Types of Leases in Real Estate

Instructor: Shawn Grimsley
A contract between a landlord and a tenant is a lease. In this lesson, you'll learn about different types of leases in typical real estate transactions including residential leases and commercial leases. A short quiz follows.

Lease Defined

John owns a property management company which manages residential and commercial properties for various landlords in town. One of the most important documents he uses in managing his client's rental properties is a lease. A lease is a contract between a landlord and tenant giving the tenant the legal right to either possess or make a specific use of the landlord's real estate. Leases outline the legal rights and obligations of both parties. While most leases contain standard terms and provisions, leases can vary depending on the nature of the property and the type of tenant. For example, John has clients that own both residential properties that will be leased to people needing a home and commercial properties that will be leased to businesses. Different leases are used for these types of properties.

Regulating the Landlord-Tenant Relationship

John and his landlords don't have unfettered discretion in what they impose upon tenants in a lease. States regulate leases through statutes and the common law (i.e., law developed through judicial decisions). Model laws, such as the Uniform Residential Landlord Tenant Act or the Model Residential Landlord-Tenant Code, have been adopted in some states. Building codes may also impose certain requirements on rental property. For example, in some places buildings must feature fire escapes or egress windows for underground living spaces.

The statute of frauds in John's state requires that all leases that last longer than one year must be in writing and signed by the landlord and tenant. Since John is a professional, he requires a written lease in all cases as a best practice regardless of its duration.

Residential Leases

John will use a residential lease for tenants seeking to lease property as a residence. The tenant will pay the landlord rent (usually in monthly installments), but the landlord typically remains financially responsible for the maintenance, taxes and insurance on the real estate. However, tenants are responsible for the personal property in the units they lease. (Some may opt to pay for renter's insurance policies to cover their personal possessions.)

One of the most important legal impositions in residential leases is the warranty of habitability, which exists in nearly all states. This warranty is implied, which means the law deems that each residential lease is subject to the warranty even if it's not written in the lease. The warranty imposes an obligation on the landlord to ensure that the residential property is habitable for humans, which generally means availability of electric power, a functioning plumbing system (including drinkable water), an air conditioning or heating system and that the physical structure of the residence is safe to occupy.

Commercial Leases

John will use a commercial lease if he is leasing property to a business for a business purpose. Commercial leases tend to be more flexible than residential leases with less legal protections automatically afforded to tenants. Unlike residential leases, the tenant often must directly foot the bill for the costs associated with owning real estate even though they are only renting it. (In reality, most residential tenants also pay much of these expenses as well, but the costs are embedded in their rent). John uses four standard commercial leases:

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