Finance

What Is A Lease?

“Lease” is a term that is very common nowadays. But, most people wonder what is a lease? And how can they get that? A lease is a contract by which one party conveys land, property, services, etc. to another for a specified time, usually in return for a periodic payment.

Property, buildings, and vehicles are common assets that are leased. Industrial or business equipment is also leased.

Understanding a lease

Leases are binding contracts that set the terms and agreements between two parties in real estate and personal property. These contracts dictate the rules and regulations and duties by both the parties to be enforced by each other for maintaining the agreement. For example, a residential property lease includes the address of the property, the responsibility of the landlord, responsibility of the tenant, rent deposits, rent amount, the due date for rent, conditions and consequences for breach of contract, duration of the lease agreement and any other essential information.

Every lease contract is not the same, but they mostly have some common information i.e. rent due, rent information, due date, and expiration date. Before occupying the property or the car the landlord or the leaser makes the lease to sign the contract.

A lease is an implied or written agreement specifying the conditions under which a lessor accepts to let out a property to be used by a lessee. The agreement promises the lessee use of the property for an agreed length of time while the owner is assured consistent payment over the agreed period. Both parties are bound by the terms of the contract, and there is a consequence if either fails to meet the contractual obligations.

What is a lease agreement?

A lease agreement is simply a contract between a landlord and a tenant that states what the tenant will pay monthly for rent and for how long. Lease agreements, like many contracts, tend to affect some people because much of the rules and regulations in the contract can be confusing and overpowering. However, if you have a basic understanding of what is included in a lease agreement, it can help you avoid unnecessary disagreements or expenditures during or after your lease is over.

While most lease agreements are written, there are verbal lease agreements that can be enforced as oral contracts; however, it is important to note that not all states allow verbal residential lease agreements, and verbal commercial agreements are prohibited in every state. Tenants with verbal residential lease agreements are protected by tenants-rights laws that exist in each state. The complexity of commercial leases makes it nearly impossible to substantiate verbal agreements in court and that is why they are not allowed.

A lease guarantees the lessee (the renter) use of an asset and promises regular payments (lease rental installments) from the lessor (the property owner) for an agreed period of time. Unless there is a renewal of the contract or sale of an asset to the lessee; both the property owner and the renter must abide by the terms of the contract for the lease to remain valid.

Types of lease

Leases are very different from each other, but there are some that are common in the property and construction sector. The structure of a lease is created or modified by the lessor’s preference, as well as the current trends in the market. Some leases place the burden on a tenant while others put the entire load over to the property owner. That’s not all; there are many different types in between. here are different kinds of lease arrangements. It makes sense to consider them all to see which is best suited to your business, your particular circumstances, and the asset that you are acquiring. Here are the most common forms of lease agreements.

1.   Absolute net lease

In an absolute net lease, the tenant takes care of the entire burden, including insurance, taxes, and maintenance. The absolute type is common in single-tenant systems, where the property owner builds housing units to suit the needs of a tenant. The proprietor turns over the finished unit to the tenant for a specified duration.

The tenants, in such a case, usually include large businesses that understand the terms of the contract and are ready to shoulder the outlays. However, because most of the burden is on the tenant, property owners usually accept lower monthly rates.

2.   Triple net lease

The triple net lease comes with three expense categories associated with it: insurance, maintenance, and real property taxes. Such expenses are also known as pass-through or operating expenses because the property owner passed them all to the tenant in the form of rent excesses. In some cases, the excesses are referred to as taxes, insurance, and common area (TICAM).

Often referred to as NNN, triple net agreements are the norm in single-tenant, as well as multi-tenant, rental units. Under a single-tenant lease, the tenant exerts control over landscaping and exterior maintenance. In short, the tenant decides what the property looks like as long as the tenancy is in effect.

A multi-tenant arrangement gives the property owner total control over a property’s appearance. In such a way, no tenant can ruin the overall appearance of a building. In addition, a multi-tenant arrangement requires the tenant to pay a regular pro-rata towards operating costs.

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For that reason, tenants obtain the right to audit the building’s operating costs. A triple net lease precludes the property owner from hiring a janitor. Each tenant contributes to janitorial and interior maintenance expenses.

3.   Modified gross lease

The modified gross lease transfers the entire burden onto the property owner. Based on the terms, the owner pays all the insurance, property taxes, as well as common area maintenance. On the other hand, the tenant shoulders janitorial, utility, and interior maintenance costs.

The tenancy arrangement also stipulates that the roof and other structural aspects of the building are the owner’s responsibility. However, because the owner takes care of a large portion of the tenancy’s costs, the monthly rates are higher compared to other types.

