What Is a Lease? How Leases Work and What to Check Before Signing

A lease is a contract that gives you the right to possess and use property you do not own, for a set period, in exchange for payment. Possession is the operative word, and it is what separates a lease from a mere license to use a space. That is the whole idea. Everything else in the document exists to answer four questions: what you pay, what you can do with the space, who fixes what, and how it ends.

Around 46.8 million American households rent rather than own, and every business that does not own its premises signs one of these too. This is a plain-English guide to how a lease works, what each part of it decides, and what to read closely before you sign. It is general information rather than legal advice. Landlord and tenant law is state law and varies considerably, so a lawyer in your state is the right person to ask about your own agreement.

What a lease is, in plain terms

Strip out the formatting and every lease settles the same seven things. If you read nothing else in the document, read these.

• Who the parties are, what property is covered, and for how long

• The rent, and every cost that sits outside the rent

• The deposit, and the conditions for getting it back

• Who is responsible for repairs and maintenance

• What you may and may not do in the space

• How the lease ends, and what happens if you leave early

• What governs a dispute, and where it has to be brought

Residential and commercial leases are not the same thing

Before any of the detail, one distinction does more work than all the rest. A residential lease sits on top of a large body of tenant protection law that applies whether or not the document mentions it. A commercial lease very largely does not.

The reasoning is that commercial parties are presumed to be sophisticated and capable of negotiating for themselves, so courts generally enforce what they agreed. The practical effect is that in a residential lease an unlawful term is usually void anyway, while in a commercial lease the document is close to the whole of the law between you. That is why commercial leases run to forty pages and residential ones to four.

1. The parties, the property and the term

Check that the landlord named is the entity that actually owns or controls the property, that the description of the space matches what you viewed, and that the dates are right.

A fixed-term lease, sometimes called a tenancy for years, runs to a stated end date and generally ends on that date without notice. A periodic tenancy, which is what most people mean by a month-to-month rental agreement, continues from period to period until someone gives notice, and the notice required is usually at least as long as the period itself.

What to check: which of the two you are signing, and what happens at the end of a fixed term. Some leases roll into a monthly tenancy automatically, some renew for another full term unless you give notice by a deadline, and the difference is expensive.

2. The rent, and everything that is not the rent

In a residential lease the rent figure is usually most of the cost, with utilities as the main variable. In a commercial lease the headline rent can be a minority of what you actually pay, because the structure of the lease decides how much of the building's running costs land on you.

The labels are used loosely in practice, so the structure named on the front page is a starting point rather than an answer. What matters is the expense clauses: which categories you contribute to, how your share is calculated, whether there is a cap on annual increases, and whether you can audit the reconciliation.

What to check: the total cost per month, not the rent. Ask for the last two years of operating expense statements before signing a net lease, and read the escalation clause, which sets how the base rent itself rises over the term.

3. The deposit and the conditions for getting it back

A majority of states cap residential security deposits, though a sizeable minority set no cap at all. Most set a deadline for returning the deposit, commonly between fourteen and sixty days after you move out, with an itemized statement of anything withheld. No state caps a commercial security deposit, which is the starkest single illustration of the gap between the two kinds of lease.

What to check: the amount, the deadline for return, what can be deducted, and whether a move-in condition report exists. Photographs taken the day you take possession are the cheapest protection available in either kind of lease. Our guide to reviewing a lease before you sign goes through the residential version of this in detail.

4. Repairs and maintenance

In a residential lease the implied warranty of habitability, recognized in most states, requires the landlord to keep the place fit to live in regardless of what the lease says. Day-to-day upkeep can still be allocated to you.

In a commercial lease there is generally no equivalent, beyond a narrower implied warranty of suitability that a minority of states recognize. Responsibility for the roof, the structure, the HVAC and the parking lot is whatever the document says it is, and in an absolute net lease that can be all of it.

What to check: the split between structural and routine repairs, any dollar threshold that shifts responsibility to you, the condition of the HVAC if you are taking on its maintenance, and how you report an urgent problem.

5. What you may and may not do in the space

Use clauses, alteration rights, and restrictions on who else may occupy sit here. In a residential lease this covers pets, guests, smoking and subletting. In a commercial lease the use clause can be narrow enough to prevent your business changing what it sells, and there may be exclusivity provisions protecting other tenants from you, or co-tenancy provisions protecting you if an anchor tenant leaves.

What to check: whether the use clause covers what you plan to do in two years, not just today, and whether consent to assign or sublet may be withheld for any reason or only a reasonable one. That single word changes what happens if you need to get out.

6. How the lease ends, and what happens if you leave early

Ending a lease is where most of the money is lost. Look for a break clause, an early termination fee, a re-letting provision, and a holdover clause. Holdover terms in commercial leases frequently set rent at 150 or 200 per cent of the previous rate for any period you stay past the end date.

