The following is a guest post by FMF reader Apex. He has been investing in rental real estate for more than four years and is authoring a Real Estate 101 series, posting every Friday, based on his experiences. (To read the series from the beginning, start here.) The series is designed to give prospective investors the basic tools they need to succeed.
There are entire sections of state statutes dedicated to the landlord tenant relationship in addition to federal laws such as anti-discrimination laws. The statutes offer protections for both landlords and tenants but they typically offer more protections for tenants. However, landlords have one major legal advantage on their side. The tenant will be signing a contract that they likely had no input into. You as the landlord write the entire lease contract and decide what the rules are as long as they don’t violate any of the state statutes of which there are many.
As such it is extremely important that you have a solid lease. This is not something you should just throw together. You should not go to an office store or the Internet and get a generic lease and simply use that. This is your one chance to protect your rights. Doing this carelessly could be a costly mistake.
There are 4 things I want my leases to do.
Follow Local Statutes
They must conform to local statutes. There are many things you may try to put in your lease that are simply against the law in your state. It’s not illegal to put them in your lease, but a judge will just throw them out if you end up in court. If you do not know what the statutes are many sections of your lease that you think are protecting your rights will likely be found invalid in court. It’s better to find out what is legal and stick to that. The best way to do that is to find local leases that have been written or approved by your state attorney general or that are being written by local multi-housing associations.
Clarify All Money Issues
The rent must be clearly spelled out obviously. In addition all items concerning the security deposit should be clearly spelled out. This includes how much it is, what it can be used for, how much interest will be paid on it if any, and how and when it will be returned. Most states have very strict statutes around security deposits so make sure you are in line with what is required by law. You should also address utilities. If any are included in the rent list those. If some are added to the rent as an additional fee that should be listed. You should state that any utilities not listed in the lease are the responsibility of the tenant lest they get the idea or claim that you told them certain things were included. Finally all fee related items need to be clearly spelled out. Late rent fee and returned check fee are the two big ones to address here. Make it clear what the dollar amount of the late fee is, when it is applied, and how rent needs to be paid if it is late. Some leases require a cashier’s check once rent is late. I do not do this but if you do, it needs to be in your lease.
Set the Basis for Termination
This is an important item that often gets overlooked. Your lease should make it very clear that a violation of any clause in your lease is reason for you to terminate the lease and to pursue eviction if necessary. If your lease does not spell out what the consequences of violating parts of your lease are, you should not assume a judge will allow you to evict for it. There are certain things like not paying rent that are almost always in state statutes as cause for eviction. However, if you have a no pets clause and your lease doesn’t have a termination and eviction clause for violations, it is unclear that a judge will let you do anything about that violation let alone evict for it. Ideally you don’t want to go to court at all. If your lease has a termination and eviction clause you can make it clear to your tenant that you will terminate and evict if they don’t rectify the situation. Without that clause an informed tenant may very well ignore you and point out that there is no penalty in your lease for violating the no pets clause. So make sure your lease always spells out that you have the right to terminate and evict for violations of any clauses in your lease.
There are some things that are not really a legal issue. For instance my lease states that the tenants are responsible for changing light bulbs and smoke detector batteries as they quit working. This isn’t really an eviction issue, but it makes it clear that they are not to call me to deal with these types of issues. My lease makes it clear they are not to alter the property in any way including painting without prior written approval. I point out all the sections that have expectations when we sign the lease because not all tenants will read their leases. There are other expectations in my lease as well. The point of these is to make it clear what they are expected to do and what they are not allowed to do. This is an important part of your lease because verbal expressions of what is expected won’t carry the weight of items in the lease that have been pointed out to them. Some may still violate them but most good tenants will not.
Building the Lease
In order to do these four things, I start with a lease approved by the Attorney General of my state and then I modify it to meet my needs. The fact that the Attorney General approves of a lease is not the same as a guarantee that all of it’s clauses will stand up in court, but it is a pretty good bet since they will have written it with very detailed knowledge of the statutes that are necessary. Some people would argue that it is best to use an approved lease without alteration, but the lease does not do everything I want it to do, and it also has some protections in it for the tenant that I take out. For instance the lease that my state Attorney General produces states that either side can win legal costs if they win in court. The statues in my state already make it clear that a tenant can do this if the lease gives the landlord the right to do it. Whether or not I specifically state this right for the tenant in my lease, they have it. Stating it just draws their attention to it, and I would prefer not to do that. In addition there are the things I mentioned above that I want to add to the lease simply to set expectations.
It is important that you do not alter the lease in ways that remove the parts that are necessary in your state. If you don’t know what is necessary then it’s probably best to just add to and not remove from a state approved lease.
Your lease protects your rights and tells your tenants what you expect from them. This is your only chance to do this, so make sure you do not do it carelessly.
To read the next part in this series, see Real Estate 101: Financing.