A property lease agreement is a legal contract between two parties, a lessor (landlord) and a lessee (tenant), whereby the lessee is granted access to a property for a certain amount of time. There are usually certain conditions attached to this agreement regarding how and by whom the property may be used.
You might be wondering how – if at all – this differs to a tenancy agreement. Allow us to shed some more light on exactly what lease agreements are and when they’re relevant.
Lease agreement or tenancy agreement?
There are two key differences:
- Shorter-term versus long-term: Firstly, a rental agreement is a temporary contract whereas a lease agreement can last anywhere from 12 months to 99+ years.
- Subject to changes versus fixed terms: Secondly, the terms of a rental agreement can be updated by either party. A rental lease, on the other hand, is for a set term, with agreed terms and conditions which can’t be changed until the end of the lease (unless official, written agreement is provided by both parties).
In commercial terms, a tenancy agreement is considered a periodic lease whereby the landlord or tenant can issue a termination period of one month. Under a lease, the terms are set and the lessor cannot easily introduce new terms into the lease until they expire.
Why do people take out lease agreements?
Tenancy agreements are preferred for short term residential stays, often chosen because the landlord wouldn’t like to be strictly tied down to one tenant for a long time. Or they may want to be able to sell the property within a few years.
When do leases become relevant?
Leases are preferred for longer terms such as commercial premises. They’re often chosen because the lessor would like to have security (the lessee cannot easily opt out of the lease).
They’re also a consideration when it comes property purchases and there are a few variations of a lease, beyond a typical rental lease that has been outlined above. We discuss one of these (lifetime leases) below.
Lifetime lease
A lifetime lease is a type of agreement that’s applied to the purchase of a property. It guarantees that the lessees can live in the property for the duration of their lives. It’s usually offered for older people, approximately 60 years old and above. Since the property is returned to the lessor after the lessee passes away, the cost of purchasing the property with a lifetime lease is often much lower than purchasing it outright.
A lifetime lease has a number of benefits. For instance, the lower prices mean that people can afford a property that would otherwise be too expensive. Additionally, there’s the benefit of having tenancy secured for life.
Lifetime leases tend to require a one-off payment upfront, with funds often raised from the sale of a previous home, and there are no mortgage payments, rent payments, or interest payments to be made. These types of deals are only offered to those over 60 for a reason – they require either previous homeownership or a significant amount of savings.
The downside of purchasing a lifetime lease rather than owning the property outright is that you will not be able to leave the property to anyone once you’re no longer here.
Short lease
A lease is considered to be a short lease if it’s below 99 years, often 70 or 80 years. Short leases affect the value of a property; where a property with a typical 99-year lease will retain 99-100% of the freehold** property value, a lease of 70 years will retain approximately 90% of the freehold value. The shorter the lease, the lower the value of the property over time.
Short leases can be difficult to raise a mortgage for since many lenders will not provide a mortgage due to the depreciation of the property. It’s possible to apply for a lease extension in order to counter this depreciation, however this can be very expensive and complicated to arrange.
**A freehold agreement is where you purchase a property and the land on which it sits, so you own it completely and with no time restrictions on ownership. A leasehold, on the other hand, is where you purchase the property but not the land on which it sits, meaning at the end of the specified time period (often 99+ years), the property will return to the freeholder (who owns the land).
That concludes our brief guide to property lease agreements. The legal jargon surrounding property agreements can be confusing and very technical. Here at James Anderson, we pride ourselves on helping people with all of their property needs. For more property information, browse our blog, or get in touch with us.