There are few things in real estate that cause as much confusion as contracts; filled with all sorts of jargon, terminology and phrasing.
But one often neglected cause of confusion is the basics of what exactly you’re getting signed or signing when you’re renting.
Is this a lease agreement or a rental contract? and should I be paying more attention to it? Let’s find out.
What Are They?
A probable cause of all the confusion between the two agreements is likely because despite a few nuances the contracts essentially serve the same purpose.
Both contracts are used to facilitate a situation whereby a landowner (landlord) rents out their property to a prospective individual (tenant) in return for rental payments.
The specific differences are as follows:
What Is A Lease Agreement?
A lease agreement is an agreement of accommodation between a landlord (property owner) and prospective tenant whereby the landlord offers accommodation on the property for financial reimbursement from a tenant.
A lease agreement binds the tenant and landlord for long periods at a time (12 months +) whereby if any party chooses to break the lease before that; they are liable for legally enforceable consequences.
Lease agreements are considered concluded at the end of that period; after which, the parties will agree to either renewal, alter or cancel the agreement from there.
What Is A Rental Contract?
A rental agreement is an agreement of accommodation between a landlord (property owner) and prospective tenant whereby the landlord offers accommodation on the property for financial reimbursement from a tenant.
A rental agreement binds the tenant and landlord for short intervals cycles (month-to-month). Rental agreements cycle between renewal and expiration each month and tenant and landlords will normally agree on a “notice period” needed to discuss alterations and cancelations to the contract.
What Makes A Lease Agreement and Rental Contract?
Despite the differences in the time frames of the contracts, both rental contracts and lease agreements will largely involve the same details, terms, and agreements which can be broken down into the following 6 categories.
- Party Identification.
- Property Details.
- Party to Party and Property Responsibilities.
- Conflict Resolutions.
- Agreement Terms
a. Party Identification.
Both agreements will identify the parties involved and aiming to be bound in the contract. This will include; names, birth certificates, signatures, banking, and financial details and identification numbers. All the details needed to verify that the individuals in the contract have willingly participated in the contract.
b. Property Details.
Where the property is located, the size of the property, and the specific amenities that make up the property (special structures, number of bedrooms). Verification that the landlord is the owner and is legally able to offer tenancy to the prospect.
c. Party to Party and Property Responsibilities.
From the tenant, responsibilities include the following:
- Paying rent (periodically and on time).
- Accommodating the property.
- Maintaining the property (not causing direct damage).
- Accepting and living by property guidelines rules and regulations.
- Reporting wear and tear property damage.
- Accepting and executing on enforced consequences of going against agreement terms (late fees, damage fees, evictions, etc).
From the landlord, responsibilities include:
- Repairing and renovating the property to legally habitable standards
- Maintaining and repairing the property from wear and tear and to meet the agreed-upon standard
- Being available to the tenant for enquires
- Accepting and living by property guidelines rules and regulations.
d. Conflict Resolutions.
The details, procedures, and terms by which disputes between the landlord and tenant are resolved. The additional parties involved in conflict resolutions will also be mentioned here such as guarantors.
e. Agreement Terms.
The boundaries by which the contract is held. Start and end dates as well as dates for inspections. If there are special procedures for concluding or altering the contract early; they will also be included here.
Evaluating The Pros And Cons Of Lease Agreements And Rental Contracts.
Advantages Of Rental Agreements Over Lease Agreements – Table.
Advantages Of Lease Agreements Over Rental Agreements – Table
|Landlords’ ability to rent in unflattering situations.||Stability of a guaranteed long-running income for the duration of the lease.|
|Landlords’ flexibility to quickly make alterations depending on market conditions.||Tenant security is not affected by market conditions for property arrangements.|
|Tenant flexibility to move without consequences.||Stable enough for subleasing arrangements.|
Advantages Of Rental Agreements Over Lease Agreements – Rundown.
1. Landlords’ ability to rent in unflattering situations.
Situations, whereby a property may not be viable for long term lease agreements, include situations, where the economy is in turmoil and tenants, are not willing to enter such long-term binding contracts because they are uncertain about their financials. This also includes situations where a property is not ideal concerning its location, design, and amenities.
Landlords in these situations would not have their properties viable for renting under lease agreements. Rental contracts allow landlords to generate income at such times.
2. Landlords’ flexibility to quickly make alterations depending on market conditions.
At most, landlords in rental contracts are only required by law to give tenants a 30-day notice to make any alterations to the contract.
This includes increasing the renal price, changing rules and regulations on the agreement and ending the contract, and evicting the tenant.
In a lease agreement situation, landlords are unable to alter the contract until it has run its due course. If the market crashes and landlords need to increase prices to make it viable; they are unable to do so until the term ends.
