Lease or Rental Agreement?

A lease is a contract that allows a tenant to occupy a property for a specified period of time, at an agreed-upon rent, as long as the terms of the lease are followed. Does that benefit the landlord? Or is it only a benefit to the tenant? A lease is nothing more than a rental agreement with a term longer than a month.

A lease differs from a rental agreement in that a rental agreement is usually only month-to-month, and allows termination by either party on a specific notice, in most states 30 days.

Without a doubt, a written agreement is always in the best interests of both the landlord and the tenant. It is in their mutual interest because it spells out exactly what is expected of both parties and the mechanism for changing and terminating the agreement. In fact, if you are tempted to rent a property without a written agreement, you need to call your psychiatrist at once and see if you can get in today.

What we will look at here is the pros and cons of using a lease rather than a month-to-month rental agreement.

You are “guaranteed” a tenant and rent for the term of the lease

That is what you hope against hope, and that is one of the principal reasons that landlords use a lease rather than rent month-to-month. However the reality is often different. Property managers in different areas tell me as many as 50 percent of tenants move before the end of the lease.

Of course your ex-tenants don’t want to pay rent on the place they just moved out of, in spite of the fact that the lease they agreed to states specifically that they are required to pay the agreed-upon rental amount until the expiration of the lease or until you re-rent the property. They will try to get out of paying double rent with any number of unfounded ploys, including claiming that the unit was “uninhabitable” because you refused to make repairs to the damage they deliberately did to the unit.

Also, if the tenant moves out of the area of your rental, such as to another state, you are in for a monumental task collecting the rent he or she owes you.

Tenants will say they want to make sure you will not “sell the property out from under them,” or raise the rent. Not bad reasons on their part, but certainly no protection or guarantee for you.

Section 8 requires a lease. That fact should be a dead giveaway that leases are not in favor of the landlord, since the Section 8 program is designed to help tenants, not rental property owners.

Meticulous tenant selection and huge deposits are the surest ways to keep from having a tenant bail in the middle of a lease, leaving you high and dry.

You have a contract

This reason has considerable merit, as long as the tenant understands that a lease is a contract. As I point out in the next section, it spells out responsibilities, as well as beginning and ending dates of the lease, and states exactly how much money is to be paid you as landlord. That can have a decisive effect on people when they affix their signatures to a contract.

In addition, as long as it is drawn properly, a lease contract is enforceable in court, should it come to that.

One way to make leasing tenants understand the rent they owe is to specify not only the monthly rent, but also the total amount of the rent for the period of the lease. For example,

“Tenant to pay $6,000 in rent, payable in monthly installments of $500 or more.”

That goes part and parcel with the contract. However, responsibilities are spelled out just as well in a rental agreement as in a lease. As I said above, the advantage for both parties is that both landlord and tenant understand fully their rights and responsibilities.

Could be an impediment to sale

A lease goes with a property. That means if you have a lease and you sell your rental property, the new owner has to honor the lease or buy out the lessee. Not a problem if you are selling investment properties, such as multi-unit buildings. But if you are selling a single-family home, it could cut the number of potential buyers by two-thirds or more. Buyers of single-family homes usually want to live in them, not rent them out. A lease will keep them from doing that until the term of the lease expires. Then they still have to deal with getting the tenant to move.

The buyer might also not be able to get financing. Lenders loan money to owner occupants. They have to live in the property they are buying. If there is a lease with another six months to go, that could mean the lender won’t loan on that property because it can’t be owner-occupied for six months.

When you always want to use a lease

Some localities, such as Seattle, have laws that require that landlords have “just cause” to terminate a tenancy. Tenants, on the other hand, can move out, with proper notice, anytime the mood strikes them. Ordinances such as these tip the scales heavily in favor of the tenant. A lease can balance the scales back toward the landlord. If a tenant is obligated to live in the property for the period of the lease, the landlord has taken away a tenant advantage. Another advantage to you is that the law that requires “just cause” to terminate a tenancy may include as “cause” the expiration of a lease.

If you are going to use a lease, or if the tenant insists on a lease, ask and verify the answers to the following questions:

1. Have you ever moved out before the expiration of a lease?
2. Have you ever had a lease terminated for cause?

Think hard and prepare properly before you agree to rent your property using a lease. Even with all the traps, they can work for you if you do it with open eyes and careful procedures.