What Is a Lease?
A lease is a contract outlining the terms under which one party agrees to rent an asset—in this case, property—owned by another party. It guarantees the lessee, also known as the tenant, use of the property 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. A lease is a form of incorporeal right.
- A lease is a legal, binding contract outlining the terms under which one party agrees to rent property owned by another party.
- It guarantees the tenant or lessee use of the property and guarantees the property owner or landlord regular payments for a specified period in exchange.
- Residential leases tend to be the same for all tenants, but there are several different types of commercial leases.
- Consequences for breaking leases range from mild to damaging, depending on the circumstances under which they are broken.
- Certain protected groups are able to vacate their leases without any consequences, for which some form of proof is usually required.
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 property address
- Landlord and tenant responsibilities
- The rent amount
- A required security deposit
- Rent due date
- Consequences for breach of contract
- The duration of the lease
- Pet policies
- Other essential information
Not all leases are designed the same, but all of them have some common features. These include the rent amount, the due date of rent, the expiration date of the lease. The landlord requires the tenant to sign the lease, thereby agreeing to its terms before occupying the property.
Most residential leases are standard with the same terms for all tenants. 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 if and when any disputes arise.
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, giving a certain amount of notice or forfeiting the security deposit allows tenants to break their leases with no further consequences.
Some leases have early termination clauses that allow tenants to terminate the contracts under a specific set of conditions (job-related relocation, divorce-induced hardship) 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.
The terms of a lease cannot violate state or federal law. 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 allow is not enforceable.
Certain groups of people have more leeway in ending leases early. Chief among these are members of the military. Under the Servicemembers Civil Relief Act, they can break their leases if they receive active-duty orders, requiring them to relocate for more than 90 days.
Many states allow domestic violence victims to break leases without negative consequences. The abuse must have been fairly recent (normally within the last year) and the tenant usually should show some form of proof, such as a court order of protection or a police report documenting the violence.
Some states also allow renters, especially older adults, to terminate a lease early due to disability, health conditions, or medical crises that make living in the current home untenable. Usually required is a letter from a local doctor, hospital, or other medical professional attesting to the health condition.
Even people in these protected groups must give landlords at least 30 days’ notice, in writing, of their desire to break the lease.
Lease-Breaking in the COVID-19 Era
Coronavirus-induced shutdowns and financial hardships have caused many renters to wonder if they can get out of their leases without being penalized because of the pandemic. The short answer is no. Despite federal and eviction moratoriums, the pandemic does not relieve a tenant from their contractual obligations. Even in the era of COVID-19, if you end a lease early, you’re still responsible for your rent until the end date in your contract.
That said, there might be extenuating circumstances and exceptions. On Aug. 3, 2021, the Biden administration imposed a Center for Disease Control-recommended 60-day moratorium on evictions for failure to make rent or housing payments in areas experiencing high incidences of the Delta variant of the virus. However, on Aug. 26, 2021, the Supreme Court vacated the CDC order, effectively ending the eviction moratorium.
On Sept. 24, 2021, the Federal Housing Finance Agency (FHFA) announced that Fannie Mae and Freddie Mac would continue to offer COVID-19 forbearance to multifamily property owners. So if your landlord has a Fannie- or Freddie-backed mortgage, an FHA loan, or a VA loan, they must agree not to evict tenants solely for the nonpayment of rent, and allow flexibility in back payments.
Having lost the threat of evictions, landlords in these situations may be more lenient in letting a renter break a lease.
If you want to break your lease because of financial problems, there are rental assistance programs in place. The federal Emergency Rental Assistance program, for example, has thus far allocated just $3 billion of its $47 billion budget. You can learn about eligibility and finding a local assistance program or a counselor through consumerfinance.gov, the website of the Consumer Financial Protection Bureau (CFPB).
Types of Leases
Beyond residential 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.
How Do Leases Work?
Leases are generally legally-binding contracts between two parties: the lessor and the lessee. They involve a piece of property rented out by the owner (the lessor) to the lessee or the tenant. Leases can be verbal agreements but are normally drawn up in writing. Both parties agree to the terms of the lease, including the rental amount, length of time for the contract, as well as any consequences that may result if either party doesn’t uphold the terms and conditions of the contract.
What Benefits Do Leases Provide for Landlords and Tenants?
Signing a lease provides both landlords and tenants with clear terms and conditions outlining the relationship and the rental agreement. Doing so also establishes the rights and responsibilities of each party involved. For instance, leases provide both parties with structure, in that they establish the cost associated with renting and the length of time under which the lease is exercisable. This provides both parties with stability. A lease also gives both parties a clear understanding of what happens when either party breaks or goes against any of the terms laid out within the lease contract.
Can You Break a Lease?
Either party can break a lease. But doing so isn’t advisable as there may be consequences involved. Tenants may be responsible to pay the landlord early release charges and/or the remaining balance to pay off the lease. In some cases, breaking a lease may even hurt a tenant’s credit score. Landlords may have to provide tenants with alternate living spaces while others may face civil or legal challenges if they break their leases without cause. Regardless of whether you’re a tenant or landlord, it’s always a good idea to talk to the other party involved to avoid any negative consequences and end the lease amicably. Certain protected groups, such as active military members or victims of domestic violence, may break their leases without any consequences as long as they are able to provide some proof.