In an earlier article, we did an overview of what leases are and their importance. In this article,
I’d like to spend some time outlining some specific clauses that I consider most important. Keep in mind that the list below is not exhaustive.
- Early Termination
Conducting business in a college town, we often have tenants who may want to leave before their lease is up. Besides college students, we’ll have other tenants who may be buying a house or experiencing other circumstances where they want to end their lease early. Because of these reasons (and others), we include an Early Termination Clause in our lease.
This clause allows a tenant to terminate a lease when they pay 2 months rent and forfeit their security deposit. Essentially, we allow tenants to buy themselves out of a lease. I know a lot of landlords who require tenants to pay the entirety of their rent, regardless of how many months of the lease are left. In our experience, we think it’s fair to give renters a way to get out of a lease. While it’s an inconvenience for us to get the property rented again, it does help to get a property back early to cover the expense of paying our property manager.
Another important thing to remember with this clause is that life happens. As a landlord, you have to be reasonable and fair, and for us, this clause is a good indication of both.
- Paying Rent
In this section, we outline how and where to pay rent. We instruct renters that they can mail their rent to us, drop it off at our property manager’s office, or do our preferred method of an ACH (an electronic transfer of funds). Our property manager goes over this clause with each renter to make sure there are no misunderstandings or excuses when it comes to ensuring their rent is paid.
- Security Deposit
Typically, we make our security deposit equal to one month’s rent. The reason for this is because sometimes renters (especially problematic ones) won’t pay their last month’s rent, so a minimum-security deposit equal to one month’s rent can protect you as a landlord. Some people encourage a security deposit equal to two month’s rent, which I can see the value in, but sometimes this large of a deposit is difficult for some renters to come up with.
80-85% of the time, our renters get their full security deposit back within a few weeks of moving out. If the property has sheetrock damage, excessive floor damage, high levels of uncleanliness, broken appliances, or blind damage, we will debit the security deposit. At the end of the lease, we have a schedule of fees that outlines these charges, which will be discussed later in this article.
Sometimes tenants will ask if they can pay their security deposits after they move in. As a matter of standard operating procedure, our company does not allow for this option. If tenants are allowed to pay their security deposit after moving in, the chances of you receiving that deposit sooner rather than later is low. Additionally, a tenant’s ability to pay a security deposit up front is typically a good indicator of their money-management skills.
A side note on security deposits: as a landlord, you are required to hold security deposits in a separate account from your company’s operating capital. Security deposits must be held in trust in an independent, non-interest-bearing account to make sure you aren’t spending your tenants’ money. Your accountant may have some insight on how to go about this, but the most important thing is that you have money on hand to pay back all your security deposits if you need to.
- Use of Premises
In this clause, we explain that the property is to be used exclusively as a private, single-family dwelling (tenants and immediate family listed on the lease). This way, we can limit the people who live there and what activities they are engaged in. Of course, our tenants can have guests, but if those guests stay past a certain term, we address this with our tenants and those guests typically move out. This clause also prevents tenants from using the premises as a place of business.
- Conditions of the Premises
Essentially, this clause states that the property is in good condition before any tenants move in and that this condition is expected to be maintained. If any damage occurs, the tenants must notify the property manager, but overall, the property must remain in safe, clean conditions for tenants to avoid eviction.
- Assignment and Subletting
We don’t allow any of our tenants to sublet. It’s important that we know and have control over who is living in our properties. In the situation that one person is on the lease and then invites a roommate to live with him or her, we simply ask that the second person is added to the lease.
- Alterations and Improvements
It’s not uncommon for tenants to ask if they can make alterations and/or improvements to their homes. More often than not, our answer is no. In some cases, however, we’ve had some long-term tenants who have requested improvements. If we knew that they were good, capable tenants, we would agree to their requests. In the case that improvements are agreed upon, it’s important to ensure that the labor performed is of high quality and at a fair price.
- Hazardous Materials
When someone moves into our properties, we ensure that there are no hazardous materials on site. In return, we expect for tenants to keep hazardous materials off the site as well. This protects us in the case that something unfortunate happens with regard to hazardous materials.
- Utilities
This clause requires tenants to switch utilities over to their name within 3 days of moving in. During occupancy, we also require tenants to keep utilities turned on and in working order. Inevitably, when you own rental property, someone will fail to pay his or her water or electric bill and the water/power will get shut off. It’s impossible to live in a unit without basic utilities and keep it in good order. This clause requires basic utilities in order to protect the overall condition of the unit.
- Maintenance and Repairs
In this clause, we require tenants to keep the property clean and in good working order, especially from the exterior. This maintenance includes regular lawn care, functioning windows, blinds, and toilets, regular disposal of garbage, etc. Simply put, the property should never look trashy. If the exterior of a home looks unclean, it’s likely that the interior will be in disrepair.
