What Is a Lease?

Leases Explained in Less than 5 Minutes

How leases work. A lease is a contract between two parties: the lessor and the lessee. After you apply for an apartment and are accepted, you're given a lease by your landlord. While the term of a lease may vary, it is commonly 12 months. The lease dictates how much you owe each month, the security deposit amount owed, if any, and any additional stipulations. The lease becomes legally binding once both parties have signed. A lease can be broken, but it may come with financial consequences and a hit to your credit score.

The Balance / Julie Bang

If you’ve ever rented an apartment, you’re probably at least a little bit familiar with a lease. This contract, signed between two interested parties, offers protection to all renters as well as the landlord while the property is being rented. A lease doesn’t always apply to homes, either. You can lease cars, cell phones, propane tanks—just about anything can be leased as long as the two parties come to an agreement. Let’s take a look at what a lease is, how it works, and alternative options for leases. 

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 party 

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, the most 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, many leases may revolve around the school year, allowing students to go home for the summer and pay for a shorter term. 

You must apply for a lease before signing the formal document. In most cases, the application process comes with an application fee paid directly to the landlord. The price varies by state. In New York, for example, application fees cannot exceed $20.

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 keep 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.

Depending on the state and the landlord’s policies, there are some cases where breaking a lease is acceptable. For example, a call to military service or a necessary protection for a survivor of domestic abuse can mitigate the consequences of breaking a lease.

While it is recommended to have a written lease, there are some cases where a lease may be verbally binding. 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.”

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 responsibility of a lease to another individual. However, the original tenant continues to hold all responsibility for committing to the terms of the lease.

Many leases prohibit subleasing or subletting. Be sure to read all details of your lease carefully or contact your landlord before agreeing to sublet.

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. Say you lose your job, though, and are unable to provide the necessary documentation.

In these cases, 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.

If you’re unable or unwilling to secure an apartment lease, you may want to consider other short-term housing options. Although expensive, home rental agencies such as Airbnb don’t lock you into any type of lease, nor do they ask for proof of income. You may need to pay up front, but different lengths of stay can be charged differently.

Pros and Cons of Leases

Pros
  • Generally offer clearly defined expectations


  • Protect you from unexpected price increases


  • Can give you legal protection in the case of a dispute


Cons
  • Lock you into a specified term length


  • Property must be returned at lease expiration


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.

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.  

Key Takeaways

  • A lease is a contractual agreement between you (the lessee) and the property’s owner (the lessor).
  • Leases exist for all types of property, including homes, cars, and even propane tanks.
  • You may consider not signing a lease if you are living in a temporary location or don’t meet the financial requirements of the landlord.