How Does a Lease Work?

Real estate is often divided between so-called renters and property owners. However, most of us think of rental as leasing. As a landlord, your tenants are leasing a property from you, not renting. In this blog, you'll learn the difference between renting and leasing—plus how a lease works and what a lease agreement should include.

The difference between "renting" and "leasing"

Think about a property the way you think about an automobile. If you rent a car, it's probably for just a few days, perhaps on vacation or during a move. If you lease a vehicle, you're leasing it for a period of years and paying for the use of the car during that time, along with its depreciation.

It's the same with an apartment, condo, or single-family dwelling. Renting lasts for only a short term, as in the case of an Airbnb. On the other hand, leasing generally lasts several months to several years, depending on the tenant and the terms you've agreed. In addition, during a lease, the tenant often has obligations regarding upkeep and maintenance associated with the property.

What you should look for in a lease agreement

When taking on a new tenant, it's important to put together a comprehensive lease agreement so that the tenant's rights and responsibilities are clearly spelled out. A thorough lease protects you as the landlord and the tenant by ensuring that everyone is literally on the same page regarding the lease. 

If you work with a real estate broker regularly, either as a property manager or to list your rental property, they may have a standard lease agreement template that you can use. Otherwise, you may want to enlist the help of a real estate attorney to draw up a custom lease agreement, especially if your property has unique features or if you have special requirements to include.

Regardless of where you get the lease agreement, the following items should be included:

Occupants

All adult tenants (age 18 or over) must be included in the tenant screening process and named in the lease agreement. In addition, each of them should sign the agreement to indicate that they are aware of all of the terms and conditions.

By including all adult tenants, you ensure that if one leaves before the end of the lease term, the others are financially obligated to continue paying rent for the remainder of the term. In addition, if one tenant violates the terms of the agreement, all of the named parties are responsible and liable for damage that may occur.

Duration

You'll want to state clearly how long the lease term will last. A standard term may be 12 months, though seasonal or partial year leases may be common in some markets. A longer lease term of two or three years may be attractive for some tenants, offering them added peace of mind and stability. However, be cautious about signing a longer-term lease since it may prevent you from increasing the rent if market conditions improve the value of your property.

Responsibilities

Your tenant may have specific obligations concerning the care and upkeep of the property. For example, you may require them to handle the lawn care or change the filters in the HVAC system. These should be clearly spelled out in the lease agreement. You should also include your responsibility as the landlord and the terms under which you will perform any needed maintenance or repairs.

Financial obligations

Here, you'll include the amount of rent, pet fees or pet rent, security deposit, and other financial obligations. If you hold a security deposit in escrow, you'll also want to name the financial institution where the escrow account is located. Here you will also give instructions as to when the rent is due, late fees that may be imposed, and how the rent is to be paid — whether through an online portal, check, or ACH bank transfer.

Pet policy

Should you decide to accept pets in your rental, you'll want to include the number of pets allowed, the type of pets allowed, and the size of pets allowed. In addition, you will want to outline any specific information about pets, like the amount of the upfront pet deposit or the monthly rental fee you will charge.

Restrictions

There are many types of restrictions or limitations you want to impose on your tenants or restrictions regarding your role as a landlord. These should be outlined, including the following:

• Limits on disruptive behavior, such as excessive noise, and illegal activity, such as drug dealing
• Rights to sublease or sublet the property
• Restrictions on early termination of the lease agreement
• Relevant disclosures and required information regarding lead paint, rent control, health and safety codes and other local or state requirements

Rights of entry

Although you as a landlord have a right to enter the property, the tenant also has a right to privacy. Therefore, you should include information regarding when you will enter the property, for example, to make a repair. You'll also want to communicate how much notice you will be required to give and how you will deliver that notice (e.g. phone call, text message, email address).

Exit process

You'll need to make it clear what will be required at the end of the lease term. This may include:

• The number of days of advance notice required in writing to terminate the lease at its end
• Processes and procedures for final walkthrough, key turn-in, and satisfactory cleaning procedures at the end of the lease
• Information regarding the return of the security deposit along with a time limit for its return.

Be sure that you include supplemental documentation required, including receipts for professional house cleaning and carpet cleaning services, if applicable.

Ready to create a more streamlined leasing experience for your tenants? RentSpree offers a fully integrated process from start to finish, with online application and tenant screening, e-signing of documents including the lease agreement, and ongoing services like renter's insurance referrals and rent payment options.