- Prohibited
If a tenant breaks any component of this clause, we will terminate their lease. In this section, we outline all of our prohibitions. Some of these include the prohibition of smoking, yard sales, yard signs, and fireworks.
Additional prohibited objects are trampolines, swimming pools, and playground equipment—all of which are dictated by our insurance company. We also have an addendum that restates these particular prohibitions.
- Insurance
We do not carry renter’s insurance for our tenants. We highly encourage that tenants secure this insurance, but the majority of our customers do not have it.
- Tenant’s Obligation to Prevent Unsightly Conditions
I take this section very seriously. One of its clauses states that the landlord reserves the right to declare any condition on the premises as being in violation of the provision. Some things prevented within this clause are grease on driveways, parking on grass, inoperable vehicles on site, trailers left in driveways, firepits, trash or debris, holiday decorations beyond 2 weeks of the holiday season, etc.
This clause ensures that the property remains attractive and clean, and I feel strongly that these obligations should be upheld. The reason for this is because when a property appears unsightly, its overall value decreases, and the value of the neighborhood decreases. As a property owner, a property’s visual appearance is essential in maintaining the integrity of your business. If you don’t hold high standards for your property, it’s likely that your tenants won’t either, so you must be willing to enforce your expectations as outlined in the lease.
- Damage to Premises
In the case that a natural disaster or fire occurs, this clause explains that the landlord has the right to ask tenants to move out during the repair period. If the tenant has to move out for more than 180 days, a longer conversation will be held to make arrangements.
- Inspection of Premises
In this clause, the landlord (or the landlord’s agent) has the right to enter and inspect any rental property with or without notice to the tenant during all reasonable times. For us, we have never gone into a unit without giving notice, but we want to reserve the right that we can enter without notice in the case that we would need immediate access to a unit. This clause is incredibly important for safety precautions, maintenance access, and thorough investigation if there is cause to believe that a tenant is violating the lease.
- Animals
Pets are always a big question. For us, our clause allows a total of one (1) pet per rental home, whether it be a dog, cat, bird, etc. If a tenant has a pet, he or she must pay a non-refundable pet deposit of $200. We also stipulate that pets must weigh 15 lbs or less, but we sometimes make exceptions to this rule. In some cases, we will allow a tenant to have two pets.
- Quiet Enjoyment
We use this clause quite a bit. Basically, it states that tenants cannot disturb the neighborhood or other tenants while they are living in one of our properties. If tenants do not comply with this, we have the right to enforce a quiet environment or evict the offending tenants.
- Indemnification
Every good lease has an indemnification clause, which basically says that tenants cannot sue the landlord for bad things that happen. This clause needs to be checked out by your attorney and by your insurance agent.
Indemnification is tricky, but we try to use reasonable language. If something is our fault, we will own it. If not, the tenant must indemnify us.
- Late Charge
There are multiple policies when it comes to late charges. For us, our rent is due on the 1st of every month, and it’s late by the 5th, so we give tenants a 5-day buffer to turn their rent in. If tenants pay after the 5th, this clause states that a $75 late fee will be added to that month’s rent. Before the next month’s rent is due, the tenant must have a $0 balance. If he or she doesn’t have a $0 balance by then, another $75 will be charged. Basically, we want tenants to stay caught up with their rent and fees. We want our policies to discourage behaviors that we don’t want to see.
Something to mention here—every property of ours functions by the same, reproducible standards. We expect each tenant to conform to our standards, especially when it comes to paying rent. This expectation ensures a high level of fairness and predictability within our company and also creates predictable standards for our team members to follow, which creates a higher level of efficiency.
- Fees for Processing
If people write a bad check or have an auto draft with insufficient funds, this clause states that we will charge them $75. We do this because dealing with insufficient funds is time-consuming and disruptive. Of course, there have been times when we have forgiven processing fees (and late fees), but if there are not systems of accountability in place, it’s likely that you will be taken advantage of as a property owner. Be aware that some banks will also charge you as a customer if you receive a bad check or an electronic transfer with insufficient funds. You might investigate this before deciding what to charge for a processing fee.
- Abandonment
Simply put, if someone abandons their property, this clause gives us the right to enter the home and dispose of the tenant’s belongings.
- Attorney’s Fees
In the event that we have to sue a tenant or take him or her to court, this clause allows us the right to collect all necessary attorney’s fees.
- Parking
This clause prevents parking on grass at all of our properties. For some properties, this is more important than others.
In Summary:
Leases contain a variety of clauses to cover a multitude of subjects. While every property is different, it’s important to clearly communicate landlord expectations and tenant responsibilities within every lease. Some additional takeaways include:
- Continually work at improving your lease to create the best language for you as a landlord.
- Check with your attorney on any changes to make sure they conform to the laws that are applicable to your region.
- Leases are only as valuable as the time and energy you spend to maintain them. You can avoid a lot of frustration by having a good lease.