Suppose you are considering renting an apartment. You, the renter, can be viewed as an agent while the company that owns the apartment can be viewed as the principal. What agency conflicts do you anticipate? Suppose, instead, that you work for the apartment company. What features would you put into the lease that would give the renter incentives to take good care of the apartment?
The agent (renter) will not take the same care of the apartment as the principal (owner), because the renter does not share in the costs of fixing damages to the apartment. To mitigate this problem, having the renter pay a deposit should motivate the renter to keep damages to a minimum. The deposit forces the renter to share in the costs of fixing any problems that are caused by the renter. In addition, the provision in the lease for annual renewals allows an incentive for a long-term renter* to maintain the leased apartment.