If you’re a landlord, your lease is one of the most important documents you have for your rental property. A good lease not only tells your tenant when the rent is due, but it also protects you when things go awry.
Not All Leases Are Equal
When landlords use the word “lease,” they may not always be referring to the same type of document.
At one end of the spectrum, you have the handwritten agreements or fill-in-the-blank forms from office supply stores. These agreements contain the rent amount and due date, but not much else in terms of clauses.
At the other end of the spectrum, you have state-specific documents that reference local laws and ordinances. They contain clauses for every type of contingency; as such, they are usually much longer.
If you had to pick, which one would you choose to protect your investment?
If you’re starting out as a landlord, it’s important to remember you’re running a business. If you want to protect your interests and profits, then you must take steps to limit your liability for when things go wrong.
A solid, state-specific lease is a great way to start.
Location, Location, Location
State-specific leases are important because landlord-tenant law varies by state, county, or even city.
For example, each state has different laws on the amount of security deposit you can collect. Different cities may have enacted rent control, which will affect how often and how much you can increase the rent. Required disclosures like flooding, mold, and radon vary depending on the state.
As a landlord, it’s important for you to be familiar with your local laws when setting up your lease. The reason for this is if you include a clause in your lease that goes against the law, it will not hold up in court. Even if you and the tenant have signed it, your lease is not valid unless it adheres to the laws of your state, county, and city.
There are many ways to find a state specific lease. You could hire a lawyer to draft one for you, or check with your state’s association of Realtors®. You could also try Tellus for free access to our comprehensive, digital lease. We currently provide a California lease, and will soon be rolling out state-specific leases for every state.
Until then, let’s look at some of the specific clauses your lease should have.
1. Due Date and Payment
This one is obvious, isn’t it? You want to get paid! But let’s look at some of the nuances.
When do you want your due date to be? Most landlords choose the 1st of the month. Having all payments neatly contained in one calendar year is helpful for tax purposes. But what if you have a tenant move in halfway through the month? Then you will want to prorate the rent. Your lease should have a clause on how that is done.
Your lease should also include acceptable payment methods. Whether this is check, cash, or a speedy online payment processor like Tellus, you should specify your preference. Keep in mind that your state laws may require you to accept multiple payment methods. For example, in California, landlords must accept at least one payment method other than cash or electronic funds transfer (i.e. check), unless there is a history of bounced checks from the tenant.
2. Late Fees
What happens if your tenant pays late? If the biggest consequence is a slap on the wrist, you’re looking at more late payments in the future.
Most landlords agree that charging a late fee helps motivate tenants to pay on time.
The amount you can charge depends on your state laws. Some states require a one-time flat fee, while others allow a daily fee for each day the rent is late (sometimes in addition to an initial flat fee).
You should also check your state laws to see if there are any required grace periods. For example, California does not require grace periods, but Tennessee and North Carolina require a 5 day grace period.
It’s a common misconception that a grace period allows the rent to be paid at a later date without penalty. Some tenants view the end of the grace period as the “real” due date for rent. The reality is that rent is still due on the due date as specified in the lease; the grace period only delays the application of the late fee.
Grace periods are written as a number of days. The count normally starts after the due date, unless specified by state requirements (like in Tennessee, where the due date is included). For example, if rent is due on the 1st, having a 3 day grace period (where the count starts after the due date) means the late fee is applied on the 5th.
Because there is some confusion surrounding late fees and grace periods, you may need to clarify your expectations with your tenants about when rent is actually due. Say you have rent due on the 1st, but there is a 3 day grace period. While paying on the 2nd will not incur a late fee, rent is still late. Some landlords choose to serve notice at this point to encourage their tenants to pay on time. Check your state laws for how best to proceed.
3. Security Deposit
What happens if your tenant damages the apartment? Collecting a security deposit when your tenant signs the lease ensures you have funds available to pay for damages. It will also motivate your tenant to take better care of your property.