The modified lease type is advantageous to the tenant because the owner takes care of associated risks such as operating costs. The tenant’s rates are relatively the same all year, and he plays no part in the affairs of the property. Unfortunately, the owner may choose to charge a premium each month to cater to the cost of managing the building.

4.   Full-service lease

As the name suggests, the full-service lease takes care of most of the cost of operating a building. Nonetheless, there are a few exceptions, such as data and telephone costs. Otherwise, the rest of the cost is on the property owner, including common area maintenance, taxes, interior, insurance, utility, and janitorial costs. As a result, the monthly rate is slightly high, and such leases are common in huge multi-tenant units where it is impractical to partition a building into smaller spaces.

Such an arrangement is advantageous to the tenant because there are no extra costs over and above the usual monthly rate. The disadvantage is that the owner may decide to charge a little premium on top of the monthly rate to cover the cost of the tenancy. Most proprietors prefer the full-service arrangement because it allows total control over a building’s overall appearance.

Contents of a lease agreement

Common contents of a lease agreement include:

  • Names of the lessor and lessee or their agents.
  • Description of the property.
  • Amount of rent and due dates, grace period, late charges.
  • Mode of rent payment.
  • Methods to terminate the agreement prior to the expiration date and charges if any.
  • Amount of security deposit and the account where it is held.
  • Utilities furnished by the lessor and, if the lesser charges for such utilities, how the charge will be determined.
  • Amenities and facilities on the premises which the lessee is entitled to use such as swimming pool, laundry, or security systems.
  • Rules and regulations such as pet rules, noise rules, and penalties for violation.
  • Identification of parking available, including designated parking spaces, if provided.
  • How tenant repair requests are handled and procedures for emergency requests.

Types of residential lease

The type of lease that you sign can have a big impact on your rental experience. Make sure that you know exactly what type you’re agreeing to before you sign on the dotted line since you won’t be able to change it later on.

1.   Fixed-term lease

This is probably the most common type of residential lease, and guarantees your tenancy (and your monthly rental cost) for a set period of time—for example, six months, a year, or two years. If you plan to stay in one place for a while, a fixed-term lease gives you a lot of reliability, plus the assurance that your rent won’t unexpectedly get increased.

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2.   Month-to-month

Also referred to as a periodic lease, a month-to-month lease provides both the tenant (you) and your landlord with the ability to cancel at any time without penalty, so long as proper notice is given. Look at the lease itself to figure out what constitutes proper notice, particularly how far in advance you need to notify your landlord that you plan on vacating the apartment, or that your landlord needs to notify you of changes, such as a rent increase.

3.   Sublease agreement

This is a special type of apartment lease that only applies if you are going to be subletting to another individual during the course of your tenancy. Under a sublease agreement, you (the original leaseholder) are agreeing that a tenant not on the original lease will be residing in your apartment and will be the one paying rent and maintaining the unit.

Do note however that your ability to sublet will depend on your original lease agreement, and will also need to be cleared with your landlord. It does also come with some risk to you since you’re still ultimately on the line for ensuring rent gets paid on time and the apartment is well taken care of.

Lease or rent, Which is better?

Rental agreement

Rental agreements are very similar to lease agreements. The biggest difference between lease agreements and rental agreements lies in the length of the contract.

Unlike a long-term lease agreement, a rental agreement provides tenancy for a shorter period of time, usually thirty days.

Lease agreement vs. rental agreement

The pros and cons of each specific contract fall into a few different categories and depend on the landlord-tenant relationship you’re looking for.

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Pros of a lease: If stability is your main priority, a lease may be the right option. Many landlords prefer leases to rental agreements because they are structured for stable, long-term occupancy. Placing a tenant in a property for at least a year may offer a more stable rental income stream and cut down on other costs.

Cons of a lease: That said, once a lease agreement is signed, the rental cost is set in stone until the end of the agreement. In an up-and-coming area with consistently growing property values, 12 months of a fixed rental cost could mean you miss out on substantial incremental income from market increases. According to the Home Buying Institute, the median home price in the U.S. rose by 8.1% over the past year and is predicted that prices would rise by 6.5% in the next 12 months. This forecast was issued in July 2018 and extends into the summer of 2019.

Pros of a rental agreement: Due to the short term of a rental agreement, they allow much more flexibility when it comes to renting increases. Technically speaking, rent may be revised each month with a rental agreement to stay in line with the current fair market rent so long as rent increases comply with local law and the notice provisions that govern the month-to-month rental.

