Mortgages & Home Loans What Is a Lease? Leases Explained in Less than 5 Minutes By Carissa Rawson Carissa Rawson Carissa Rawson is a personal finance and credit cards expert who has been featured in numerous publications, including Forbes, Business Insider, and The Points Guy. Carissa earned a bachelor's from the American Military University and has an MBA from Norwich University, an M.S. from the University of Edinburgh, and is currently pursuing an MFA from National University. learn about our editorial policies Updated on May 31, 2022 Reviewed by Doretha Clemon Reviewed by Doretha Clemon Doretha Clemons, Ph.D., MBA, PMP, has been a corporate IT executive and professor for 34 years. She is an adjunct professor at Connecticut State Colleges & Universities, Maryville University, and Indiana Wesleyan University. She is a Real Estate Investor and principal at Bruised Reed Housing Real Estate Trust, and a State of Connecticut Home Improvement License holder. learn about our financial review board Share Tweet Pin Email In This Article View All In This Article Definition and Examples of Leases How Leases Work Alternatives to a Lease Pros and Cons of Leases Definition A lease is a contract between two parties: the lessor (or owner of the property) and the lessee (the one who will be using the property). It acts as an alternative to purchasing the property, whether that’s a condo, a car, or a commercial building. Photo: The Balance / Julie Bang Definition and Examples of Leases Long story short, a lease is a contract between two parties: the lessor (or owner of the property) and the lessee (the one who will be using the property). It acts as an alternative to purchasing the property, whether that’s a condo, a car, or a commercial building. Leases are legally binding and usually contain five minimum components: The names of each party A description of the property you’re leasing The amount of rent due The length of the agreement Signatures from each party How Leases Work Let’s say you’re going to be living on your own for the first time, perhaps after attending university. You’ve saved up enough money for the security deposit, you’ve bought a brand-new bed, and now you’ve finally found an apartment that suits you. Once you’ve applied and been accepted by the landlord, you’ll be given a lease. While the term of the lease may vary, a common term is 12 months. You can also look for an apartment that offers a month-to-month lease, though these can be more expensive. In college towns, leases may revolve around the school year, allowing students to go home for the summer and pay for a shorter term. Note You must apply for a lease before signing the formal document. In most cases, the application process comes with an application fee paid directly to the landlord. The price varies by state. In New York, for example, application fees cannot exceed $20. The lease will dictate how much you owe each month. It will also specify the security deposit amount, if any, which is often paid before you move in along with the first month’s rent. In some cases, it may include additional stipulations regarding furnishings or offering to cover any utility costs. Once both parties have signed the lease, it becomes legally binding, and all names on the lease are legally responsible for complying with the terms. While it’s possible to break a lease, doing so can have consequences, such as having to continue paying rent or taking a hit to your credit score. Plus, you can face eviction if you break the terms of a lease. All of these details will usually be outlined in the lease as well. Note Depending on the state and the landlord’s policies, there are some cases in which breaking a lease is acceptable. For example, a call to military service or a necessary protection for a survivor of domestic abuse can mitigate the consequences of breaking a lease. While it is recommended to have a written lease, there are some examples of legally binding verbal leases. If you and your landlord have made a verbal agreement, it may be counted as an oral lease as long as it is “reasonable, equitable, conscionable, and made in good faith.” Alternatives to a Lease Signing an apartment lease could set you up for additional costs if you ever need to break it. Let’s say you’re not sure how long you’re going to be living in a specific area, or you suddenly lose your job. In these cases, you may consider subletting or subleasing your unit. This allows a tenant to turn over the apartment (and rent costs) to another individual. However, the original tenant continues to hold all responsibility for committing to the terms of the lease. Note Many leases prohibit subleasing or subletting. Be sure to read all details of your lease carefully or contact your landlord before agreeing to sublet. Generally, lessors also have financial requirements that tenants have to meet before being approved. In order to qualify for a lease, you will have to provide proof of income through documents like bank statements. If you lose your job and are unable to provide the necessary documentation, there are alternatives to a fully binding lease. If a car lease is what you’ve been searching for, you may want to consider purchasing or otherwise financing a vehicle. This option leaves you with a tangible asset when you’ve finished paying it off. Note If you’re unable or unwilling to secure an apartment lease, you may want to consider other short-term housing options. Although expensive, home rental agencies such as Airbnb don’t lock you into any type of lease, nor do they ask for proof of income, though you may need to pay rental costs upfront may need to pay upfront. Pros and Cons of Leases Pros Generally offer clearly defined expectations Protect you from unexpected price increases Can give you legal protection in the case of a dispute Cons Lock you into a specified term length Property must be returned at lease expiration Pros Explained Generally offer clearly defined expectations: Having a lease, especially a written one, can ensure that both you and your landlord are on the same page when it comes to rent, maintenance, and other rules surrounding your tenancy. Protect you from unexpected price increases: A lease will specify the amount of rent due for the duration of the lease. This means a landlord cannot change the rent unless that provision has already been included in the lease you signed. Can give you legal protection in the case of a dispute: If a dispute arises between you and the landlord, the lease will be reviewed to determine who is in the right. In this case, a written lease can be much more valuable, as oral leases mean it’s your word against the landlord’s word. Cons Explained Lock you into a specified term length: A lease may not be a good idea for you if you’re not sure how long you’ll be living somewhere. Even if you leave the area, you’re still liable for the lease. Property must be returned at lease expiration: Unlike purchasing property, the leased item must be returned when the lease is over. This means that no matter how much money you’ve paid into it, the item will not belong to you and you are responsible for returning the property in the best possible condition. In the case of an apartment, for example, you may face fees for damages sustained during the lease agreement. Key Takeaways A lease is a contractual agreement between you (the lessee) and the property’s owner (the lessor).Leases exist for all types of property, including homes, cars, and even propane tanks.You may consider not signing a lease if you are living in a temporary location or don’t meet the financial requirements of the landlord. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Land for Good. "Frequently Asked Questions: What Is a Contract? What Makes a Lease a Legally Binding Contract?" New York Department of State. "Guidance for Real Estate Professionals Concerning the Statewide Housing Security & Tenant Protection Act of 2019 and the Housing Stability and Tenant Protection Act of 2019." Tenants Union of Washington State. "Breaking a Lease." Alexandria Government. "The Alexandria Guide to Landlord-Tenant Laws and Policies," Page 10.