Lease Agreement or Rental Agreement – Which Should You Choose?

Last Updated on April 12, 2022 by Kravelv

Real estate properties cost a fortune. Hence, those who cannot afford to have one resort to renting a property instead. Entering into a rental or lease agreement is nonetheless serious undertaking; all terms included in the contract must be carefully and thoroughly weighed and discuss before formally sealing the deal.

You probably have heard of the rental agreement and lease agreement and thought they referred to the same thing. This article aims to shed light about the similarities and the differences between the two so you can decide better.

Rental Agreement and Lease Agreement Compared

There are two types of agreements in the leasing industry; rental agreements and lease agreements. True they have a lot of things in common but they vary in some significant aspects somehow.

Lease Agreement. A lease agreement contains a definite rent amount due for the entire duration of the contract and while this contract is effective, the rental property owner or the lessor cannot change or alter the terms in the contract especially the rent amount and occupancy terms. In other words, the lessor must wait until the expiration of the contract before he can include or propose any lease term alterations. And it will necessitate the preparation of an all-new contract like both parties are back to square one.

Major attributes of a lease agreement include the following:

• Lease Term. A lease agreement runs longer than a rental agreement. Most lease terms last for six months to one year but there are also leases that remain active for as long as thirty years as in cases of commercial leases.

• Renewal. The automatic renewal practice in rental agreements exists to save unnecessary hassles and paperwork of preparing a new contract on a short term basis. But here in lease agreement where the duration takes up years, renewal of the contract is not automatic. Once a lease contract expires, the landlord and the tenant will have to sign a renewed lease with probably new and modified terms.

• Alteration of Terms. Since we are talking of “years” in a lease agreement, this also sets the lease terms definite for the said period. Modification or alteration of the terms is strictly prohibited. This means the landlord cannot simply implement an increase in the lease in the middle of an active contract. Instead, he will have to wait until a month before the contract expires before he can propose a raise in the fee and the increase will only be effective once the new contract, signed by both parties, commences. In most state laws, the lessor will be required to notify the lessee about the proposed increase at least a month before the date of renewal.

• Alongside the components mentioned above, health and safety concerns may also be covered in the terms of the lease.

Rental Agreement. Those who wish to have a more lenient and considerate lease term are advised to consider joining a rental agreement instead as this type of agreement covers a shorter term than lease agreements. Most rental agreements are renewable after a month; a deal advantageous for the rental property owner and the tenant.

In the rental agreement, terms pertaining to the fee, the rules, and the general terms can be reset or modified after a month as long as appropriate notice has been provided to the other party. In most cases, the landlord is obliged to give 30-day advance notice prior to the expiry of the old contract and the auto-renewal of a new contract.  This 30-day grace period can nonetheless differ depending on the location of the rented property.

Major attributes of a rental agreement include the following:

• Rental Term. A rental agreement has a shorter term than a lease agreement, i.e. agreements are deemed valid for only a month and shall necessitate renewal right after. Rental agreements can even last for only a week or a couple of days like what is being practiced by AirBnB and hotels.

• Renewal. In terms of contract renewal, in rental agreement, most renewals are automatic and by default, the terms and conditions of the current contact shall be carried over to the new contract. Therefore, if the current contract is up for thirty days, the same duration shall be followed in the new contract unless either or both parties wish for modification or alteration.

• Alteration of Terms. Unlike in lease agreement, in rental agreements, since renewal of contract is by default automatic, any proposal that necessitates a modification in the rental terms must be discussed and agreed prior to the renewal date, i.e. the tenant must be fully aware of the changes days ahead to allot a room for adjustments and to ensure that the terms have been approved by both parties.

Components of a Rental or Lease Agreement

Both rental and lease agreements constitute a legally binding contract. They may vary in terms of terms, renewal policy, and modification of terms but basically, they contain the same list of components. Every rental or lease contract must have the following clauses:

1. Name of the Rental Property Owner (Lessor)
2. Name of the renter (Lessee)
3. Rent Amount or Lease Amount
4. Security Deposit and Advance Payment Terms including the amount, date, and terms of payment and return of security deposit
5. Contract Start Date
6. Contract Expiration Date
7. Property Entry Terms/Limitations of the Landlord. This is to protect the tenant’s right to privacy. The landlord may legally own the establishment but once he puts his property for lease, he must also learn to respect the privacy of the occupants.

Other terms that also deemed necessary are the following:

1. Pet Owning Policy. A lot of properties for rent do not allow pets inside their premises because of health and safety concerns. This clause is necessary especially for properties that share the same entrance and exit points.

• Occupancy Limitations. Rental contracts are effective for a shorter period but subleasing can sometimes take place. Hence, occupancy and subleasing terms should also be iterated in the contract to ensure that only the authorized occupants can enter the rented premises unless permission from the landlord has been granted.

• Repair and Maintenance Terms. Although renovations sound like a good thing or a property, this can still cause damage or disturbance to the neighboring community. Hence, it must be clearly discussed and defined in the contract. By default, tenants are required to secure permission first from the landlord before any modification or repair of the property commences.

• Harmful, Illegal, Disruptive Activities. This includes activities that can disturb the community, e.g. excessive noise.

Some People Prefer Lease Agreements. Here’s why…

Although rental agreements give the tenants and landlords freedom to alter and adjust the terms, a lot of people still prefer being in a lease agreement because of the following reasons:

• Lease agreements are more stable because of the longer period of validity. In rental agreements, landlords will constantly need to find another occupant if the current occupant decides to leave which make lease agreements perky especially for rental property owners.

• The turnover rate in lease agreements is less compared to that in rental agreements. This may be beneficial more on the part of the landlord but this can also be perky on the part of the tenant because not having to renew the contract on a monthly basis means less hassle and the fixed lease amount all throughout the term is also pro-financial.

Others Enter in a Rental Agreement. Here’s why…

Lease agreements may be beneficial but rental agreements are also advantageous in their unique ways:

• Lease agreements are long term; rental agreements are not. This makes the latter easy to handle for both parties. A rental agreement is a more viable option especially for cases where the landlord only wants to put his property for rent for a limited period of time. The tenant must be well informed of this plan, nonetheless. Hence, the landlord is required to inform the tenant ahead of time to give the latter enough time to move out.

• Lease agreements may have a fixed lease fee for the entire duration of the contract but some landlords are already wise enough to consider this fact. Hence, most of them would already demand a raised fee to ensure a maximized earning. This makes the rental agreement a realistically beneficial option as the rental fee can be easily adjusted or modified on a monthly basis. The landlord can benefit from this by implementing an increase. In the same manner, the tenant can easily look for other properties set for rent if their preferences change.

• People who wish to put their homes under renovation will opt for rental agreements because of the shorter term. At the same time, those who temporarily settle in other areas for internship or job relocation purposes can easily find a shelter for a short period of time. This may mean stable income for the landlords but renters can still benefit from the versatility of the offer.