“They seemed like really great people, but now I’m being sued!”
I hear it all too often. Landlords will draw up a lease with the best of intentions, armed with Google knowledge, and all their worst-case scenarios fresh in their mind. This lease will be a “set of rules” based upon the landlord’s interpretation and personal expectations. These are loosely based around the local and state property codes that govern the safety and habitability of a property, as well as thinking up the worst-case scenario.
This may sound pessimistic, but in fact it’s not far off the mindset for a self-managing landlord. A residential tenancy agreement is in fact the binding legal agreement between yourself and your tenant. This sets the tone for the relationship between you and the tenant on how the property will be maintained. Suffice to say, it is extremely important that you do your due diligence during this process.
Defining a Lease
Firstly, it’s important to understand the basic premise of a lease agreement. A residential lease or rental agreement is the blueprint of a tenancy. It lays out the rights and responsibilities of both the landlord and the tenants.
It’s not only a binding contract that the parties can enforce in court, it’s also a highly practical document full of crucial business details. It includes information such as how long the tenants can occupy the property and the amount of rent due each month.
A lease agreement is a bilateral contract between two parties, in this case between a landlord and a tenant. What this means is that the landlord and tenant have agreed to certain terms such as:
- Rental amount
- The day the rent is due and the frequency of payment
- Ongoing condition of property
- Ongoing maintenance and how the property is expected to be kept during the tenancy
- Ongoing inspection and how the tenant is expected to leave the property
What to Include in a Lease
Here are some essential things you’ll want to address your lease agreement:
- Names of all tenants and occupants
- Description of rental
- Term of the tenancy
- Deposits and fees
- Repairs and maintenance
- Entry to rental property
- Your rules and important policies
- Contact information
- Other restrictions
When Things Go Wrong…
Full disclosure, I am not an attorney nor qualified to give legal advice. Keep that in mind as you read on.
Oftentimes, landlords find themselves unknowingly in trouble when the terms of the lease are not upheld. Here is where the “gray area” happens from the landlord’s point of view. However, in reality, there should be no gray area—only black and white.
That black and white is called your lease agreement and should clearly state the terms and conditions that have been agreed upon by both parties. Nowhere in the lease does it say that the landlord has the right, or may they use their discretion, to pick and choose when they do or do not enforce the lease terms.
See, when you have this contract with your tenant, you have an expectation that certain things will happen, such as paying rent on time, keeping the property in good condition, etc. In the eventuality that they do not, there are fees/penalties that will have been written into the lease agreement that will be charged.
If, in the worst case scenario, the issue cannot be resolved, the tenant can be removed by legal means of eviction through the court system. The thing is, when you’re dealing with people, there is never going to be a perfect way of handling the many different situations that will arise throughout the course of a tenancy. Nor will there be a perfect solution to each and every problem.
The difference will come back to how you choose to handle these issues. And to make sure things are written in black and white terms, always refer back to the lease and subsequent clauses.
Paying Rent “On Time”
Let’s say the lease agreement states rent is due on the first of the month and is considered late after the third. Meaning at 12:01 a.m. on the fourth—per the contract—the rent is late. Enforcement for this is normally in the form of late fees, which are defined in the contract. In this example, let’s say that the first is a Monday, which would make the third…you guessed it, Wednesday.
Now, the first misconception is that rent is due on Wednesday the third. This is incorrect: Rent is due on the first, but the lease states that they have until the third to get you your money before it’s considered late.
This is a very important point I bring up because this is something that should be clearly defined and explained to the tenant at lease signing. Your rent money is due and expected on the first, not the third. You simply allowing a grace period until the third for it to arrive.
Speaking from personal experiences (and lots of them), in this world of real estate you will presented with a weird and wonderful array of “reasons” as to why certain terms of the agreement can’t be met.
The most frequent (for me certainly) has been why the rent can’t be paid on time. I am going to give you an example of why it is imperative to operate inside the boundaries when it comes to lease agreements, in the hope that you may learn from my lessons and not make some of the same mistakes.
Late with the Rent
You get a call on Tuesday or Wednesday afternoon from your tenant stating that they do not get paid until Friday, and they will make sure to get you the money ASAP. On face value this is not all that uncommon, and to date they have been a good tenant and you have a good business relationship with them.
