Real Estate 101: The Lease

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.
 
Set Expectations
 
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.

Comments

[John S @ Frugal Rules]

Good post. We had to sue a former landlord a number of years ago because they would not give us our deposit back. They actually were not our original landlord so there was some haggling over the terms of the contract between them and our original landlord. Thankfully the judge ruled in our favor as the new landlord received our deposit from the original and thus they had to pay us back.

[Luis]

Some gray areas between landlord-tenant issues are when trying to claim a home fit to live or not and determining if the cause was the fault of tenant or not. I believe the definition of fit to live surrounds mostly roofing and kitchen problems only. A case I had was when the pipe under the kitchen sink burst. How many days to compensate, if any, when fit to live was under question. I ended up compensating for each full day at a calculated daily rate.

[Jim]

Good advice. I particularly like to add lots of 'rules' to the lease. Its best to think of anything/everything you can. For example, do you allow water beds? What about 100 gallon fish tanks? Is it OK for your tenants to have house guests? yes/no? Where can they park their car? How many cars? What about loud music after 10pm? Would you like your tenant to paint all the walls pink and black? Think about the worst behavior of tenants imaginable and have some rules to prevent that kind of thing. Don't expect tenants to act like this but do put stuff in the lease to make it clear its not acceptable.

If you don't set the rules you can't get mad that they break em.

I haven't seen a 'state approved' lease. My state doesn't offer that kind of thing. Is this typical in other states?

[Jim]

Luis, landlords are generally required to ensure 'habitability' which is a basic livable condition. State laws may or may not define habitability to some degree. Theres some pretty obvious points : heat, running water, functional doors with locks, no safety hazards, etc. But yeah there can certainly be gray areas as laws rarely cover every feasible situation and don't often go into fine detail.

[Apex]

@Jim,

Not every state may produce a standard lease by a state department such as the attorney general's office. If not then I would recommend my second option which is to find a multi-housing association or a landlord association. Most states should have such an association and they typically have lease documents among other documents that are created for their members. I still wouldn't use this whole-sale but I would generally advise using these as a starting point as they are likely put together by people with both knowledge of the statutes as well as likely having gone to court because of the large number of people using them. Thus they would likely get updated to reflect what will actually stand up in your state.

I do agree with your comment about putting in lots of rules too. I probably could use even more than I have. That was my point about expectations though. The lease is the right place to lay down all your expectations or rules. Simply stating them in the lease and pointing them out to the tenants should prevent most of the instances of them doing things you do not want. Knowing they signed a legally binding document prohibiting them from doing it will stop most people. If not and it gets bad enough then at least you have an option for recourse.

[Rich@Money Wise Pastor]

Apex, I'd also recommend that you review your state and local laws each year, and make addendums to current leases and changes to new leases as necessary.

Two years ago, I had to evict a tenant because she let her adult children hang out and invite their friends over - one of whom sold drugs in the home and was arrested in a drug bust.

I was notified by the city code enforcement division re: the drug bust and they recommended that I evict everyone immediately because if a second drug bust happened, the city could padlock my house for a year, and if a third happened, I could lose possession of the house.

What I didn't know was that the state now allowed landlords to evict tenants within 24 hours based on a drug violation, but my lease had the old language in it which said I could evict on a 7-day notice to quit.

So, I had to wait 7 days to file the paperwork with the court. It wasn't a biggie, but I could have gotten them out sooner if I had updated my lease when the law changed.

I highly recommend that landlords join the local home owners association. Our local one has all the approved leases available, along with any possible form you would need. Landlords can also get credit and background checks done through them. And ours even gives us access to an attorney to call up and ask any question and get the answers we need.

Re: adding rules to leases, I kept mine pretty standard to what the state required, then created a separate addendum to the lease which listed my rules and regs. I had the tenant sign this addendum, and it was also noted in the lease that there was an addendum of rules that was to be considered part of the agreement.

[Apex]

@Rich,

Good advice to keep current on local laws.

Why have a 7 day notice in your lease? I put no time limits on it so that I can use whatever the statutes allow, which means I can pretty much file immediately if I desire.

Since you have an addendum to your lease and then state in your lease that there is an addendum to your lease that is part of the lease then you have technically put it in your lease you just have a longer lease that is the combination of two documents that both comprise the lease. I prefer to keep everything in one document. I suppose its just personal preference. We are both basically doing the same thing, just taking different paths to do it.

[Rich@Money Wise Pastor]

@Apex, I had the 7 day notice to quit (for illegal drug activity)in my old lease because that was what the state law allowed at the time.

The new state law allows you to evict for illegal drug activity with a 24-hour notice, but only on two conditions: 1) a formal police report has been filed, and 2) the lease explicitly allows for the termination with a 24-hour notice.

So, because my lease hadn't been updated with the new 24-hour language, I had to wait the 7 days.