Lease Agreement

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Lease Agreement

A Brief Introduction About the Agreement

What is a lease agreement?

A lease agreement is a legal contract between the lessor and the lessee.

There are different types of leases, depending on the asset being leased.

Commercial lease agreement: When it comes to renting commercial property to a business, Commercial lease agreement is required to be entered into by the landlord and the business.

For preparing this agreement, you can refer to a commercial lease agreement in pdf below.

Equipment lease agreement: In Equipment lease agreement, the asset involved is an equipment which is owned by the lessor, and it is leased out to the lessee for a particular duration.

Horse lease agreement: In such contracts, the lessor allows the lessee to use the horse for commercial purposes on a monthly basis. The mortality insurance proceeds are paid to the lessor in the event of the death of the horse.

Apartment Lease Agreement: When it comes to a residential lease, these agreements are required. These agreements are between the landlord and the tenant.

Vehicle Lease Agreement: When you decide to buy a vehicle by making payments over a period of time instead of a lump sum payment, you need this agreement.

Who takes the agreement – People involved

A lease agreement is entered into by two parties, the lessor and the lessee. The lessee has to make periodic payments to the lessor for the use of the asset during the tenure of the lease.

The asset you want to lease could be a commercial property, equipment, a horse, an apartment or vehicle. In order to lease any assets, it is advisable for you to enter into a lease agreement.

The lessor is the owner who has invested in the asset so as to get a return on the investment by leasing it. The lessee is the party who requires the asset to generate income but is not willing to buy the asset.

The lessor and lessee enter into a lease agreement which defines the rights and responsibilities of both parties. Both parties should be transparent about what they expect from each other. This will minimize the possibility of disputes in the future.

Purpose of the agreement – Why do you need it

A basic lease agreement defines the rights and responsibilities of the lessor and the lessee. The agreement includes the rent payable, and the due date, responsibility for repairs, repayment of security deposit. The expectations of both parties are clearly laid out in the agreement.

The goal of every lessor is to maximize the return on investment irrespective of the asset involved, and the goal of every lessee is to have the right to use the asset for the tenure of the lease agreement. Both the goals of the lessor and lessee will be achieved if there is a lease agreement.

Without an agreement, issues like charging the client for damages to the property, timely payment of rent, payment for utilities cannot be amicably settled and will reduce your returns.

The lessor will not have the right to take any legal action against the lessee for any of the above violations as there is no legal document which clearly states the clauses on the basis of which the asset has been leased. The laws of the state will not apply, as there is no written agreement.

The purpose of having a lease agreement is to avoid all these hassles and ensure you get your desired return on investment.

Contents of the agreement – Inclusions

A lease agreement should contain the names of the parties to the agreement, the lessor and the lessee. Apart from this, the following information should be included:

  • The effective date of the agreement
  • Description of Asset: A detailed description of the asset is required. If commercial property is being leased, then it should be clearly stated whether bathrooms, kitchen or parking is included or not.
  • Lease payments: The details of the agreed lease rental and the frequency of payment, security deposit and the penalty for delayed payment. Rent is determined
  •  on the basis of the area of the property in square feet. You need to understand whether the walls of the apartment and the elevators are being included or not.
  • Term of lease: The duration of the lease with the start and end date. Most commercial leases are long-term leases. However, for startups, it is advisable to go for a short-term lease with an option for renewal
  • Improvements: The agreement should clearly state what modifications or improvement is allowed by the lessee as well as the responsibility of both parties towards sharing the cost.
  • Applicable laws: The laws of the state under whose jurisdiction the agreement is being drafted
  • Other payments: It is important to clarify who will be paying for utilities, insurance, property taxes, and repairs.
  • Signs: The agreement should state whether display signs are allowed by both the local zoning ordinances and the lessor
  • Use clause: The purpose for which the lessee can use the property should be defined

How to draft the agreement – Points to consider while preparing the agreement

While drafting the lease agreement, the following points need to be kept in mind:

