Contract To Lease Vs Lease Agreement: What’s The Difference?

What Is A Contract To Lease?

Defined by Black’s Law Dictionary, a "contract to lease" is "a contract under which one party binds himself to rent property to another, with the agreement that the other will accept the property. [A] contract to lease under which the leased property is not delivered and nothing is paid by the lessee…."
While a contract to lease often looks and feels like a lease in the sense that it conveys the core terms of a landlord/tenant relationship, it does not create any binding legal obligations. Rather , because it is negotiated with the intent to negotiate a lease, it is a document that has been, in the past, used in the process to lay the foundation for the ultimate lease document.
It is important to note, however, that the express terms of a contract to lease play an important role in the real estate industry. For instance, the contract to lease often conditions entry of the landlord/tenant relationship on the completion of certain contingencies as a precondition to negotiating the lease document.

What Is A Lease Agreement?

A lease agreement typically represents a business that’s renting out either real property or personal property for a specified duration in exchange for compensation, typically a monthly or periodic installment. These types of documents will lay out the terms of how one party is renting out their asset(s) to the other. In some cases, these agreements are for residential properties, whereas in other cases, they are for such things as equipment or cameras—just about anything a rental transaction could involve.
In most cases, these contracts will be very similar to standard contracts in that they contain the name, address, and contact information of both the parties, as well as the terms and conditions of the agreement, including:
• List of all property the lessor is agreeing to rent out
• Rental duration and start and stop dates
• Amount of rent to be paid
• The security deposit amount and details on how to handle it, such as how and when it can be returned
These contracts function very similarly to contracts that involve the purchase of goods or services. The key difference, and the reason these documents are referred to as lease contracts instead of sales contracts, is that the property is not being sold to the other party, but rather rented for a certain period.

Contract To Lease Vs Lease Agreement: Their Distinction

A contract to lease is not the same thing as a lease agreement. A contract to lease is a much more non-committal document than a lease agreement. First, a contract to lease does not create an obligation to lease premises at all. Rather, a contract to lease shows the intent of the parties to enter into a lease agreement in the future. It is simply an agreement that the parties hope to enter into a lease agreement in the future. The contract to lease will set out the terms to be included in the lease agreement to be entered into in the future such as the rent amount, term, tenant improvements, and other obligations of the tenant.
The lease agreement is the actual document that creates the legally binding obligations. This is when the tenant actually leases the premises from the landlord for a period of time in exchange for paying the specified rent amount. A lease agreement creates an enforceable obligation of both the landlord and tenant. In exchange for the tenant performing its obligations under the lease (such as the payment of rent), the landlord becomes obligated to make the premises available to the tenant for use during the period of time specified.
In addition, it is important to not confuse a contract to lease with a ratification of a lease agreement. A ratification is an indication by a party that a previously unauthorized act by someone with the authority to act on behalf of that party is now authorized. In other words, the party who did not authorize the act now retroactively approves the act. This is usually done if the previous unauthorized act was beneficial to the party who did not previously authorize the act and the party who authorized the act on its behalf had the authority to do so. This is common example in construction contracts. A general contractor who could be liable for breach of contract for an unauthorized modification can avoid liability if the owner ratifies the unauthorized action either through its silence or subsequent authorization.

Benefits Of A Contract To Lease

For both landlords and tenants, the ability to set the timetable and terms of the lease agreement is an important benefit of a contract to lease. For example, while a landlord may want a tenant to move in quickly, the tenant may want to move in over time, enabling them to move any equipment or furnishings in to the premises in stages. Regardless of the needs of either party, all negotiations are up front with a contract to lease. As a result, if an agreement can be reached about the terms and requirements of the lease, it is extremely likely that the final lease agreement will be acceptable to both parties. In particular, where the form of lease is subject to negotiation, the parties can negotiate the terms of the lease first and then finalize the lease agreement once they are in agreement. In situations where a tenant is taking over lease obligations from the previous tenant of the premises, for example where the lease is assigned to the tenant, a contract to lease can be used to evidence the terms on which the tenant will assume those obligations under the lease, especially when there is a delay in completing the assignment of lease. A contract to lease can also be useful if the landlord requires that the tenant complete work in the premises as a condition of entering into the lease.

When A Lease Agreement Is The Right Choice

A lease agreement is more appropriate for commercial tenants who will be occupying the property for an extended period of time. A lease agreement is preferable in most instances because it provides both parties with predictability and stability, as well as explicitly delineating the specific rights and responsibilities of each party . For example, if a tenant will be running an office, retail-space, factory, bar, or any kind of business for years at a time, this relationship would be best suited for a lease agreement. A lease agreement would allow for the rent amount, security deposit, tenant improvements, eviction process, and other major issues to be spelled out clearly in a way that protects the landlord and the tenant.

Legal Considerations And Best Practices

Both parties should consider the legal implications and their own circumstances when choosing between a contract to lease and a lease agreement. Generally speaking, a contract to lease may be better for investors/developers who plan to eventually purchase the property. With a lease agreement, the tenant assumes more responsibility and liability from the outset. Typical tenant obligations in a lease include leasing costs, including rent, utilities, taxes, repairs and maintenance, insurance and property management, all of which can add up quickly. However, it is possible to negotiate this type of lease if the landlord is flexible and the improvements are minimal. Before executing a commercial lease, tenants should always ask their attorney for suggestions on how to reduce lease costs and limit their liability.
The best practices are to hire a lawyer with experience in commercial real estate to draft any lease or contract to lease and to become familiar with the terms in the agreement. Tenants often make assumptions that can later on come back to haunt them. For example, the lease should clearly state how much a tenant will owe and when, including the date the first payment is due and whether there are any late fees. All of these issues should be addressed when negotiating the terms of a lease or contract to lease.

Which Option Works Best For You

Determining whether a contract to lease or a lease agreement is best for your needs and situation will depend on the parties’ specific circumstances. Although this decision can be complicated, there are several factors that can help in making that decision. First, if you are working with a real estate agent, they may have a preference as to which one to use. Ask them to elaborate on their reasons given the facts of your particular circumstance. Second, if the property is in a residential area, most jurisdictions have preapproved standard form residential lease agreements. Obtaining a copy of those forms and using them is almost always a good idea in this situation. Third, if the property is located outside of an urban area (and does not have a mix of residential and commercial uses), most people would suggest using a lease agreement rather than a contract to lease . This is particularly true if the contract period will be greater than one year. Fourth, if the parties are entering into a lease agreement for a certain term or under the terms of a month-to-month extension, it is preferable to use a lease agreement. It would be difficult to manage a leasehold with no fixed termination date. Finally, there are no significant advantages to the landlord of choosing a contract to lease and a lease agreement will almost always be better for the tenant. Consequently, unless the parties have no other choice and just have to use a contract to lease to get the leasing arrangement finalized, it is preferable for the tenant and landlord to use a lease agreement.