This week has been a forceful reminder for me of the importance of a well written lease when dealing with tenant issues, and I am very grateful that a well written lease has been available when needed.
Let me explain…
Several months ago I negotiated a commercial lease for one of my clients, where this client was the landlord and a “niche” program (local non-profit program) was the tenant. For those of you familiar with residential leases you know how complete they should be; imagine a commercial lease with over 100 clauses in it. Overkill you might ask. Perhaps! But not in the face of challenges with a tenant.
So, in this particular case rents were due on the 1st of June. Guess what – no rent, just excuses. On the 10th, per the lease, late fees kicked in and if rent still was not paid a default could be declared and within 3 days of the default, the landlord could take back possession of the property. This is all covered in those 100 plus clauses and provides very specific remedies and actions for both parties (landlord and tenant).
While I realize that many of the requirements found in a commercial lease would never survive in a residential environment the key point is this:
Given that as of this week the rent still hasn’t been paid, in spite of continued negotiations and unkempt promises from the tenant, a default is being declared and the property is going back to the landlord. All easy actions for the landlord because the complete scenario is detailed in the lease.
You can bet this situation will end up in front of a judge and here is the most important part of this discussion — this lease is extremely clear regarding the process when rents are not paid, and the landlord is fully versed on his rights and is confident he will prevail in front of judge.
The question for you is this…
Will your lease stand up and support your actions as a landlord in front of a judge when you have to defend against a tenant who will say anything… yes even lying, to keep you at bay?
If you are in doubt for one minute regarding how your lease will support you, then you need to get your lease revised to ensure it protects you and defines the actions you need to take to manage your tenants and protect your investments.
And… what clauses might be included?
Download Your FREE copy of ‘How to Rent Your House!
Renting your house is a great way to enter the world of real estate investing, but most first-timers (understandably) have a lot of questions. Fortunately, the experts at BiggerPockets have put together a complimentary guide on ‘How to Rent Your House’. All the skills, tools, and confidence you need to successfully rent your house are just a mouse-click away.
9 Key Clauses to Include in Your Lease
1. Your right to entry. Most states have laws regarding when you can enter your properties, under what circumstances and what notifications are required. If your lease is silent to this item, your hands are tied if a tenant complains that there is neglected maintenance or safety issues and they won’t let you in to correct them. If you think I am kidding… many landlords in Maryland get caught up in this catch-22 because their lease sucks!
2. What maintenance are you responsible for? Obviously, you are most likely responsible for all of it… even the stuff damaged by your tenants. But, if it is not clearly defined in your lease and you try to charge a tenants security deposit you might run into problems once the tenant leaves.
3. Plumbing issues. This is my favorite. In fact I just had a tenant who had been living one of my properties call last month complaining that the sewer line was backed up, that there was no way they could have done this (they had been in the property for 18 months with no problems and there are no trees or roots near the sewer line) and they wanted me to pay to get it unplugged. After reminding them that per the lease this was their responsibility, I lined up the plumber and they were billed to have the sewer line cleared… just as the lease stated. Oh, and yes they did clog the drain. Diaper!
4. Allocation of rents. This is another critical item. The key here is that when rents are received they are allocated to all other charges owed by the tenants before the remainder for the month was allocated towards the rent. The result being that while the tenant thought they paid the rent on time, the amount paid went first to the other charges (maintenance, water/sewer, etc.) leaving less then the full rent amount… thereby leaving a rent amount that you could go to rent court over.
5. Late fees. When the rent is late, a late fee must be charged. Based on my experiences in rent court I am amazed how many landlords had an ambiguous late fee clause in their lease and time and again they would be denied their late fee in rent court. If your clause isn’t clear regarding when the late fee will be incurred and in the amount legally allowed in your state you should think about getting that clause in your lease.
6. Pests. As any landlord will tell you… tenants will swear on a stack of bibles that they could never be the cause of pests… roaches, ants, rodents, etc. And as landlords we know that the reality is very different from their perception. To protect you from having to deal with the poor housekeeping habits experienced with tenants your lease must specify who is responsible for pests and under what circumstances. In my lease as an example, I am only responsible for pests for the first two weeks of the tenant moving in. After that, the lease assumes the tenant and their living conditions were the cause of pests.
7. Breach of lease. This is one of those items which should find its way into many parts of your lease. Many clauses should specifically state whether violation of that clause would constitute a breach of lease. If the clause is silent relative to a breach of lease it is next to impossible to convince the court that one has occurred.
8. Security deposit. This one should be obvious. It must specify the amount of the security deposit and just as importantly it must be specific on how the deposit will be repaid. If your state has specific laws regarding the repayment of the a security deposit be sure to follow those laws and include them in your lease.
9. Severability. While this clause is not unique to a lease agreement it might the most important clause in your lease. Why? Because if you find yourself in front of a judge and the judge declares any one clause invalid, if your lease does not include a severability clause in it… guess what… the entire lease could be declared invalid. You don’t want that to occur on your watch.
That about it for now. I am sure there are other important items which should be included in your lease, so please be sure to share your favorites in the comments below.
Best of luck!
Screen Your Tenants Fast & Easy with BiggerPockets SmartMove – No Approval Process. No Applications. No Minimums. For independent landlords. Begin screening in minutes. Credit, criminal, fraud checks.