{"id":120432,"date":"2019-12-24T14:30:17","date_gmt":"2019-12-24T21:30:17","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=120432"},"modified":"2023-07-31T15:17:03","modified_gmt":"2023-07-31T21:17:03","slug":"creating-ironclad-lease-agreement","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/creating-ironclad-lease-agreement","title":{"rendered":"When It Comes to the Lease, Don&#8217;t Leave Any Wiggle Room"},"content":{"rendered":"<p><em>\u201cThey seemed like really great people, but now I\u2019m being sued!\u201d<\/em><\/p>\n<p><span style=\"font-weight: 400;\">I hear it all too often. Landlords will draw up a lease with the best of intentions, armed <\/span><span style=\"font-weight: 400;\">with Google knowledge, and all their worst-case scenarios fresh in their mind<\/span><span style=\"font-weight: 400;\">. This lease will be a \u201cset of rules\u201d based upon the landlord&#8217;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, a<\/span><span style=\"font-weight: 400;\">s well as thinking up the worst-case scenario.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">This may sound pessimistic, but in fact it\u2019s not far off the mindset for a self-managing <a href=\"https:\/\/www.biggerpockets.com\/blog\/2016\/07\/30\/how-to-be-a-landlord\/\" target=\"_blank\">landlord<\/a>. A residential tenancy agreement is in fact the binding legal agreement between yourself and your tenant. This <\/span><span style=\"font-weight: 400;\">sets the tone for the relationship between you and the tenant on how the property will be maintained.<\/span> <span style=\"font-weight: 400;\">Suffice to say, it is extremely important that you do your <a href=\"\/renewsblog\/due-diligence-ultimate-guide\/\" target=\"_blank\">due diligence<\/a> during this process.<\/span><\/p>\n<p><em><strong>Related<\/strong><\/em>: <em><a href=\"https:\/\/www.biggerpockets.com\/blog\/self-managing-rental-properties\" target=\"_blank\">How I Perfected the Process of Self-Managing My Rentals<\/a><\/em><\/p>\n<h2>Defining a Lease<\/h2>\n<p><span style=\"font-weight: 400;\">Firstly, it\u2019s 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 <\/span><a href=\"https:\/\/www.nolo.com\/legal-encyclopedia\/ten-tips-landlords-29482.html\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">landlord<\/span><\/a><span style=\"font-weight: 400;\"> and the tenants. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">It\u2019s not only a binding contract that the parties can enforce in court, it\u2019s 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.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">A lease agreement is a bilateral contract between two parties<\/span><span style=\"font-weight: 400;\">, in this case between a landlord and a tenant. <\/span><span style=\"font-weight: 400;\">What this means is that the landlord and tenant have agreed to certain terms such as:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Rental amount<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The day the rent is due and the frequency of payment\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Ongoing condition of property<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Ongoing maintenance and how the property is expected to be kept during the tenancy<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Ongoing inspection and how the tenant is expected to leave the property\u00a0<\/span><\/li>\n<\/ul>\n<h3>What to Include in a Lease<\/h3>\n<p><span style=\"font-weight: 400;\">Here are some essential things you\u2019ll want to address your lease agreement:<\/span><\/p>\n<ol>\n<li style=\"font-weight: 400;\">Names of all tenants and occupants<\/li>\n<li style=\"font-weight: 400;\">Description of rental<\/li>\n<li style=\"font-weight: 400;\">Term of the tenancy<span style=\"font-weight: 400;\">\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\">Rent<\/li>\n<li style=\"font-weight: 400;\">Deposits and fees<\/li>\n<li style=\"font-weight: 400;\">Repairs and maintenance<span style=\"font-weight: 400;\">\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\">Entry to rental property<\/li>\n<li style=\"font-weight: 400;\">Your rules and important policies<\/li>\n<li style=\"font-weight: 400;\">Contact information<\/li>\n<li style=\"font-weight: 400;\">Other restrictions<\/li>\n<\/ol>\n<p class=\"b-blog__title\"><em><strong>Related<\/strong>: <a href=\"https:\/\/www.biggerpockets.com\/blog\/lease-clauses\" target=\"_blank\">25 Crucial Clauses Landlords Need for a Highly Enforceable Lease<\/a><\/em><\/p>\n<h2>When Things Go Wrong\u2026<\/h2>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-main-slider wp-image-118807\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/11\/stressed-702x336.jpg\" alt=\"landlord-things-go-wrong\" width=\"702\" height=\"336\" title=\"\"><\/p>\n<p><em>Full disclosure, I am not an attorney nor qualified to give legal advice. Keep that in mind as you read on.\u00a0<\/em><\/p>\n<p><span style=\"font-weight: 400;\">Oftentimes, landlords find themselves unknowingly in trouble when the terms of the lease are not upheld. <\/span><span style=\"font-weight: 400;\">Here is where the \u201cgray area\u201d happens from the landlord&#8217;s point of view. However, in reality, there should be no gray area\u2014only black and white. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">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.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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. <\/span><span style=\"font-weight: 400;\">In the eventuality that they do not, there are fees\/penalties that will have been written into the lease agreement that will be charged. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">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.\u00a0<\/span><span style=\"font-weight: 400;\">The thing is, when you\u2019re 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. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">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, <em>always<\/em> refer back to the lease and subsequent clauses.\u00a0\u00a0<\/span><\/p>\n<h3>Paying Rent &#8220;On Time&#8221;<\/h3>\n<p><span style=\"font-weight: 400;\">Let\u2019s say the <a href=\"https:\/\/get.biggerpockets.com\/forms\/index\/\" target=\"_blank\" rel=\"noopener\">lease agreement<\/a> 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\u2014per the contract\u2014the rent is late. Enforcement for this is normally in the form of late fees, which are defined in the contract. In this example, let\u2019s say that the first is a Monday, which would make the third\u2026you guessed it, Wednesday.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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\u2019s considered late.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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<\/span><span style=\"font-weight: 400;\">.