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Rental Agreement vs. Lease Agreement Discussed

Besides car, property is one of the greatest yet costliest investment one can have in a lifetime. Hence, if you own one and you are to put it for lease or rent, a simple verbal agreement shall absolutely deem insufficient and unsecured; everything has to be put in writing.

If you are in the process of renting your property out, it is necessary to look into the terms present in your agreement form or contract. Sure a lot of potential tenants are going to be inquiring about your property especially now that building a house requires a lot of money.

 

Lease Agreement versus Rental Agreement

In the world of leasing, there are two types of agreements landlords can use from: lease agreements and rental agreements. However, the thing is rental and lease agreements may have many things in common but they are not exactly the same, albeit being used interchangeably. Below is how they differ:

 

Rental Agreement

A rental agreement is generally a term modifiable on a monthly basis, i.e. the rental property owner is allowed to alter the terms of the property rules and the general rental terms during the rental period as long as proper advance notice has been given to the tenant. In many cases, the rental property owner is required to give a 30 days advance notice before the changes are to take effect. However, this grace period can vary depending on the state where the rental property is in.

Digging deeper, a regular rental agreement that bears the signature of both parties: landlord and tenant, varies from a lease agreement in terms of length, renewal, and alteration of rental terms.

 

  • Unlike in lease agreements, rental agreements are commonly short term. More often than not, their validity is up for 30 days only. In particular cases, they can even cover shorter periods as in weekly or just a matter of days. That is to say that the current AirBnB trend is usually operating under rental agreement terms.

 

  • In terms of renewal, rental contracts automatically renew whenever the previous contract matures and expires. The terms included in the previous contract are being carried over to the new period by default and that includes the agreement term length. Hence, if the previous term was up for thirty days, the same will apply on the renewal.

 

  • Alteration of terms, meanwhile, made by the landlord is to be acknowledged. This covers the modification of term length as well as the price. However, as aforementioned, before the changes can take effect, the tenant must be fully informed of the changes ahead of time to make room for adjustments and to make sure that the commencement and terms of the renewal have been agreed upon. The notice shall be documented and shall depend on the state law. Commonly, the notice must be given to the tenant 30 days before the contract renewal period but there are states that strictly require land lords to give notice as much as 60 days ahead to allow enough period for the facilitation of the changes. As soon as both parties come into terms, the new contract shall have to bear their signatures.

 

Lease Agreement

Unlike rental agreements, a lease agreement already makes sure of the rent amount due for a particular period of time. During the lease period, the rental property owner or the landlord is prohibited to make any alterations to the rent amount or property rules. If the landlord wishes to make changes to the lease agreement terms, then he will have to wait until the expiration or maturity of the previous lease contract and communicate the new terms to the lessee for approval.

 

Let us discuss the basics of a lease agreement below:

 

  • In terms of length, lease agreements run longer than rental agreements. Commonly, lease terms last for one year but they can get longer than that as long as it is stipulated in the contract, e.g. six months up to thirty long years especially in commercial leases.

 

  • Now, unlike in rental agreements, in a lease agreement, there is no automatic renewal of lease. That is to say that once the original contract matures, the tenant and landlord will have to sign a brand new lease with the terms probably altered. In many cases, after the expiry of the original lease, the lease term becomes shorter, i.e. monthly.

 

  • The lease terms cannot be changed during the lease period. Hence, if the lessee signed a year-long contract and the lessor wanted an increase in the rent, the latter will have to wait until a month before the original lease contract expires. The lessor will then need to give the lessee a notice about the increase at least thirty days prior to the renewal date.

 

  • Besides the abovementioned elements, safety and health issues may also be included in the lease terms including lead paint disclosures and safety or health-related information of the property or the environment.

 

Nonetheless, both rental and lease agreements still have a lot of things in common. Both are legally binding agreements with written contracts which are to contain the following clauses:

  1. Rent Amount
  2. Name of the rental property owner (lessor/landlord) and the renter (lessee/tenant)
  3. Contract Start Date and Maturity/Expiration Date
  4. Security Deposit Terms (Amount, Schedule of Payment and Return, etc)
  5. Landlord Entry Terms
  6. Move Out Policies and Procedures
  7. Pet Policy

 

  1. Occupancy Limitations (Although rental agreements cover shorter rental periods, limits on subleasing or occupancy is still vital to make sure that only those who have signed the rental agreement along with their immediate family can live on the rental property unless allowed. The tenants will also be prohibited to put their rented property for rent to other parties without your approval as the rental property owner.)

 

  1. Maintenance and Repair Clause. You and your tenant may discuss the specific maintenance obligations that the latter shall meet under the rental contract and these must be clearly defined in the terms. For instance, the tenant shall have the responsibility of keeping the premises maintained and clear from hazards. The rental agreement must also require the tenant to inform you or ask permission from you before any repairs or modifications can be carried out to the property.

 

  1. Disruptive, harmful, or illegal activities which include excessive noise or drug dealing and engagement. It would be best if the rental agreement listed out all the illegal activities or behaviors which constitute grounds to terminate the rental agreement.

 

What Makes Rental Agreement a Good Choice For Landlords?

Although lease agreements are more common, short term rental agreements are believed to be beneficial, thus more preferable both in the eyes of the landlord and the tenant for a lot of reasons:

 

  1. Rental agreements are short term, thus allowing both parties to breathe. In specific cases, for some reasons, a landlord may want to have his property occupied by a tenant for only a short period of time and in this case, a rental agreement is without a doubt a better option All the landlord has to do is inform the tenant thirty days ahead or whatever period is stipulated in the state law prior to the move out date he desires.

 

  1. Rental prices are easier adjusted. Rental agreements win in the eyes of landlords in terms of flexibility in the rental price as he becomes entitled of the option whether to increase the rent every rental period, i.e. if the rental period is every thirty days, then the landlord can benefit from the rent increase every thirty days or else the tenant will be inclined to move elsewhere provided there are no exceptions stipulated under rent regulations or control.

 

  1. More income can be gained. While people who could not afford to buy a house only settled for leases, there are still a wide percentage of the population which are fit better under rental agreements because of their period requirements. For instance, people who are currently having their houses renovated or settling at other places for job or internship reasons will want to consider being in a rental agreement better. With this huge market, landlords can easily gain from the monthly rental amount that they can change on shorter periods.

 

The Downsides of Rental Agreements

Rental agreements may be winning in terms of basic lease clauses but it is no secret that they come with a couple of disadvantages too.

 

  1. Stability – In terms of stability, rental agreements can be questioned because of their short term nature, i.e. for one month, you will need to prepare yourself for another vacancy and if the odds go against your favor, it may mean you will have no income coming in.

 

  1. Turnover Rate – Where rental agreements are more practiced, landlords are required to be more prepared for a nonstop cycle of finding new tenants for the property. Although it may be more income generating, the risk factors to earning less are also there.

Rental agreements are nonetheless considered as a great starting point. At the end of the day, however, how smoothly they run or end ultimately depend on how well the rental contract is documented and discussed.

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