3. Tenant flexibility to move without consequences.
Tenants, in rental contracts; are not bound to long term obligations to the property and the landlord like they would be in lease agreements.
This provides the tenant with the freedom to move when they see fit, faster acceptances of requests to rent, and less specific rulings regarding the property.
It is not rare for leased properties to involve long periods of tenant vetting and screening as their contracts are more influential as well as lease agreements will often have rulings that restrict the amount of time the tenant can lease the property vacated (as a safety concern) – this can interfere with vacations and special need travels.
Advantages Of Lease Agreements Over Rental Agreements – Rundown.
1. Stability of a guaranteed long-running income for the duration of the lease.
Unlike with rental contracts, landlords can rely on their generated income as being stable and consistent. only in dire consequences would their income be jeopardized.
Rental contracts have a more unstable income as the tenant is only bound to the contract in intervals as short as 2 months; in which they can cancel their contract and exit the property; thus leaving the landlord without income.
2. Tenant security is not affected by market conditions for property arrangements.
Landlords are as bound to the contract as tenants are.
As such. tenants can predictably operate within the property without the fear of landlords making unwarranted changes to the price of rent or rules of the property as would be probable in rental contracts.
3. Stable enough for subleasing arrangements.
Both the landlord and the tenant can benefit from a subleasing arrangement whereby the tenant enters a rental agreement with a sublessee.
The landlord can benefit from raising the tenant’s rent at an agreed-upon rate when they bring in a sublessee. as well as potentially having a new tenant vetted and lined up to take the current tenants’ place should they leave the property.
The tenant benefits from generating rental income from the property they are renting as well as being able to have the sublessee take on some of the responsibilities that come with leasing a property such as being allowed to vacate the property for longer periods as the sublessee remains and keeps the property occupied.
Subleasing is very risky for all 3 parties in a rental agreement as a subleasing contract only involves the sublessee and the current tenant and not the landlord. When a tenant’s contract ends with the landlord – so does their contract with the sublessee; in a rental contract, this happens monthly.
If you are interested in learning more about the nuances of effectively subleasing; I have a post going over all the details you should know (HERE).
Conclusion – Considerations For When To Use A Lease Agreement Or A Rental Contract?
Deciding between a lease agreement and a rental contract comes down to identifying your stance on the following considerations:
- Your current environment.
- Your level of certainty in your tenant.
- Your requirements from your property.
- Your interest in subletting.
1. Your current environment.
Though tenants have little to no power over influencing a landlords’ decision over whether or not to enforce a lease agreement or rental contract; the economy will dictate the viability of lease agreements.
Regardless of the economy, the landlord can decide to issue either-or, but in situations of economic uncertainty; lease agreements are often avoided by tenants because of the long-term binding associated with them.
Lease agreements work best in thriving economies or at least when the property is based is situated in a favorable environment where it naturally attracts tenants who can afford the responsibilities to lease regardless of the economic situation (high-value property for high-value clients).
The landlord should also note that in lease agreements, their ability to change the price of tenancy is typically only valid once the contract ends (12 months +); rental contracts allow for more fluid changes to rental prices.
2. Your level of certainty in your tenant.
Picking the right tenant will always be, in my personal opinion; the most important decision for a prospecting landlord and should not be taken lightly in any situation.
That being said, when comparing between the 2 contracts, rental contracts are more forgiving of errors in tenancy than lease agreements.
Though both contracts will have contingencies that legally allow landlords to evict tenants, in the case of lease agreements; tenants have more leverage to defend the viability of their tenancy than tenants in a rental agreement as their contracts are naturally short-term.
3. Your requirements from your property.
Landlords are afforded more liberty in controlling their property in rental contracts; simply because the contracts are frequently up for alteration than in the case of lease agreements.
In lease agreements, the landlord cannot easily adapt the contract to suit their most current needs as they are beholden to the terms of the contract for up to 12 months+. This can restrict selling the property, using it as collateral for loans, occupying it, making renovations that could otherwise disrupt the tenants’ occupancy, etc.
In a rental agreement, the landlord is more flexible in controlling their property as an overall asset than just a rental property bound to its current tenant.
4. Your interest in subletting.
Subletting is a stained topic for most people which has benefits and costs that are better left discussed in a dedicated article.
That being said, legally speaking; subletting is only truly viable under a long-term lease agreement as subletting contracts are bound to the active continuation of a contract of tenancy between the landlord and tenant.
A tenant cannot legally continue a subletting agreement when their contract ends with a landlord; which is the monthly case in a renting contract. Though not impossible, subletting in a rental situation leaves all parties vulnerable to legal ramifications.