  • The names of the parties involved in the agreement and the relationship between them
  • The nature of the asset being leased should be described in detail. If it is a commercial property being leased out, then the agreement should contain what is being included
  • Use clause: The intended purpose for which the lessee intends to use the asset and the activity that can be carried out is defined. This will protect the lessor from damage to the property.
  • Exclusivity clause: In case of properties being leased for commercial use, the lessor cannot lease the property to a competitor in the same complex.
  • Subletting: A subletting clause is important in such agreements, especially if the lessee is a new business which might wind up or move to a more economical location. The business can sublet the property to another party for payment of rent.
  • Consideration: The consideration or the lease fee should be mentioned including the frequency of payment and penalty for default
  • Duration of the lease: The validity of the lease should be mentioned with the starting and ending dates
  • Termination of lease: The events which lead to the termination of the lease needs to be mentioned

Negotiation Strategy

Before entering into a lease agreement, both parties should discuss the terms and conditions. The lessor should try and obtain a lease rental commensurate with the fair market price of the property. The lessee should ensure that the price being charged is justified according to the facilities being provided by the lessor.

Benefits & Drawbacks of the agreement

The benefits of a lease agreement are:

  • Protection of interest of both parties: With the lease agreement, the lessor is assured a certain return on investment for the property or asset. The lessee can use the asset for the lease period. If the lessee defaults in payment of the lease rental, the lessor can take legal action against them. The lessor needs to provide the facilities mentioned in the agreement, Otherwise, it will be considered a breach of contract.
  • Exclusivity clause: The lessee can ensure that the lessor does not lease out another apartment in the same commercial complex through this clause
  • Use clause: The lessor can ensure that the lessee uses the property for the activity mentioned in the agreement. This will protect the lessor’s property from damage.
  • Renewal: The agreement can be renewed at the discretion of the lessor. The lessor can continue with the present lessee or choose a new lessee if a higher rental can be obtained.

The drawbacks of the lease agreement are:

  • Eviction: The lessee can be evicted before the end of the lease period if there is a violation of a clause
  • No flexibility: The landlord or tenant cannot prematurely terminate the agreement, losing better opportunities

What happens in case of violation

A lease agreement is a legal document where the owner of the asset, the lessor, lets out the asset to the lessee for a mutually agreed lease rental. The lessor is supposed to provide the asset in a certain condition to the lessee and is paid a lease rental periodically. The lessee has the right to use the asset provided the lease payments are made on time.

The lease agreement is prepared in accordance with the laws of the state relating to commercial property rentals. The clauses in the agreement follow the state laws, and breach of any clause renders the agreement null and void.

It is vital, therefore, that the parties to the agreement discuss the terms and conditions before entering into the agreement. All the clauses required to protect the interest of both the lessor and the lessee should be incorporated in the agreement after discussion.

Clauses like the subletting clause should be incorporated for new businesses as this would protect the lessee from default as they could sublet the property in the event the business of the lessee fails, or there is a need to relocate.

Such clauses would minimize the possibilities of violation of the agreement and lead to a more amicable relationship between the lessor and the lessee.

If you have an asset that you want to lease, then a lease agreement is mandatory. The agreement lays down the terms and conditions of the lease rental so that the interest of both the lessor and the lessee are protected.

The lessor would benefit from a steady rental with increments every year for which the lessor needs to provide the basic amenities required by the lessee.

The lessee would benefit from this agreement as the property can be used commercially in keeping with the activity mentioned in the agreement. The lessee can use the property as long as there is no willful damage to the property, and the lessee takes responsibility for their share of utilities.

The lessee can also protect themselves by inserting an exclusivity clause so that the lessor does not lease out any apartment to a competitor.

A commercial lease can be a profitable proposition provided both the lessor and lessee abide by the agreement.

Sample for Lease agreement

A sample of the Lease agreement can be downloaded from below.

Download Lease Agreement Template

Agreement of lease

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