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Speaking from personal experiences (and lots of them), in this world of real estate you will presented with a weird and wonderful array of \u201creasons\u201d as to why certain terms of the agreement can\u2019t be met.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The most frequent (for me certainly) has been why the rent can\u2019t 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.<\/span><\/p>\n<h2>Late with the Rent<\/h2>\n<p><span style=\"font-weight: 400;\">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. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">A standard response may be, \u201cThat&#8217;s fine. It&#8217;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.&#8221; After all, they are a good tenant, never a problem, and pay on time usually.\u00a0<\/span><\/p>\n<p>Now here is the moment of truth&#8230;Do you try to keep the relationship intact and waive the late fees because after all this was not in their control?\u00a0<span style=\"font-weight: 400;\">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.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Now, after examining all the facts based on your perception of events, you tell the tenant, \u201cYou\u2019re 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.\u201d<\/span><\/p>\n<p><span style=\"font-weight: 400;\"> 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.<\/span><\/p>\n<h3>Cherry Picking from the Lease<\/h3>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-main-slider wp-image-119356\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/11\/checklist-702x336.jpg\" alt=\"cherry-picking-lease\" width=\"702\" height=\"336\" title=\"\"><\/p>\n<p><span style=\"font-weight: 400;\">What you don\u2019t realize is that you may have just breached the contract, and quite possibly in some judges&#8217; eyes, could have voided the whole agreement by that simple act of compassion.\u00a0<\/span><span style=\"font-weight: 400;\">Now, you may be wondering why and how is that possible. You were simply trying to keep your relationship with the tenant, and they&#8217;re your rules to decide if, and when, to enforce them.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">If you think this, you&#8217;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.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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\u2019s the point in having them sign the contract at all?\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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,\u00a0 you could possibly be facing a fair housing or discrimination liability issue. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">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.\u00a0<\/span><\/p>\n<p><em><strong>Related<\/strong><\/em>: <em><a href=\"https:\/\/www.biggerpockets.com\/blog\/2015-11-24-landlord-minimize-chances-lawsuit\" target=\"_blank\">Landlords: The 6 Best Ways to Minimize Your Chances of a Lawsuit<\/a><\/em><\/p>\n<h2>Late with the Rent&#8230;Again<\/h2>\n<p><span style=\"font-weight: 400;\">Now, back to the example of our late paying tenant. Let\u2019s say it\u2019s 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). <\/span><\/p>\n<p><span style=\"font-weight: 400;\">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. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">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 \u201cyes&#8230;BUT\u2026\u201d 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.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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.\u00a0<\/span><span style=\"font-weight: 400;\">As you can see, this can become a very slippery slope, and not one that you want to go down!\u00a0<\/span><\/p>\n<h2>It&#8217;s Nothing Personal<\/h2>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-109234\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/03\/woman-deal.jpg\" alt=\"tenant-landlord-relationship\" width=\"702\" height=\"336\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/03\/woman-deal.jpg 702w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/03\/woman-deal-300x144.jpg 300w\" sizes=\"auto, (max-width: 702px) 100vw, 702px\" \/><\/p>\n<p><span style=\"font-weight: 400;\">My point in telling this story is that by being nice to a resident and going against your own policies and procedures\u2014as well as disregarding the contract that was signed by you and your tenant\u2014you open yourself up to liability.\u00a0<\/span><span style=\"font-weight: 400;\">This will cost you time and money\u2014but more importantly, the mental stress that is completely avoidable and not necessary.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">My advice is that when you <a href=\"https:\/\/www.biggerpockets.com\/blog\/what-to-include-in-a-lease-agreement\" target=\"_blank\" rel=\"noopener\">write a lease agreement<\/a> you are prepared to 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.<\/span><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-main-slider wp-image-119124\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/11\/business-podcast-ad-for-blog-702x125.jpg\" alt=\"\" width=\"702\" height=\"125\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/11\/business-podcast-ad-for-blog-702x125.jpg 702w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/11\/business-podcast-ad-for-blog-300x53.jpg 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/11\/business-podcast-ad-for-blog.jpg 706w\" sizes=\"auto, (max-width: 702px) 100vw, 702px\" \/><\/p>\n<p><em>Landlords, what mistakes of your own have you learned from when creating a lease agreement?<\/em><\/p>\n<p><strong>Share with a comment below!<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>When drawing up a lease agreement, you need to make sure it&#8217;s ironclad. Don&#8217;t leave any gray areas aka opportunities for you to be taken advantage of\u2014or worse, sued! Learn from my mistakes and put your rules in place, and stick to them.<\/p>\n","protected":false},"author":612019,"featured_media":113314,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5183],"tags":[],"class_list":["post-120432","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-landlording"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/120432","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/612019"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=120432"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/120432\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/113314"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=120432"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=120432"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=120432"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}