Cons of a rental agreement: A tenant looking for a long-term lease may be scared away by the flexibility of a month-to-month lease, which may leave them subject to frequent rent raises or indeterminate rental periods. For landlords, the costs of more frequent tenant turnover should also be kept in mind, including advertising, screening, and cleaning costs. Additionally, if your rental is located in an area with lower occupancy rates, you may have trouble keeping your unit rented for long periods of time.

What is a lease on a car?

A car lease is a popular type of auto financing that allows you to “rent” a car from a dealership for a certain length of time and amount of miles. You’ll typically make monthly lease payments on a vehicle, and in exchange the dealer allows you to drive it. At the end of the lease, you’ll either return the vehicle to the dealership or buy out your lease if you want to keep the car if that’s an option in your lease.

You’ll typically need good credit to lease a new car. People leasing a new vehicle in the third quarter of 2020 had an average credit score of 733, according to Experian data. FICO considers scores of 670 and above to be “good.” Keep in mind that even though you don’t own the car you’re leasing, your lease-payment history will show up on your credit reports.

If you’re considering leasing, you’ll want to verify if your terms are for a closed-end or open-end lease. With a closed-end lease, you typically don’t pay anymore after you return your vehicle — unless it has excessive wear and tear or you went above any mileage limits.

A closed-end lease means you’ve already agreed on how much the car’s value will decrease during your lease term. If the car is worth less than your agreed-upon amount when you return it, you have no additional financial obligation.

With an open-end lease, the future value of the car isn’t in the contract. At the end of an open-end lease, you may get a refund if the vehicle is worth more than expected. But if the car is worth less than expected, you may have to pony up more cash.

What is a lease for an apartment?

An apartment lease tells you your rights, your responsibilities, and those of the landlord. Most important are the financial specifics. The lease will tell you how much you’re supposed to pay in rent each month, along with fees for late payments, whether certain utilities are covered by the tenant or the landlord, and move-in costs like and a one-time security deposit. Usually, the security deposit is returned to the renter when he or she moves out — or at least most of it. This is a fund your landlord will dip into to fix any damage incurred during your residence. If you happen to put a hole in the wall, and it costs $100 to fix, your security deposit of $300 will be returned to you at $200.

Types of apartment lease

1. Long-term leases

long-term lease, or fixed-term lease, is the most common type of contract, usually set for a minimum of one year.  Upon the lease’s expiration, you can choose to leave the apartment (with proper advance notice), live there month-to-month (see below), or renew your lease, sometimes at a special reduced rate (offered as an incentive to renew).  Note that, typically, the shorter the lease, the higher the rent rate.

2. Month-to-month leases

A month-to-month lease, or periodic lease, allows the tenant or landlord to terminate the lease at any time.  Month-to-month leases are generally self-renewing.  Renters can expect the monthly rent rate to be much higher than that of a fixed-term lease.  However, renting month-to-month gives you the flexibility to move out with far less notice than with other lease types.

3. Subleasing

Subleasing, or subletting, occurs when the original leaseholder rents his apartment to someone, not on the original lease.  This is often an option renters choose who travel or who want to leave the apartment early but avoid breaking a lease.  Rules about subletting vary from apartment to apartment and contract to contract, so if you are thinking about subletting your apartment, make sure you know what is allowed and what is not.  For example, some apartments will want to run a background or credit check on the potential subletter, while others have no requirements, but will hold the original tenant fully accountable for any missed payments or damages incurred by the subletter.  Likewise, if you want to sublease from a renter, make sure you know what you are responsible for, from bills to apartment behavior.

Conclusion

There are different types of leases, but the most common types are absolute net lease, triple net lease, modified gross lease, and full-service lease. Tenants and proprietors need to understand them fully before signing a lease agreement.

Equally, there is a huge benefit for both property owners and tenants if they engage real estate experts during such agreements. Real estate experts are the best people to talk to as they can give the best advice when leasing property.

Charles Bains

Charles Bains started his insurance career as a marketing intern before pounding the pavement as a commercial lines agent in Orlando, FL. As an industry journalist, his articles have appeared in a variety of trade publications. His insurance television career, short-lived but glorious, once saw him serve as the expert adviser on an insurance-themed infomercial (yes, you read that correctly). Having recently worked for various organizations, coupled with his broader insurance knowledge, Charles is able to understand our client’s needs and guide them accordingly. He is a gem for Insurance Noon as his wide area of expertise and experience have been beneficial in conducting further researches to come up with solutions and writing them in a manner which is easy for everyone including beginners to comprehend.

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