What’s the Difference between a Lease and a Rental Agreement?
What's the difference between a lease and a rental agreement? Here's what landlords and tenants need to know.
Most people use these terms interchangeably, but there is a difference. Let’s take a look.
A lease (or lease agreement) is a long-term contract lasting anywhere from six months to two years. During the rental period (the term covered by a lease or rental agreement), neither the landlord nor the tenant can change the terms except by mutual consent.
A rental agreement (also called a periodic rental agreement or a month-to-month rental agreement) is a contract that lasts for a much shorter period of time, from one week to one month. After each rental period, it is either renewed or notice is given for termination.
The primary advantage of a rental agreement is the flexibility it offers both the landlord and the tenant. For renters who want a temporary living situation or are engaged in temp or contract work, having a month-to-month rental agreement gives them the flexibility to stay for as much or as little time as they like.
Some landlords use this type of agreement to give themselves more protection against undesirable tenants. If a tenant turns out to be problematic, it’s easy to give notice and find someone else.
Landlords may also use a month-to-month rental agreement if they plan on living in the unit for part of the year. This gives them the flexibility to still earn some rental income, even if it’s only for a limited period of time.
The flexibility of a rental agreement means that either the landlord or the tenant can terminate at any time, provided they follow state and local laws for notice.
For example, in non-rent controlled areas in California, either a landlord or tenant may terminate a month-to-month rental agreement with 30 days’ notice, or 60 days’ notice if the tenant has lived in the unit for a year or more.
While some may appreciate having the flexibility, the disadvantage is that landlords may be faced with an unexpected vacancy, or tenants may be asked to move before they planned to.
For renters, one drawback is the terms of the agreement may change each rental period. Depending on state laws, there is nothing to prevent the landlord from raising the rent each month. Landlords who plan to increase the rent should make sure they follow their state and local guidelines for doing so.
When Can the Terms Be Changed?
For a rental agreement, the terms can be changed after the rental period is complete. However, landlords looking to change the terms of the agreement (such as rental price) need to follow their state laws for appropriate notice.
For example, for month-to-month rental agreements in California, landlords who want to raise the rent need to give tenants 30 days’ notice if the increase is under 10%, or 60 days’ notice if the increase is over 10%.
These laws may vary if you live in a rent-controlled city. It’s always best to follow your local and state laws regarding changes to a rental agreement.
The main advantage of a lease is the stability it provides for both the landlord and tenant. A tenant who has signed a year-long lease has locked in that particular rental rate for the year. Legally, the landlord cannot change it until the lease term has expired.
Similarly, a landlord has a guaranteed tenant for however long the lease lasts. This means stability in rent payments and cash flow. If a tenant decides to break the terms of the lease, either by leaving early or choosing not to pay rent, then the landlord can pursue legal action.
Related: My Tenant Wants to Break Their Lease: A Landlord's Guide
The main drawback for renters is that a long-term lease offers less flexibility than a month-to-month rental agreement.
For landlords, a lease can be disadvantageous if they have a bad tenant. Rather than simply waiting out the rental period and not renewing, landlords are forced to pursue costly eviction procedures.
When Can the Terms Be Changed?
Signing a lease means the terms must stay the same for the entire term of the lease. The exception is if both parties agree in writing to any proposed changes.
Of course, landlords need to ensure their lease adheres to state and local laws. No matter what the tenant may have signed, the law supersedes any agreement if the terms of the agreement are not in compliance with the law.
Can a Lease Ever Become a Month-to-Month Rental Agreement?
Yes. If landlord accepts payment after the termination date of the lease, the terms are still in full effect, but only for another rental period (one month if that’s what the tenant has paid). In this scenario, each time the landlord accepts payment, they are renewing the rental agreement for another month. Some landlords choose to start with a lease and continue with a month-to-month rental agreement as long as it suits them.
For landlords who want to avoid vacancies and have an assurance of rental income, a long term lease is a good decision. If a landlord is having trouble attracting tenants with a lease, offering the flexibility of a month-to-month rental agreement may sweeten the deal. Additionally, any landlord looking to live in the unit for part of the year should consider using a short term rental agreement.
For renters, signing a long term lease may be beneficial if you’re trying to lock in a particular rental rate. If flexibility is your goal, a month-to-month rental agreement is the way to go.
Leases and rental agreements are different documents, but each of them has a place in the landlord-tenant relationship. As always, having a written agreement (as opposed to a verbal agreement) can help everyone avoid misunderstandings.
Need a written lease or rental agreement? Consider using the Tellus superapp. We’ve got you covered with digital leases, state specific terms, and customizable clauses that will leave even the pickiest landlord feeling satisfied.
Related: How Your Lease Can Make You Money