Definition and Examples of Leases

Long story short, a lease is a contract between two parties: the lessor (or owner of the property) and the lessee (the one who will be using the property). It acts as an alternative to purchasing the property, whether that’s a condo, a car, or a commercial building.

Leases are legally binding and usually contain five minimum components:

• The names of each party
• A description of the property you’re leasing
• The amount of rent due
• The length of the agreement
• Signatures from each party1

How Leases Work

Let’s say you’re going to be living on your own for the first time, perhaps after attending university. You’ve saved up enough money for the security deposit, you’ve bought a brand-new bed, and now you’ve finally found an apartment that suits you. 

Once you’ve applied and been accepted by the landlord, you’ll be given a lease. While the term of the lease may vary, a common term is 12 months. You can also look for an apartment that offers a month-to-month lease, though these can be more expensive. In college towns, leases may revolve around the school year, allowing students to go home for the summer and pay for a shorter term. 

The lease will dictate how much you owe each month. It will also specify the security deposit amount, if any, which is often paid before you move in along with the first month’s rent. In some cases, it may include additional stipulations regarding furnishings or offering to cover any utility costs. 

Once both parties have signed the lease, it becomes legally binding, and all names on the lease are legally responsible for complying with the terms. While it’s possible to break a lease, doing so can have consequences, such as having to continue paying rent or taking a hit to your credit score. Plus, you can face eviction if you break the terms of a lease. All of these details will usually be outlined in the lease as well.

While it is recommended to have a written lease, there are some examples of legally binding verbal leases. If you and your landlord have made a verbal agreement, it may be counted as an oral lease as long as it is “reasonable, equitable, conscionable, and made in good faith.”1

Alternatives to a Lease

Signing an apartment lease could set you up for additional costs if you ever need to break it. Let’s say you’re not sure how long you’re going to be living in a specific area, or you suddenly lose your job. In these cases, you may consider subletting or subleasing your unit. This allows a tenant to turn over the apartment (and rent costs) to another individual. However, the original tenant continues to hold all responsibility for committing to the terms of the lease.

Generally, lessors also have financial requirements that tenants have to meet before being approved. In order to qualify for a lease, you will have to provide proof of income through documents like bank statements.

If you lose your job and are unable to provide the necessary documentation, there are alternatives to a fully binding lease. If a car lease is what you’ve been searching for, you may want to consider purchasing or otherwise financing a vehicle. This option leaves you with a tangible asset when you’ve finished paying it off.

Pros and Cons of Leases

Pros Explained

Generally offer clearly defined expectations: Having a lease, especially a written one, can ensure that both you and your landlord are on the same page when it comes to rent, maintenance, and other rules surrounding your tenancy.

Protect you from unexpected price increases: A lease will specify the amount of rent due for the duration of the lease. This means a landlord cannot change the rent unless that provision has already been included in the lease you signed. 

Can give you legal protection in the case of a dispute: If a dispute arises between you and the landlord, the lease will be reviewed to determine who is in the right. In this case, a written lease can be much more valuable, as oral leases mean it’s your word against the landlord’s word.

Cons Explained

Lock you into a specified term length: A lease may not be a good idea for you if you’re not sure how long you’ll be living somewhere. Even if you leave the area, you’re still liable for the lease. 

Property must be returned at lease expiration: Unlike purchasing property, the leased item must be returned when the lease is over. This means that no matter how much money you’ve paid into it, the item will not belong to you and you are responsible for returning the property in the best possible condition. In the case of an apartment, for example, you may face fees for damages sustained during the lease agreement.