Lease Definition

What is a Lease?

A lease is a legal contract that establishes the terms of renting real estate or other types of property. There are several types of leases, but each typically includes standard provisions such as the rent amount, lease term, and the rights and responsibilities of the landlord and the tenant.

REtipster does not provide legal advice. The information in this article can be impacted by many unique variables. Always consult with a qualified legal professional before taking action.

What Should Be Included In A Lease?

Whether the lease is for residential or commercial property, certain elements should be present, such as:

  • The parties to the lease. The lease agreement should spell out the name of the tenant and the landlord. In some residential lease agreements, any adult occupying the property but not a signatory to the lease is also listed in the lease.
  • Description of the property. This includes the full property address as well as a description of any storage units, parking spaces, and any other areas reserved for the exclusive use of the tenant.
  • Term of the tenancy. Lease agreements are typically reserved for terms of six months or longer. In commercial leases, terms of 10 years or more are not uncommon. For terms of fewer than six months, a rental agreement instead of a lease is commonly used.
  • Rental price. This section typically includes the rental amount, due dates, payment methods, and other charges, such as late fees or return-check charges. Landlords should pay attention to local laws on the payment of rent, as these vary from state to state.
  • Security deposit and fees. The lease should state the amount of the security deposit, how it can be used, the policy for refunding the deposit at the end of the lease, and how deductions will be calculated. This section may also cover nonrefundable fees like pet or cleaning fees. Again, state laws vary regarding security deposits, so landlords should ensure their security deposit policies comply.
  • Responsibility for utilities. In residential leases, it is typical for the lease to specify whether the landlord or tenant is responsible for electricity, gas, water, sewer, and trash collection. In a commercial lease, this is usually described as either a gross lease or a net lease[1].
  • Repair and maintenance. The lease should stipulate which party handles routine maintenance and repairs and the process for handling repair requests. Most states have laws limiting the landlord’s right to enter a residential property, so it is common to include a right-to-enter clause describing the situations where the landlord can enter the property and the policy for notification. There are usually no limitations present on commercial property, but it is still good form to include entry and notification policies in the lease.
  • Tenant rights, responsibilities, and restrictions. This section details issues such as lawn care, snow removal, and the right to make alterations to the property. Landlords can also prohibit or restrict smoking and/or pets on the premises. In a commercial lease, landlords are generally responsible for maintenance, although some lease agreements may share some of these responsibilities with the tenant[2].
  • Subletting. Most landlords prohibit or place restrictions on subletting a residential property. Some also include language describing the policy on using the property or any portion of it as an Airbnb rental. A commercial lease should also state whether the lease can be assigned.
  • Insurance. Many lease agreements specify that the tenant maintains liability insurance on the property.
  • Termination and lease extensions. The procedure for lease termination and notification requirements should be clearly described. The lease should also note whether there is an option to renew at the end of the term. Most residential leases also include information on “holdovers,” which typically state that the lease converts to a month-to-month agreement once the term expires.

RELATED: Single, Double, and Triple Net Lease – What’s the Difference?

Special Considerations for Commercial Leases

Commercial leases take one of three forms: gross or full-service; net (either single net, double net, or triple net); or modified gross, a hybrid between gross and net. The type of lease describes the costs and responsibilities assigned to each party.

Beyond that, however, certain items are typically addressed in commercial leases that do not apply to residential properties. These are:

  • Escalations: when rent increases are allowed and how they will be calculated.
  • Common Areas: Hallways, restrooms, and other common areas included in the lease and how they are maintained.
  • Improvements and Build-Outs: Who pays for them and who owns them when the lease expires.
  • Signage: What is allowed, its size, and placement.
  • Americans with Disabilities Act: Who pays for necessary modifications (for commercial spaces that employ more than 15 people or are open to the public[3]).

Residential leases are much more regulated than commercial leases, which means many of the terms are codified in state and local law. Commercial leases, on the other hand, are virtually unrestricted and legally subject only to contract law. This means they are highly customizable, with nearly every item open for negotiation.

Void and Voidable Leases

Landlords need to be aware that the terms of a lease are not necessarily enforceable. This is especially true with residential leases because state and local governments regulate housing as part of public policy.

In Arizona, for example, state law requires landlords to give two days’ notice before entering a tenant’s home. Even if the tenant signed a lease that says the landlord can enter the property at will, the lease is void because it does not comply with the law, i.e., it is legally unenforceable.

Similarly, a lease is void if the space is not legally rentable. If a homeowner converts their garage into a one-bedroom apartment, but the structure does not meet local housing codes, the lease is unenforceable because the space cannot legally be rented out.

Leases can also be voidable. A voidable lease is one that is enforceable under state law, but one party has legal justification for canceling it. In other words, the lease would otherwise be valid if the party had not asserted an objection.

For example, if a landlord is planning major structural renovations to a property and they rent it to a tenant without disclosing that information, the tenant may be able to void the lease when the construction crew shows up. A lease is also voidable if the tenant enters active military duty or becomes a victim of domestic violence.

Lease vs. Master Lease

A master lease is a controlling lease that gives the tenant the right to control and sublet a property for a specified period. A master lease is used for income-producing properties.

When an investor signs a master lease with a property owner, they become the de-facto owner of the property via equitable title. The owner retains the legal title to the property, however. The investor makes regular lease payments to the seller, but in return, the former is entitled to all income and tax benefits associated with the property. A master lease also sometimes includes an option to buy the property after a certain number of years.

A master lease is like a lease-option agreement. It is often used by real estate investors to invest in property without putting up a sizable down payment in cash or obtaining a loan.

Do You Need a Lawyer to Create a Lease?

Many downloadable lease templates are available online (see below), but in some situations, it may be beneficial to have a lawyer draft or review a lease.

This is particularly important with commercial leases because they are usually highly customized. Commercial leases often deal with complex issues that do not apply to residential lease agreements. For example, the owner of an industrial building may need to address the hazardous waste generated by a manufacturing tenant.

While residential leases usually include boilerplate language, there may still be instances where it’s prudent to seek legal advice. Some areas have strong tenant protection laws and lease requirements, so landlords need to ensure the contract is in compliance.

Takeaways

Leases are legal documents that spell out the rights and responsibilities of both the tenant and the landlord. All leases—residential and commercial—should include certain elements, such as the description of the property, parties to the lease, term, rent, and termination.

Although it is not always necessary to have a lawyer draft or review a lease, it is often helpful because local laws can differ from standard lease language. This is especially true with commercial leases since these are flexible and highly customized.

Sources

  1. CXRE. (n.d.) Understanding Commercial Lease Agreement Terms. Retrieved from https://cxre.co/real-estate-investment/understanding-commercial-lease-agreement-terms/
  2. Legal Nature. (n.d.) Commercial Lease Agreements: Everything You Need to Know. Retrieved from https://www.legalnature.com/guides/everything-you-need-to-know-about-commercial-lease-agreements
  3. Nolo. (n.d.). The Commercial Lease: What You Should Know. Retrieved from https://www.nolo.com/legal-encyclopedia/commercial-lease-basics-29934.html

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