A standard response may be, “That’s fine. It’s unfortunate, but I understand this is out of your control (a higher power is dictating when they get paid). Just make sure as soon as you get paid on Friday, get me the money straight into my bank account.” After all, they are a good tenant, never a problem, and pay on time usually.
Now here is the moment of truth…Do you try to keep the relationship intact and waive the late fees because after all this was not in their control? Or, do you charge them late fees per the lease agreement and potentially sour the relationship? You will risk being seen as the money-hungry landlord without any compassion. And this could be the start of a bad business relationship with this tenant.
Now, after examining all the facts based on your perception of events, you tell the tenant, “You’re a good tenant, and you always pay on time and I understand. As long as this does not become a habit or a common occurrence, I am going to waive the late fees this one time.”
You will feel you made a good business decision, kept the relationship in tact between the tenant and yourself, but also laid down the law.
Cherry Picking from the Lease
What you don’t realize is that you may have just breached the contract, and quite possibly in some judges’ eyes, could have voided the whole agreement by that simple act of compassion. Now, you may be wondering why and how is that possible. You were simply trying to keep your relationship with the tenant, and they’re your rules to decide if, and when, to enforce them.
If you think this, you’d be mistaken. You signed a contract just like they did. This contract states that if the tenant does not perform per the agreement, such as paying rent on the first and in your possession by the third, then you the landlord must enforce the late fees and penalties.
You do not have the right to pick and choose when you do or do not enforce certain parts of the agreement, the same way that a tenant cannot pick and choose what parts of the agreement they want to adhere to.
When you sign that lease, as I stated in the beginning, that this is a bilateral contract that must be enforced and abided by. If they do not perform per the agreement, you must perform and enforce. Otherwise, what’s the point in having them sign the contract at all?
This situation can actually escalate and get worse for you, especially if you own multiple properties. You need to set an example and stick by it, because if you let one tenant slide by not adhering to the lease agreement, but enforce it with a different tenant in another property, you could possibly be facing a fair housing or discrimination liability issue.
If this should happen, be prepared for a very thorough and in-depth investigation of all your properties, policies, procedures, and written documentation. If you do not have any of these in place, you are about to face much bigger problems, potentially with the federal government.The law clearly states that what you do for one, you must do for all and they want to see this written down and documented.
Late with the Rent…Again
Now, back to the example of our late paying tenant. Let’s say it’s three months down the road and our tenant is once again late on their payments. Last time you generously decided to show them leniency in this matter, but enough is enough, and you are going to be the tough guy this time (or in actual fact, just enforce the lease agreement as you should have the first time this happened).
The tenant is now upset because you were forgiving before and said it was not their fault. In their eyes, you were either lying to them then or you are lying to them now. Either way they feel lied to, the relationship sours, and now they refuse to pay the late fees based on you letting them out of it the first time.
Things escalate and you end up in eviction court with this tenant. One of the questions a judge is likely to ask is have you ever let them not pay late fees. When your answer is “yes…BUT…” they will likely stop you right there and let you know you have set a precedent with the tenant and this is the new agreement.
Unless there is a signed amendment in the lease that states this, it is considered an oral agreement and in some areas this will be binding and supersedes the voided lease agreement by you, the landlord. As you can see, this can become a very slippery slope, and not one that you want to go down!
It’s Nothing Personal
My point in telling this story is that by being nice to a resident and going against your own policies and procedures—as well as disregarding the contract that was signed by you and your tenant—you open yourself up to liability. This will cost you time and money—but more importantly, the mental stress that is completely avoidable and not necessary.
From your perspective, you do not have anyone to answer to. That may be the very problem! You would soon be looking for a new job if you kept doing this as an employee. You are not only costing the business revenue of late fees that were already agreed upon, but also quite possibly putting the company in potential legal problems by cherry picking what parts of the contract to enforce.
My advice is if you put something into the lease you must enforce it. If you do not think you will always enforce it, then do not put it in there. By doing this, you will save yourself a lot of potential headaches and frustration in the future.
Landlords, what mistakes of your own have you learned from when creating a lease agreement?
Share with a comment below!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.