Lair takes place in a world threatened by numerous emerging volcanoes, causing much of the land to be destroyed and the air to be polluted. As a result, natives divided the world into two kingdoms: the Mokai, whose lands are arid and depleted of resources, and the seemingly noble Asylians, who live in one of the last remaining bountiful, green areas. Desperate to gain the Asylians' land, the Mokai attack the Asylians from the rear. The spiritual leader of the Asylians, the Diviner, preaches that the Mokai are pagans and savages, defying abominations to the will of God. Rohn, one of the Burners (dragon-riders) Sky Guards (the air force-based military) feels hatred towards the Mokai, but begins having second thoughts at a peace meeting.
The player assumes the role of a dragon-riding knight named Rohn Partridge. Rohn is given the tasks of defending a certain area, destroying certain objects, eliminating enemies or creatures, and other mission-based objectives. After each stage, the player can earn either gold, silver, or bronze medals, depending on performance during the level. A platinum medal is also available, though unlike the other three its requirements are hidden. Earning medals assists in unlocking combos and behind-the-scenes videos. Most of the game's battles are air-based combat, with some fought on the ground by landing the dragon and fighting troops and other land-based creatures. In some locations, the game features a morale system tied to the enemy; the lower an enemy's morale, the less he will fight, and it is possible that he will retreat from combat.