What to check: whether you can end it early at all, what it costs, and what happens if you stay a week too long. If you are a business tenant and a personal guaranty is attached, check whether it survives an assignment, because it often does.

7. What governs a dispute, and where it goes

The last few pages usually decide the shape of any argument. A governing law clause names whose law applies. A venue clause names the court, which may be somewhere inconvenient. An arbitration clause can remove the dispute from court altogether. And a prevailing party clause decides whether the loser pays the winner's legal costs, which can turn an uneconomic dispute into a viable one, or the reverse.

What to check: all four, before signing rather than after. Our guide on when to hire a contract breach attorney covers what these clauses mean once something has actually gone wrong.

Types of lease you may come across

• Fixed-term lease. Runs to a stated end date and generally ends there without notice.

• Periodic tenancy. Month to month or week to week, continuing until someone gives notice.

• Gross lease. One payment, landlord covers the operating costs.

• Net lease. Base rent plus some or all of taxes, insurance and maintenance, in the gradations shown above.

• Ground lease. A long lease of land alone, where the tenant builds on it and the improvements usually revert at the end.

• Sublease. The tenant leases part or the rest of their term to someone else and stays liable to the landlord.

• Assignment. The tenant transfers the whole remaining term, and the new party deals with the landlord directly.

Lease or rental agreement, and does the difference matter

In everyday American usage a lease means a fixed term and a rental agreement means month to month, though the words are used interchangeably often enough that the label on the document proves nothing. What matters is the term and the notice provision inside it.

A fixed term gives you price certainty and a commitment you cannot easily exit. A periodic tenancy gives you flexibility and exposes you to increases and to termination on relatively short notice. Neither is better; they trade the same thing in opposite directions.

Where to go deeper

• How to review a lease before you sign, the seven residential clauses worth reading twice

• How to check your rental history, what a landlord sees before they approve you

• Leasing a house in Canada, a separate guide for Canadian renters, covering how deposits and rent increases differ by province

• When to hire a contract breach attorney, if the other side stops performing

• NDA red flags, for the other agreement freelancers sign without reading

When to get legal advice

For a standard residential lease, reading it carefully and asking your state's tenant information line is usually enough, though in a rent-regulated city such as New York, San Francisco or Los Angeles there is a further layer of local ordinance worth checking. For a commercial lease it is different, because the document really is the deal and there is little law underneath it to catch you. If the term is long, the space is being fitted out, a personal guaranty is attached, or the total commitment runs to six figures, a real estate lawyer reading it before signature costs a fraction of what a bad clause costs over five years.

The short version

A lease answers four questions: what you pay, what you may do, who fixes what, and how it ends. Read those four parts closely and skim the rest. If it is a residential lease, the statute protects you from the worst terms. If it is commercial, nothing does, and the document is the whole of the arrangement.

You can paste a lease into RateMyContract for a plain-English summary, with the rent and expense terms, deposit, repair obligations, use restrictions, termination provisions and the governing law, venue and dispute clauses pulled out, and anything non-standard highlighted. It reads the document rather than giving legal advice, and it is there to tell you what to ask about.

Frequently asked questions about leases

What is a lease in simple terms?

A contract giving you the right to possess and use property you do not own for a set period, in exchange for rent. It transfers possession but not ownership, which is what distinguishes it from a mere license to use a space. Everything else in the document is detail about what you pay, what you may do with the space, who maintains it, and how the arrangement ends.

What is the difference between a lease and a rental agreement?

In common American usage a lease is for a fixed term and a rental agreement runs month to month, continuing until someone gives notice. The words are often used interchangeably, so the label proves nothing. Read the term and the notice provision inside the document instead.

What is a triple net lease?

A commercial structure where the tenant pays base rent plus property taxes, building insurance and common area maintenance. Structural repairs and the roof usually remain the landlord's responsibility unless the lease is an absolute net lease, in which case those move to the tenant as well.

Can a landlord change the terms of a lease?

Not unilaterally during a fixed term. Changes generally require both parties to agree, usually in writing. In a periodic tenancy a landlord can change terms, including rent, by giving the required notice, and how much notice that is depends on your state and sometimes on local rent regulation.

Is a lease still binding if it is not signed?

Sometimes. Most states enforce oral leases for terms of a year or less, and conduct such as paying and accepting rent can create a tenancy on its own. Longer terms usually have to be in writing to be enforceable under the statute of frauds. Whether yours qualifies is a state-law question.

What happens if I break a lease early?

It depends on what the lease says and where you are. You may owe rent for the remaining term, a stated termination fee, or the shortfall until the space is re-let. Most states now require residential landlords to make reasonable efforts to re-let rather than simply billing you for the rest of the term. Commercial leases frequently impose no such duty.