, complex lease agreements. The landlord and tenant should retain a copy of the lease for their records. This is especially helpful when disputes arise.

Key Takeaways

  • A lease is a contract outlining the terms under which one party agrees to rent property owned by another party.
  • The lease guarantees the tenant, also known as the lessee, use of an asset and guarantees the lessor, the property owner or landlord, regular payments for a specified period in exchange. 
  • Leases are legal and binding contracts that set forth the terms of rental agreements in real estate and real and personal property.
  • Consequences for breaking leases range from mild to damaging, depending on the circumstances under which they are broken.

Breaking a Lease

Consequences for breaking leases range from mild to damaging, depending on the circumstances under which they are broken. A tenant who breaks a lease without prior negotiation with the landlord faces a civil lawsuit, a derogatory mark on their credit report, or both. As a result of breaking a lease, a tenant may encounter problems renting a new residence, as well as other issues associated with having negative entries on a credit report. Tenants who need to break their leases must often negotiate with their landlords or seek legal counsel. In some cases, finding a new tenant for the property or forfeiting the security deposit inspires landlords to allow tenants to break their leases with no further consequences.

The terms of a lease are not automatically enforceable, so a clause that allows a landlord to enter the premises at any time without notice or one that, via court action, grants a landlord to recover more than statutory limits is not enforceable.

Some leases have early termination clauses that allow tenants to terminate the contracts under a specific set of conditions or when their landlords do not fulfill their contractual obligations. For example, a tenant may be able to terminate a lease if the landlord does not make timely repairs to the property.

Commercial Leases

Tenants who lease commercial properties have a variety of lease types available, all of which are structured to assign more responsibility on the tenant and provide greater up-front profit for the landlord. Some commercial leases require the tenant to pay rent plus the landlord's operational costs, while others require tenants to pay rent plus property taxes and insurance. The four most common types of commercial real estate leases include:

  • Single-Net Leases: In this kind of lease, the tenant is responsible for paying property taxes.
  • Double-Net Leases: These leases make a tenant responsible for property taxes and insurance.
  • Triple-Net Leases: Tenants who sign these leases pay property taxes, insurance, and maintenance costs.
  • Gross Leases: Tenants pay rent while the landlord is responsible for other costs.