Best Practices for Rental Lease Contracts
Property management is a litigious business. A lawsuit or threat of one will make landlords consider whether investment properties are worth the headache. A quote from Scott Smith of Royal Legal Solutions:
"If you’re a serious real estate investor, the question is not IF you will ever get sued but rather when."
Why is it so litigious? When something goes wrong or is unexpected, tenants look for answers. And if they do not like the answers, then frequently a lawsuit is threatened. A free, online lease agreement will not provide the concrete terms required to make sure you are covered.
Here are the top lessons and tips that I have learned about terms to include in the residential lease and rental management process. Please note that I am not a lawyer and all clauses and suggestions should be written and reviewed by a real estate lawyer in your State and jurisdiction.
Do not be reactive with the management of your rentals.
Take these lessons to start a proactive management process.
Why should you write such detailed lease agreements? One of the best ways to avoid communication issues is to refer to the legally binding contract signed by both parties. It is also important to not be restrictive with your tenants. It will be in your best interest to maintain a cordial and respectful relationship between the two parties and settle things by the time-tested philosophy of “treated others as you want to be treated.” Nonetheless, it’s critical that you cover your bases with some of the following terms and conditions.
I. Clauses related to the Property, Terms, and Possession
The possession date is the earliest date to store personal belongings
I make sure that my lease outlines the possession date is the earliest date that the tenants can move in their belongings. Frequently, tenants will ask to store items in the garage, shed or somewhere else before the move in date. If the tenants want early access for storage or move in, then a lease amendment should be signed with the updated move in date.
The reason to have such guidelines is liability. If a tenant’s belongings get damaged or stolen before the contract possession date, then you do not have a legal agreement to reference who is responsible for the damages to the tenant’s belongings. A concrete lease will state that a tenant is responsible for their belongings as of the possession date. You do not want to be liable for the theft or damage.
Recommendation! If the tenant has already signed a lease but the move in date is changing, create an amendment outlining a different possession date. Prorated rent and utilities should also be collected / confirmed for the tenant’s earlier move in date.
Parking is restricted to designated locations
Parking can be a major source of contention with neighbors and the city. As the landlord, you do not want fines or discontent from neighbors. That’s why it’s important to clearly stipulate the exact parking locations that are acceptable for both short-term and long-term use of occupants and/or their guests. Some rules may be subject to neighborhood or HOA guidelines rather than with the city.
II. Clauses related to Payments
Do not allow direct deposit, Venmo, PayPal or cash payments
For direct deposit, Venmo, and PayPal, you want to control rent payments. If you do not have control, then you run the risk of a tenant staying in the property longer than expected due to a technicality. You can read more about payment options here. Here are two quick examples:
Example 1: Tenant pays partial rent
If you provide tenants with your bank account and routing number, then they can deposit partial rent. If you’ve accepted partial rent for a month, then many State’s laws will not allow you to go through the eviction process for that month. See below on partial rent. Professional tenants will simply keep paying partial rent to prolong their eviction.
Example 2: Tenant allows another person to pay rent
Your current tenant may share your bank account information with another person. If this person makes one of the rent payments, then a court ruling may determine that you have accepted this other person as a tenant. You do not want anyone to become a tenant unless they have been qualified, approved, and added to the lease agreement.
Cash is another example where you can get into trouble for rent collection. It is unsafe and very difficult to track. From a safety perspective, if someone knows you have thousands of dollars floating around, then your house or business has a higher likelihood of a break in. Not to mention, it is very difficult to confirm receipt of the payment. I experienced a situation where a tenant faked a receipt and claimed she paid rent in cash. The court ruled in favor of the non-paying, lying tenant with fake receipts. Without a reputable bank or system behind you, it is the tenant’s word over your word in the courtroom. If you must accept cash, then you should look at solutions like PayNearMe where tenants can deposit money at local convenience stations and receive a receipt.
Require full, not partial, rent payments
Leases that state a due date (e.g. the first or 15th of the month) will not need a clause on partial rent. By stating a due date, it is already assumed that the landlord may decline a partial payment.
There are two primary reasons to not accept partial payments: evictions are more difficult and tenants are more likely to default in the future fall. Evictions can be more difficult because jurisdictions (check your State’s laws) can delay court proceedings for a month when partial payments have been accepted. In addition, a partial payment is evidence that the tenant is falling behind on rent. You do not want to set a precedent that rent can be late. Over time, you will become a debt collector and believe me, that is not attractive.
In roommate situations, you may want to provide a better experience and allow partial payments for the tenants’ convenience. This approach should only be taken with highly qualified tenants (where default risk is low). If you discover that the tenants are not paying the full amount by the due date, then you can retract to only allow full payments.
Joint and several liability
The lease should also state that all tenants are jointly responsible. In other words, one for all and all for one when it comes to paying rent.
According to Nolo, it means that if one tenant does not pay, the other tenant can be held responsible for the amount. They are considered co-tenants and a lease violation from one tenant can affect the other tenant. A clause that makes the leaseholders responsible for one another’s actions will eliminate you from getting involved in roommate “he said, she said” arguments.
