They say the pen is mightier than the sword. And in this context, that pen has been put to paper to draft an impenetrable lease agreement… or so we hope. In an effort to embrace brevity, or perhaps to make their lease agreement more user friendly to the tenant, landlords often omit useful lease provisions. This series will be devoted to highlighting those often neglected provisions and prevailing upon our landlord readers to give them a second look when crafting their contracts.
Download Your FREE Tenant Screening Guide!
Hey there! Screening tenants can be a tricky business, and this critical step can be the difference between profits and disaster. To help you with your real estate investing journey, feel free to download BiggerPockets’ complimentary Tenant Screening Guide and get the information you need to find great tenants.
Topic One: Landlord Defaults and Tenant Remedies
Many landlords neglect or outright refuse to address the situation in which they themselves have become a bad actor. Perhaps this stems from the landlords’ confidence in their ability to perform their obligations. And surely more than one landlord has thought, “If I don’t give the tenant any remedies, they won’t have any!” Unfortunately, experience shows that a landlord failing to perform their obligations under a lease is not a statistical anomaly; and even when the lease agreement doesn’t specify a tenant’s breach remedies, the tenant can still pursue statutory and common law remedies against their landlord.
Except in those instances where you have a thorough understanding of a tenant’s statutory and common law remedies, how they can be enforced, and believe those remedies to be less impactful than what you could draft yourself — explicitly addressing landlord defaults and tenant remedies holds real advantages for a landlord.
Defining Landlord’s Defaults
First, addressing landlord’s defaults head-on provides you, as landlord, with the opportunity to narrowly define what constitutes a default. Most commonly, the scope of a landlord’s defaults is limited by providing for a lengthy cure period, typically 60 or 90 days. Defaults that cannot reasonably be cured within the stated cure period are often exempted from constituting a default, provided that the landlord is diligently pursuing cure of the default. When defining a landlord default, you may also be able to carve out foreseeable issues. One example: minor technical defaults that the tenant could cure themselves by expending a nominal sum of money.
Tenant’s Remedies upon and Event of Landlord Default
Once you have defined what constitutes a landlord default, the lease should provide for the specific remedies available to a tenant. From the landlord’s perspective, you can categorize a tenant’s remedies into a few major categories: self-help rights with monetary offset, self-help without monetary offset, and termination rights.
You may limit your exposure by proscribing certain defaults that entitle the tenant to a more limited set of remedies. For example, you may opt to limit a tenant’s self help options to those defaults that materially, adversely affect the condition of the premises. Also, consider limiting the financial mechanism for a tenant’s expended costs associated with self-help: maybe the tenant only has a right to invoice a landlord, as opposed to offset the cost against future rent. Leases often provide that certain types of defaults give rise to a “sole and exclusive” remedy for a tenant. Maybe in the context of certain breaches the tenant should be limited to only seeking injunctive remedies. Or further, a lease may require that a tenant provide notice to the landlord’s mortgagee following the cure period, who would then also have an opportunity to cure the default (though this is not without risk from the financing perspective).
To the extent permitted under law, defining the tenant’s remedies may also afford you the opportunity to have the tenant waive certain statutory and common law rights and remedies that may otherwise be available to them. These statutory waivers will vary greatly from state to state, but may include: waiver of a tenant’s right of replevy, waiver of consequential damages or a waiver of cumulative rights of recovery. It should be noted that, particularly in the residential leasing context, some statutory tenant rights cannot be waived. In most states, that would include the right to habitability – states do not look favorably on slumlords and try their best to ensure you do not become one.
Many landlords use the tenant’s remedies section of the lease to disclaim any personal liability under the lease when the landlord itself is an entity. A closely related mechanism, landlords frequently limit the landlord’s liability under the lease to the landlord’s equity in the real property or landlord’s proceeds under an insurance policy, as may be applicable to the circumstances.
Finally, the reality of contract negotiation is that both parties are looking to strike a good deal. Including express provisions as to a landlord’s defaults and the tenant’s remedies from the first draft you present, gives the tenant more confidence that they are entering into an even-handed lease agreement.