A house or a real estate property is one of the most expensive assets a person can and will want to have in his lifetime. However, not everyone has the fortune to have one built up and live at the comforts of it. This is why these days, rental or lease agreements continue to thrive as they offer the same level of comfort and facilities without leaving too much financial burden to people.
Nevertheless, as a landlord/rental property owner, although the likelihood of you earning a lot from your property is high, it is still vitally important that you put all your leasing terms in writing as simple verbal agreement no longer deems secure or reliable.
The Difference between Rental and Lease Agreement
If you are considering to renting or leasing your property out, it is important to familiarize or strictly define the terms present in the agreement contract or form as there are a lot of potential tenants who are going to be interested in your property and not all of them can be trusted on. But first, you have to choose first between entering into a rental agreement or a lease agreement.
What is a Lease Agreement?
A lease agreement is unlike a rental agreement in many ways although they are often thought of as the same thing. To put it simply, lease agreements are longer, stricter rental contract than a typical rental agreement.
- Rental agreement is usually short term and the terms can be changed on a monthly basis including the rules, rental amount, and all other rental terms. Lease agreements, meanwhile, cover a longer period which may last from six months up to thirty long years particularly for commercial properties. The most commonly used duration, nonetheless, is one year.
- Rental agreement practices automatic renewal of contract allegedly to save a lot of paper works and hassles since the contract ends on a short term basis. Here, all the rental agreement terms of the current contract carries over onto the new contract by default and the landlord has to manually intervene and ping the other party whenever changes on the terms go down. Meanwhile, in lease agreements, automatic renewal of lease is void. That is to say that as soon as the original contract expires, the landlord and the tenant will have to sign an all new contract with terms probably modified. In many cases, after the maturity of the original lease, the lease term can go through a diminishing manner.
Both types of agreements are to follow what is stipulated in the state law regarding the advance notice period before any contract expiration or renewal. The most common grace period is thirty days, i.e. landlords are obliged to ping their tenants 30 days prior to the maturity of the contract and details of the changes in terms if there are any.
- Now, in lease agreements, the terms and clauses stipulated in the contract cannot be altered or modified in the middle of the lease period. Therefore, if the tenant already signed a lease contract that is to expire after a year, the landlord cannot implement an increase in the lease amount and will have to wait until a month before the contract expiry of the original lease. The advance 30-day to contract expiry notice still applies.
- Aside from the elements mentioned above, health and safety concerns may also be included in the terms like the lead paint disclosures or any information relating to health and safety of the tenants, landlords, and the rest of the community.
Common Clauses of Both Rental and Lease Agreements
Although they may differ especially in terms of duration, both rental and lease agreements still share a lot of things in common. They are both legally binding agreements represented by a legal contract signed by both parties. The contract must include the following clauses:
- Amount of Rent or Lease
One of the vital elements in a lease or rental contract is the amount the tenant is obliged to settle on a periodical basis. Without this, a rental agreement can go out of hand and can put the rental property at a greater risk.
- Rental Property Owner
The name of the rental property owner, also known as the landlord or the lessor, must be clearly specified in the contract as well as the name of the renter, or also known as the tenant or the lessee.
- The Start and End Date of the Contract and all that other important dates concerning the notice of expiry or payment
- The terms of Security Deposit including the amount to be deposited and paid in advance as well as the dates where the security deposit is to be paid by and returned to the tenant.
- Specific Landlord Entry Terms (Tenants are given the right to privacy that even though they are only renting the property, landlords must still respect it.)
- Move Out Terms and Procedures
- Pet Policies. Although not all landlords are strict about pets, this clause becomes necessary especially on compound properties wherein other tenants may find it uncomfortable or unsafe with animals roaming around the area.
- Limitations about the Occupancy. Rental agreements run shorter when compared to lease agreements. Regardless, both types should include the occupancy or subleasing terms to ensure that those who have signed the lease agreement and the names included in the contract are the only ones to occupy the property unless the landlord permits otherwise. Moreover, the tenants will not be allowed to put the leased property for lease to other parties sans the rental property owner’s approval.
- Repair and Maintenance Rules. Not all renovations are good for a property even if they are for beautification especially if the landlord is not comfortable with it. This is why this clause is important. Both landlords and tenants should be clear about the particular maintenance obligations that the tenants must meet under the lease contract. Nevertheless, tenants are always deemed responsible for the cleanliness and order of the rented property. All permissions or prior notice of modifications or repairs shall be clearly defined in the contract for the rental property owner’s peace of mind.
- Illegal activities or other activities deemed harmful or disruptive to the neighborhood including excessive noise or dubious engagements. All landlords are advised to list out all prohibited practices or behaviors in the contract; violation of such shall constitute bases for contract termination.
The Upsides of Lease Agreements to Landlords and Tenants
While a lot of people may say rental agreements are a friendlier option between the two, a lot of rental property owners and tenants still go for lease agreements for many valid, beneficial reasons.
For the part of the tenant, the following are the advantages:
- Reduced Initial Costs
During the construction of properties and buildings, it is not only the construction per se that needs capital. Before the building commences, the land must be acquired first. Oftentimes, the land has a significant say to the overall cost of the property and enhances the upfront development cost substantially. By entering into a lease agreement, as a tenant, you will no longer need to buy or save a lot for the land. Your land acquisition costs will automatically be eliminated.
- Reduced Tax
Entering in a lease agreement is also beneficial in terms of associated tax deductions. For tenants like you, you can actually subtract the rental payments you will have to make on the structure or underlying land from its state and federal income taxes. Sans the tax fees, it could mean lesser mortgage obligations.
For the part of the landlord, the following are what makes lease agreement a good deal:
- Reduced Tax
One upside for the landlord is the tax reduction he could be entitled to, i.e. if the property is being sold outright, it would need to identify a capital gain and pay taxes on that gain for the lease period in which the sale occurred. Meanwhile, entering into a lease allows the landlord to avoid an accumulated tax payment. Rather, the landlord can just take note of the rental income from the lease contract and only settle ordinary income tax based on that collected amount.
- Retention of Ownership
Another obvious benefit of putting the property for lease is ownership retention of the property. If the landlord runs as a large trust or corporation, long term development plans may be there or the interest to hold the property for future use may be likely. Thanks to lease agreement, this is made possible as the right to ownership is still retained under the name of the landlord.
As this is a very important, not to mention, expensive property being put at stake, putting everything in writing is outright necessary. The contract shall set as a barrier and a basis that ensures that both parties are on the same page. Investing a lot of time on the contract preparation is surely going to be worth it.