Make your late fees daily, not one-time
Your lease should always include late fees based on your State’s laws. Late fees are an easy way to refer to a legally binding contract on the consequences of late rent. Without late fees, your only other option to incentivize tenants for on-time payments is serving a notice.
I am an advocate of daily late fees, although check your State's laws on them. Unlike a one-time late fee, daily late fees provide added urgency to pay as soon as possible. For example, if the one-time late fee is on the 5th, then the amount owed on the sixth is the same amount as on the 30th of the month. When you make this fee daily, the tenant is incentivized to pay sooner than the 30th.
Landlords should never accept the rent payment until all outstanding late fees are paid. Tenants understand that a landlord will not take legal action on $30 in late fees but will take that action for $1,000 in rent. Professional tenants will try to pay the rent first. This behavior often leads to a tenant “forgetting” to pay the late fees and does not encourage on-time payments in the future.
Hemlane will automatically require late fees to be paid before rent. When an owner or manager asks us to allow the tenant to pay rent before the late fee, we often have to remind them - you know that the probability of receiving the late fee is low now. The landlord should cancel the late fee, as that is basically what they are setting as a precedent when they allow rent to be paid before late fees.
Ability to report late payments to the Credit Bureaus
While a late fee may start on the 5th of the month, rent is still considered late on the day after the due date. How do you incentivize tenants to pay on or before the due date? When a tenant knows their credit score is affected, then they most likely will take the due dates more seriously. As the landlord or manager, you need authorization to report past due rent (or other financial obligations) to the Credit Bureaus.
III. Clause related to who is allowed in the property
Make it clear who is on the lease
There are three types of people on leases:
- Tenant: Anyone 18+ years old, living in the rental, and responsible for the lease
- Co-signer (aka guarantor): Anyone 18+ years old, not living in the rental, and responsible on the lease
- Other occupant: Anyone under 18 years, living in the property, and not responsible to sign the lease
If an existing tenant wants to add another co-signer or tenant, then the new person must go through the existing application and screening process. If approved, the landlord or manager should create a lease amendment, which states all lease terms remain the same and a new tenant is being added to the lease.
Outline which pets are allowed
Remember that service animals are not considered pets. For approved pets, include a detailed description on the lease. It should note the breed, weight, and other distinguishable characteristics. In addition, you’ll want to stipulate that only the identified pet, for example “Porky,” is allowed and that any further animals must receive permission. Every animal has a different demeanor and the best way to evaluate an animal is to meet them and see how they behave in person. You do not want to merely state “one dog” on the lease. The tenant may start with a silky terrier and switch to a pitbull, which may not be covered by your homeowners’ insurance.
Ensure that you clearly define that pets include all living creatures. A fish may seem harmless, but with a fish, comes a fish tank, which comes a flooding hazard if the tank breaks. You’ll need to make sure your home insurance covers any floods from fish tank (most do). While the list of animals a tenant may use seem obvious, you cannot completely out rule that a tenant may try to bring in an unusual animal such as a bat or snake.
And to make it easier, you can state that less invasive animals, such as gerbils, hamsters, and mice, can be brought in and out without authorization. The lease should stipulate that they are disease free, kept in a case, and fewer than five animals before authorization is required.
Do not allow subletting
This clause is straightforward. Any subletting requires the landlord or manager’s approval. We have heard of pros and cons to AirBnB’s friendly building program. Regardless, your lease should state that it is not allowed without pre-approval.
Gain approval for facilitating future showings
Even though landlords are technically allowed to enter the premises with proper notification, it is a good idea to lay out the terms related to future marketing efforts. This may include things such as a stipulation that the tenant allows the landlord to show the rental to future tenants close to the turnover period, while requesting the tenant to ensure the unit is reasonably clean. As the landlord, you want to remain within reason, reducing the showings to a minimum and being respectful on the times and notifications to your current tenants.
Right to take photos, guaranteeing privacy
A proactive and smart step would be to have a term in the rental lease agreement related to photographs. The term would provide the landlord with the right to take photos and videos, within reason, for the purpose of coordinating repairs and documenting the condition of the property. Furthermore, it should put a guarantee the photos will only be used for their intended purposes and be confidential otherwise. You can read more about tenant privacy here.
No commercial activities
The proliferation of home-based businesses is only growing as people work remotely. These may not only bring additional wear and tear, but could be subject to a set of government laws. Examples range from a hair salon with clients coming and going all day to the production of adult entertainment which may be legal, but could cause contention with neighbors.
Before banning commercial activities, confirm the zoning laws for your residential rental. Upon confirming zoning laws, it is best to simply outlaw any commercial activity unless the tenant receives permission. If you grant the tenant permission, you want to make sure that they have appropriate licences, insurance, and potentially pay a rent surcharge for the business.
IV. Clause related to tenant responsibility
Hand over utilities and other services to the tenant, when possible
Tenants should be responsible for setting up and paying utilities and other third party services. Unlike short-term rentals, you are not in the hospitality business. Some rental owners believe adding services, such as free wireless internet, will attract tenants to their rentals. NO. NO. There are six reasons this is a bad idea.
