A contractual agreement by which one party conveys an estate in property to another party, for a limited period, subject to various conditions, in exchange for something of value, but still retains ownership.
A lease contract can involve any property that is not illegal to own. Common lease contracts include agreements for leasing real estate and apartments, manufacturing and farming equipment, and consumer goods such as automobiles, televisions, stereos, and appliances.
Leases are governed by statutes and by COMMON LAW, or precedential cases. Most leases are subject to state laws, but leases involving the U.S. government are subject to federal laws. Generally, federal laws on leases are similar to state laws.
A lease is created when a property owner (the offeror) makes an offer to another party (the offeree), and the offeree accepts the offer. The offer must authorize the offeree to possess and use property owned by the offeror for a certain period of time without gaining ownership. A lease must also contain consideration, which means that the offeree must give something of value to the offeror. Consideration usually consists of money, but other things of value may be given to the offeror. Finally, the offeror must deliver the property to the offeree or make the property available to the offeree. When a lease is formed, the property owner is called the lessor, and the user of the property is called the lessee.
Generally, a lease may be written or oral, but a lease for certain types of property must be in writing and signed by both parties. For example, if a lessee seeks to lease real property (land or buildings) for more than one year, the lease must be in writing. Some leases must be written, signed, and recorded in a registry of deeds. Such leases usually concern real property that will be leased for a period of more than three years.
A lease term begins when the lessee receives a copy of the lease. However, the lease need not be given directly to the lessee; it is enough that the lessee knows that the lease is in the hands of a third person acting on behalf of the lessee. A lease may also take effect when the lessee assumes control over the property.
In all states, leases dealing with commercial goods and services are strictly regulated by statute. Commercial lease laws govern the rights and duties of lessors and lessees in leases that involve commercial goods. Most states have
enacted section 2A of the UNIFORM COMMERCIAL CODE, which is a set of exemplary laws formulated by the National Conference of Commissioners on Uniform State Laws and by the American Law Institute. The laws governing commercial leases do not apply to leases of real estate, which are covered by LANDLORD AND TENANT laws.
In all states a court may void an UNCONSCIONABLE lease. A lease is unconscionable if it unduly favors one party over the other. For example, assume that a small-business owner leases property for 30 years in order to operate a gas station. The lease contains a clause stating that the lessor may revoke the agreement without cause and without notice. If the lessee performs his obligations under the lease, but the lessor revokes the lease without notice, the clause allowing termination without notice may be found to be unconscionable. A determination of unconscionability must be made by a judge or jury based on the facts of the case. The fact finder may consider factors such as the relative bargaining power of the parties, other terms in the lease, the purpose of the lease, and the potential loss to either party as a result of the terms of the lease.
Commercial leases must contain certain warranties. If they do not, the warranties may be read into them by a court. One such WARRANTY is the warranty of merchantability. Generally, this warranty requires that all leased property be fit for its general purpose. For example, if a passenger vehicle leased for transportation fails to operate, this failure might be a breach of the IMPLIED WARRANTY of merchantability, and the lessee could sue the lessor for damages suffered as a result.
Another warranty implied in commercial leases is the warranty of fitness for a particular purpose. This warranty applies only if the lessor knows how the lessee plans to use the property and that the lessee is relying on the lessor's expertise in choosing the best goods or services.
A lessee may assign a lease to a third party, or assignee. An assignment conveys all rights under the lease to the assignee for the remainder of the lease term, and the assignee assumes a contractual relationship with the original lessor. However, unless the lessor agrees otherwise, the first lessee still retains the original duties under the lease agreement until the lease expires. Generally, an assignment is valid unless it is prohibited by the lessor.
An assignment differs from a sublease. In a sublease the original lessee gives temporary rights under the lease to a third party, but the third party does not assume a contractual relationship with the lessor. The original lessee retains the same rights and obligations under the lease, and forms a second contractual relationship with the sublessee. Like assignments, subleases generally are valid unless they are prohibited by the lessor.
If a lessor defaults on his obligations under the lease, the lessee may sue the lessor for damages. The measure of damages can vary. If a lessor breaches the lease by sending nonconforming goods, or goods that were not ordered by the lessee, the lessee may reject the goods, cancel the lease, and sue the lessor to recover any monies already paid and for damages caused by the shipment of the nonconforming goods. If the lessee defaults on obligations under the lease, the lessor may cancel the lease, withhold or cancel delivery of the goods, or lease the goods to another party and recover from the original lessee any difference between the amount the lessor would have earned under the original lease and the amount the lessor earns on the new lease.
One controversial lease is the rent-to-own lease. Under such a lease, the lessee pays a certain amount of money for a certain period of time, and at the end of the period, the lessee gains full ownership of the leased item. Rent-to-own leases are often associated with consumer goods such as televisions, stereos, appliances, and vehicles. Many rent-to-own leases provide that the lessor may regain possession and ownership of the property if the lessee defaults. Such clauses have been found to be unconscionable if they are exercised after the lessee has paid more than the market value of the leased item.
For example, assume that a party leases a television worth $300. The lease obliges the lessee to make payments of $50 a month for one year. At the end of the lease period, the lessee will have paid $600 for the television. The amount of the total payment may not be unconscionable, because the lessee gains a television without making one large payment. However, if the lessee defaults after making $550 in payments, and the lessor repossesses the television, a court may find that the lessor's actions are unconscionable and order that the television be returned to the lessee.
Huddleson, Edwin E., III. 2003. "Leasing Is Distinctive!" Uniform Commercial Code Law Journal 35 (winter).
Fishbein, Bette K., Lorraine S. McGarry, and Patricia S. Dillon. 2000. Leasing: A Step Toward Producer Responsibility. New York: INFORM.