What is a Lease?
In simple terms, a lease is a legal contract between a landlord and a tenant(s). A good lease outlines and clarifies both landlord and tenant expectations in order to eliminate ambiguities. The worst thing you could do as a landlord is to have expectations that you never spell out on a lease; this just leads to frustration. Fortunately, this frustration can be fixed if you take the time to define these expectations on a lease. It’s important to treat your lease as a living document so you can amend it as your expectations as a landlord change over time. Once a tenant signs a lease, you then have recourse over the decisions he or she makes while in your property. If you don’t work hard to create a good lease that clarifies your expectations as a property owner, you’re probably going to end up frustrated.
Since leases are legal documents, it’s critical to have a trusted attorney assist in the writing and reviewing process. Oftentimes, laws differ from state to state and sometimes even city to city. An attorney can help you navigate these standards and ensure your lease conforms to applicable laws.
Generally, a lease will cover the following main components:
- Term of the Lease
- Price/Payment of Rent
- Tenants/Lessors Identified
- Conditions/Expectations of the Property
If you want to learn more about specific lease clauses, you can check out the article “A Closer Look at Critical Lease Clauses.”
Additional Lease Components
In addition to the components listed above, there are other things that you can include in the lease that may help you as a landlord. I’m going to list a handful of things that we include tostrengthen our lease and give us a better ability to manage our property.
1. Name all Occupants.
We have a section of our lease where every tenant and occupant’s name is recorded. This way, we know exactly who is going to be in our property. If someone outside of that original list starts to live in that property, like a boyfriend or additional family members, we have the right to ask them to leave. If there are any adults over 18 that are going to live in the property, we add them as tenants (or lessors) to the lease so they are also accountable for payment. That way, if someone defaults, we have more than one avenue of pursuit.
2. Unsightly Conditions.
We list everything we can think of that would be an unsightly condition so the tenant understands our expectation of keeping the rental property clean and free from things that might hurt its curb appeal. In that condition, the manager and landlord have sole discretion over what constitutes “unsightly conditions.”
3. Items that Are Prohibited on the Property.
We prohibit some items that could be an insurance hazard or potential liability from being on the property. We explain this in more detail in “A Closer Look at Critical Lease Clauses.”
4. Quiet Living.
We stipulate in the lease that tenants must preserve a quiet environment for the benefit of all who live in the neighborhood.
5. List of Repair Fees.
Finally, we have a Repair Fee Schedule that outlines every maintenance fee charge and rate of repairs. From this list, our tenants understand that we are serious about repairs, and they can’t be caught off guard when we charge certain fees. We try to make all of these fees very reasonable.
6. Initials Everywhere.
As a way to ensure that all tenants have read the lease, we make each one initial every page and sign the end of the document. This removes the excuse that a tenant didn’t see something on the lease.
7. Nomenclature.
As mentioned earlier, a lease is a living document, so it’s helpful to include the date and the version number of a lease. As we update leases and make changes, it’s important to know which version each tenant has signed. When we sign new tenants or renew leases, we make sure tenants are signing the newest version of the lease.
Managing Your Leases
As your rental portfolio grows, so does your responsibility to manage all of your tenants’ leases. It’s important to develop your ability to property track and manage every lease in your portfolio. Here are some things we’ve learned (often the hard way) about managing leases.
1. Duration of Lease
For our company, we almost always require a 1-year lease, especially when someone is new. Sometimes, during a renewal, we will allow tenants to sign a 6-month lease. Inevitability, some tenants will ask if they can sign a month-to-month lease. If their request is reasonable, we will agree to let them go month-to-month for up to three months, then we will try to move them to a longer-term lease. Under extenuating circumstances, we may allow some tenants to rent month-to-month for more than three months, but that is infrequent.
2. Filing and Tracking Leases
We keep an electronic copy of every lease, as well as a physical copy. The electronic leases are available on a shared drive that our property managers and office members can access. Softwares like DropBox, GoogleDocs, etc., can help you store and organize electronic copies, which comes in handy when you need to access a lease while away from the office.
3. Renewing Leases
When a lease is within 60 days of expiration, our office assistant sends an email to notify the tenant. This email includes renewal information and gives tenants adequate notice if any changes are being made to their lease. Some of these changes can include increases in rent or in the terms and conditions of the lease. If significant changes occur within our leases, our property manager will visit with tenants during the renewal process to review every change and answer any questions.
To learn more about lease renewals, check out the story “Thoughts on Renewing Leases.”
4. Adjusting Active Leases
Sometimes it becomes necessary to make a change in the middle of the term of the lease. On the very few times I’ve done this, it’s normally because of a larger problem I’ve had to deal with. For example, our insurance company prohibited trampolines and swimming pools on all of our rental properties. Since this prohibition was not included in our original lease, we had to create an addendum for all of our tenants to sign. For the tenants who were in violation of the new addendum, our property manager had to visit with them and explain our situation. From this point, those tenants could either remove the items from their property, or we could mutually agree to terminate their lease.
5. Terminating Leases
Sometimes, when tenants face extenuating circumstances and request to be let out of their lease, we will do so. For example, one of our tenants had a parent pass away and needed to move to take care of his mother. In this situation, we terminated his lease so he could move. While terminating a lease won’t happen very frequently, it is something that occasionally comes up and you may have to deal with as a landlord.
In Summary:
Since a lease is a legal document, I would strongly advise you to consult with your attorney on all of the points that we’ve made above. There are a variety of different laws that govern leases, which vary state by state, and the only way to know how these ideas specially apply to you is to consult an expert.
Simply managing leases can be a pretty big chore, especially as you get beyond a dozen or more rental properties. Having good systems and processes in place can improve your efficiency and overall satisfaction with owning rental property. Most often, what frustrates me most is simply not having a plan or strategy on how to manage a task. This is an area that is easy to slip by and not add good processes and systems until it’s already a problem.
In conclusion, here are a few good points to remember:
- You have to have a good attorney to advise you on creating and executing leases.
- A lease is a binding, legal contract between a landlord and a tenant(s).
- A lease covers a multitude of components, all of which serve to outline expectations in order to eliminate ambiguity.
- Leases are living documents and should be updated regularly. As you experience difficult situations, update your lease to give you a better position in the future.