Security deposit law varies by state. For example, the maximum amount you can collect depends on different factors. In California, the maximum is 2 months’ rent for an unfurnished unit, and 3 months’ rent if the unit is furnished. California landlords can add an extra half-month’s rent if the tenant has a waterbed.
Other states have specific holding requirements for the security deposit. In general, it’s wise to put the deposit into a separate bank account. It is still technically the tenant’s money until deductions are taken. Check your state laws on whether or not the security deposit needs to earn interest, and who earns the interest.
Each state has different requirements for when you must return the tenant’s security deposit. In most cases, any deductions you take must be itemized and sent to the tenant along with the remainder of the deposit, if any.
Do you plan on allowing pets in your rental property? As the landlord, you are allowed to set the rules for what pets you will and will not accept. For example, you may only want cats or want to set a weight limit for dogs. Double check your insurance policy and HOA rules (if applicable) to determine if there are any additional restrictions.
Landlords often charge additional deposits or fees for pets. These fall into three main categories:
- Pet deposit. This is an amount collected with the security deposit and is refundable if there are no pet-related damages. Sometimes this is not categorized as a separate pet deposit; instead, some landlords just charge a larger security deposit for tenants with pets. Keeping a pet deposit separate from the security deposit means landlords run the risk of pet damage exceeding the amount of the pet deposit. Keeping them together means any damage (pet related or otherwise) can be covered.
- Pet fees. This is a non-refundable one-time fee collected when the tenant signs the lease. The fee usually goes toward cleaning costs associated with having an animal in the unit. Check your state laws before charging this. For example, in California, non-refundable fees are illegal (with the exception of late fees and application fees).
- Pet rent. This is a smaller, monthly amount the tenant pays on top of regular rent for the privilege of having a pet in the unit. It is non-refundable.
Note that the laws are different for service or emotional support animals. In most cases, landlords may not be able to refuse tenants because of their animal, nor will they be able to charge a pet-specific deposit.
If your tenant will be absent for several months of the lease (most commonly during the summer in college towns), they may want someone to take over the lease during their absence. This is known as subletting.
Some landlords allow subletting without any problems. Other landlords don’t allow it under any circumstances.
If you do decide to allow subletting, we recommend having a clause in your lease stating the tenant may only sublet with your permission. This allows you more control over who is living on your property. It’s also a good idea to screen potential subletters to see if they conform to your screening requirements.
Subletters should still sign a lease and agree to abide by all the regulations.
While many subletting cases fall into the example above, others are a little different. For example, some tenants may want to list your property on Airbnb or a similar short term rental listing platform to earn extra money while they are away.
The problem with this is there is increased liability for you as landlord. Having short term renters means there are people on your property you haven’t screened and who haven’t signed your lease. If one of them gets injured, you may be looking at a lawsuit. For this reason, many landlords choose to have a clause in their lease prohibiting Airbnb rentals for tenants.
6. State Specific Disclosures
If you’re renting out property in a certain state, there are usually specific disclosures you must include in your lease.
For example, at the federal level, landlords must disclose the existence of lead paint if the unit was built prior to 1978.
In any state, if a property was used as a former meth lab, this must be disclosed to tenants.
In California, landlords must make tenants aware of the Megan’s Law database for registered sex offenders.
In Florida, landlords must disclose the possibility of radon gas.
In Indiana, landlords who rent out a property located on a flood plain must disclose this to tenants.
Be sure to check your state’s requirements for disclosures when setting up your lease. In general, tenants need to be informed of these issues prior to move-in. Going through the lease (before they sign) is a good way to do so.
A good lease should be like a roadmap, showing you how to handle tricky situations that come up. It’s important to make sure your tenants understand your lease. This helps them know your expectations, which establishes clearer communication. Going through the lease with your tenants will also set the proper tone from the beginning, helping them understand that this agreement is important and they should follow it. Setting clear guidelines and enforcing them will help you be a more professional landlord.
As you’re getting set up, consider how technology can save you time. Tellus helps landlords with leases, rent collection, tenant screening, and more.