Reduce marketability of unit: You need to make up for the cost of the services somewhere else. In most cases, it requires increasing the listed rent price. Many prospective tenants only compare the base rental rates, without factoring in the additional services offered as part of the base rental rate. If your property is $25 more than a comparable rental that does not have wireless internet included, there is a strong chance the tenant will look at the lower priced rental first.
They contact you with issues: You just added a responsibility that may be outside of your control. For example, the tenants will call you, rather than Comcast, at 3AM when their internet is not working. It is better for them to have the direct relationship with the service provider.
Can’t cut off service if they are delinquent on rent: If the tenant is delinquent on rent, an owner will not want them to receive additional free services. You should let the service providers determine when to shut off electricity or wireless, based on their own relationship with the tenant.
Abuse of service: If your tenant uses the service in a way which contravenes laws or the providers terms of service, you could be held liable or at least get caught up in any sort of action taken against them. For example, if your tenant uses their internet connection for hacking or pirating of copyright multimedia.
Tenants have specific needs: Some tenants may require a long distance phone plan or faster internet. You don’t want to contact the provider every time you get a new tenant to adjust the service.
No incentive to reduce consumption: If you are paying for services, tenants won’t think twice about trying to reduce consumption which will be bad for your bill, and bad for the environment.
In some cases, it will make sense to pay for some or all of the utilities. For example, if the utilities are shared amongst several units and it is too administrative to split the bill and accept payment. But, it's better to offload the utilities and services when you can.
Remember that utilities should be put back into the landlord’s name after the tenant vacates the premise at lease expiration. Many utilities company now have an option that utilities will “default” to you if there is no one listed on the account (for example, the tenant takes their name off the utilities).
Require tenants to have renters insurance
When there is damage or theft to a tenant’s property, tenants may notify you and ask for compensation. Similar to your homeowner’s insurance, the tenant should have their own insurance to cover their losses. As the landlord or manager, you should not get involved with their personal property claims. It may be good for you to be aware of the situation, but the tenant is inevitably responsible for reclaiming their losses through a third party insurance agency. To further safeguard yourself, insert a clause which specifically limits your liability if there is damage to their belongings caused outside of your control. (For example, if a carport, which has been properly maintained to local code standards, collapses under an unusually large snow load.)
Do not allow the tenant to make alterations to the property
It is a good sign when a tenant maintains the property and keeps it in great condition. In some cases the tenant goes overboard, modifying the property. From building their own pools to changing fixtures, your lease should state that no alterations can be made to the premise without explicit prior authorization. If there is an upgrade that you would see as valuable and the tenant is willing to pay for it, it requires additional approval, bonded and licensed contractors, and confirmation that the improvement stays with the property. In addition, you may state that any upgrades they wish to do MUST be returned to the exact prior state (or a state you agree on) before they leave.
Clearly outline maintenance responsibilities
One of the key communication mishaps is responsibility related to maintenance and repair. Here is a helpful article on who is responsible for common maintenance activities. The best way to avoid miscommunication is to clearly outline maintenance responsibilities in the lease. Also, a single family home will generally put more maintenance responsibilities on the tenant as apartments and larger complexes share communal areas, which are assigned to the landlord for maintenance.
Tenants may select to only perform the minimum amount of required maintenance, which could damage your property or subject you to fines from your HOA or government authorities. You also need to assume that tenants simply don’t know how or what maintenance to perform. Please check your State and local laws, as well as understand safety concerns, before assigning responsibilities to tenants. A way to articulate the maintenance responsibilities of the tenant is by creating a list that includes the task, frequency, and notes. Here are a couple of examples of certain maintenance that you can hold the tenant responsible for during the lease duration:
- Cutting grass:
- Frequency: At least every 2 weeks (be sure to stipulate when the grass growing season is)
- Notes: Dispose of grass clippings in city provided grass recycling
- Cleaning gutters:
- Frequency: Once a year
- Notes: Must have a professional gutter cleaner for safety reasons
- Cleaning windows:
- Frequency: Once a year
- Notes: Must have a professional, for any window that may be considered a safety concern
- Cleaning carpets:
- Frequency: Every 2 years
- Notes: Must be with a professional carpet cleaning company
- Removing snow & debris from sidewalks:
- Frequency: As needed
- Notes: Must ensure all sidewalks are usable and do not contravene local regulation
- Hurricane preparation:
- Frequency: As needed
- Notes: Please provide protection on windows and clear the lawn
Restrict disruptive behavior
Not only can disruptive or illegal behavior result in damage to your rental, it could result in fines and safety issues. To prevent this, you may want to dissuade the following behaviors and actions:
- Excessive noise
- Loud parties
- Any & all illegal behaviors
- Anything else that affects quiet enjoyment for your neighbors
You want to make a clause stating that contravening any of these behaviors can result in a termination of their lease and/or damages, if warranted.
While rental leases can be long and complex, the lease provides a legally binding contract. When a tenant argues a late fee or violation notice, it should not be taken personally. The landlord or manager should refer back to this legally binding contract as something agreed upon by both management and the tenant. For all of the above terms, Hemlane encourages you to work with a lawyer to draft up the contract.
Photo cred: Chris Brignola