Elements of Real Estate Lease Agreements

Real estate lease agreements consist of numerous elements that set out the rights and obligations of the lessor/landlord and the lessee/tenant. In the absence of restrictions on use, the tenant can normally utilize the property for any lawful purpose.

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Possession of the Property

Tenant in a leased office
Luis Alvarez / Getty Images

This element of a real estate lease addresses the rights of possession of the tenant. The landlord promises the tenant the possession of the property for their enjoyment and promises that the ​landlord will not interfere with that possession.​​

This does not mean that the landlord cannot enter the property, as it is usually part of the lease agreement that the landlord has the right to enter the property for repairs or other activities outlined in the lease.

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How the Tenant Can Use the Property

There are many types of leases, residential, office, retail, etc. All of these types may have reason to specify restrictions on the use of the property by the tenant. A residential lease might forbid use for any business purpose. An office lease might state that the property can only be used as a "real estate" office. A retail lease might specify what types of product that could be sold in the space.

In the absence of restrictions on use, the tenant can normally utilize the property for any lawful purpose.

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What Is the Term of the Lease?

Generally, leases specifically state a beginning and an ending date for the lease to be effective. This period, when set both front and back end, would mean that no notice to vacate would be needed. The tenant would vacate on the prescribed ending date unless a new agreement is reached.

Leases can run for months or years. Some states prohibit very long leases in excess of 100 years, but it's OK in others. Generally, the term is stated with a beginning date and an ending date and the total period. Example: The lease will run from January 1, 2019, through December 31, 2020, a period of two years.

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The Security Deposit

Most leases have a provision for one or more security deposits against the possibility of non-payment of rent or damages to the property. Most states have stringent rules for how deposits should be handled and for whether interest should be paid to the tenant while the deposit is held. There are many deadline timelines for refunding of deposits once the lease period is ended, the property is vacated and inspected for damage.

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Improvements to the Leased Property

Generally, during a lease, there will be no improvements made by the landlord unless specifically called for in the lease agreement, or unless a new agreement is made in writing. The tenant may make improvements with the permission of the landlord, but they would become the property of the landlord at the end of the lease.

Improvements clauses are much more prevalent in commercial leases. Offices and retail spaces are subject to modifications that are considered improvements and that are done to accommodate the business of the tenant.

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Maintenance of the Leased Property

Maintenance elements of a real estate lease can vary significantly depending on whether it is residential or commercial in nature. In most residential property leases, the landlord is responsible for all repairs and maintenance. In commercial properties there are varying agreements made that could make some maintenance the responsibility of the tenant. As in any contract, the responsibilities of the parties should be carefully and completely spelled out to avoid misunderstanding.

In the case of a retail or office establishment, there could be a requirement for maintenance of the fixtures, such as display cabinets, that would fall upon the tenant, while the structure and major building maintenance would be done by the landlord.

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Assignment or Sublease of the Leased Property

If the tenant assigns their lease, it usually means that they've transferred all of their leasehold interests to the other party. In a sublease, the original tenant is releasing the property to another, with some of their interests transferred.

The lease agreement will specify whether any assignment or subletting is allowed and under what circumstances. In many cases, the tenant retains some or all of their liability for payment of rents and responsibility for damage to the property.

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Options for the Tenant in the Real Estate Lease

Many leases provide an option for the tenant to renew the lease prior to the end of the lease period. With the proper notice, the tenant can renew for another pre-agreed period. An example clause might read: "Any time up to thirty days prior to the expiration of this lease; the tenant can elect to extend the lease another six months by written notice to the landlord. The rental amount will be $xxx.xx per month for the new lease term."

Another option is the one to purchase the property during the lease period. Generally, the purchase price is stated, and the landlord may or may not apply some of the rental payments to the down payment or purchase price.