Lease vs. Rental Agreement: Know the Difference

A lease is a formal, legally binding document. A rental agreement can be in writing, but can in some cases be less formal than a lease. If you’ve agreed to rent a property but do not have a lease, a rental agreement is the default position.

Read on for more information on the differences between leases and rental agreements.

What is a lease?

A lease is a legally binding contract between a landlord and tenant that states how long the tenant will rent the unit and for what price, such as $1,000 a month for 12 months. To be valid, a lease must contain the following elements:

  • Both parties must be competent adults who can legally sign a contract.
  • There needs to be a meeting of the minds. In this case, there needs to be an offer made by the landlord and an acceptance of that offer by the tenant.
  • There needs to be a stated rental amount.
  • There needs to be a legal description of the property – usually the property’s address.
  • The lease must state the intended purpose. Most residential leases will state something like, “For residential purposes only,” or words to that effect.

A lease also contains terms that outline the obligations of the landlord and the tenant. Here are some examples of what you might find in a lease—this is not an exhaustive list:

  • How much is the security deposit?
  • Is subletting allowed?
  • What are the late fees, if any?
  • What happens if a tenant breaks the lease?
  • What is the pet policy?
  • Who is responsible for yard maintenance?
  • Who pays for utilities?
  • How much notice does the landlord need to give before entering the property?

If the tenant breaks any of the lease terms, the landlord can evict. And if the landlord doesn’t live up to their obligations, the tenant might be able to break the lease. It’s always risky to withhold rent, however. Before ever doing that, seek the advice of an attorney.

A lease also creates a leasehold interest in the property. That means the tenant, by paying rent, has bought the right to occupy the property undisturbed, meaning that the landlord can’t just come in whenever they like. They need to give you notice before coming over, unless there’s an emergency that requires the landlord to get in immediately.

What is a rental agreement?

A rental agreement is usually a month-to-month arrangement, but it can be weekly as well. It can be written and would generally state terms as a lease would, but it doesn’t have a start and end date. If it did, it would be a lease. 

A rental agreement could also be a looser arrangement. If a landlord and tenant agree on the terms of a rental, but never sign a lease, they enter into a rental agreement. The same thing happens if a tenant continues to rent the property after a lease expires – unless they renew it.

Tenant at sufferance

If you had a lease but are staying in the rental unit after the term ends without permission from the landlord, you’re a tenant at sufferance. Another term for this is “holdover tenant.” The landlord might need to take legal action to get you leave by sending you what’s called a “notice to quit.” If you still don’t leave, the landlord could and probably will evict you. Once you have an eviction on your record, you’ll probably find it difficult to rent another place.

Tenant options when a lease ends

When a lease ends, tenants don’t need to give any notice to vacate. They can just leave. The exception is if there’s a clause in the lease that makes the lease automatically renew. If there is, you would need to give notice when you want to move, depending on the terms of your lease. But if there is no clause like that, you can just leave at the end of the term.

Landlords often inquire one or two months in advance to find out their tenant’s intentions, and if you know you wish to stay longer or are planning to leave, you can let your landlord know. But tenants have no obligations to the landlord other than what is stated in the lease. For example, if your lease is from June 1 of the current year to May 31 of the following year, you can simply move out on or before May 31 with no reason or notice given.

There are three options when a lease ends: renew, move, stay on as a month-to-month tenant. You’ll need permission from the landlord if you wish to renew or stay on as a month-to-month tenant. If nothing is said at the end of the lease and you simply stay on and pay rent which the landlord accepts, you now have a rental agreement.

Pros and cons of a lease for tenants

The advantages of signing a lease are that you’ll know you have a place to live for as long as the lease specifies. The landlord can’t kick you out, for example, if they want the property back for some reason. The landlord can’t raise the rent during the lease term, either. This means you can budget without any surprises.

The disadvantage of signing a lease is that you’re stuck with the rental unit for the entire lease term. You can leave if you want or need to, of course. But if you do decide to move before the lease is up, you’ll be liable for the balance of the rent.

Think of it this way. Let’s say you signed a 12-month lease for $1,000 a month. You’ve really entered into a contract with the landlord stating you’ll pay them $12,000 only broken up in installments. If you leave early, the landlord still gets the balance of what you owe. There are a couple of ways out of this, however:

  1. If there’s a lease break clause: Some leases allow tenants to break the lease, usually for a fee, which could be two months’ rent, for example. It’s not a great option, but it’s not terrible, either.
  1. Landlords in most states need to find a replacement tenant: Let’s say you want to leave six months’ before the lease is up. Landlords typically can’t just sit back and collect rent from you; they need to actively try to re-rent. If they can’t find a replacement tenant that meets their standards, you would be on the hook for the rent. But if they do re-rent, you no longer need to pay rent. Landlords aren’t allowed to double-dip by collecting rent from two sources.

Pros and cons of a rental agreement for tenants

The advantage of having a rental agreement is that you can leave whenever you like. All you’d need to do would be to give a month’s notice. If you aren’t sure how long you want to rent a place, a rental agreement would probably be a good option.

The disadvantage of a rental agreement is that the landlord can end the agreement or increase your rent at any time. Just as you can give your landlord notice to vacate, your landlord can give you notice to vacate with only one or two months’ notice, depending on your state’s law. If you want to stay longer, that’s too bad. The landlord can also increase your rent or change any other lease terms with only a month’s notice, and that could force you out, for example, if the place becomes unaffordable.

The bottom line

Both a lease and a rental agreement have pros and cons. The best way to decide which is better for you is to choose whichever arrangement best fits your needs.

For more information, check out our definitive guide to leasing.