Real Estate Leases

Introduction

With real estate purchasing at an all time high, more and more people are looking to increase their return on investment. Purchasers are searching the market for income property, whether renting out a former home or leasing a large multi-unit apartment building. 

A solid real estate lease can protect your investment by defining your relationship with your tenants and shielding you from potential liability. In fact, a well-crafted lease should be the foundation for the ongoing relationship between you and your tenant. 

The Real Estate Lease library will provide you with an overview of the elements of a real estate lease. It outlines the basic lease types, security deposits, late fees, inspections and checklists as well as maintenance and other landlord obligations. 

When you are ready to become a landlord, Certified Document Solutions will take the hassle out of preparing the one document that will define your relationship with your tenant.

 

Tenancies

Most professional leases also include a description of the type of tenancy provided by the lease. There are some basic tenancies you should be familiar with: 

Periodic Tenancy: A periodic tenancy is the right to lease property for a set period of time. This can be month-to-month or year-to-year. 

Month-to-Month Tenancy: With a month-to-month tenancy, the landlord agrees to lease his or her property or a portion of the property for one month. Generally, the landlord and tenant automatically renew the terms of their agreement each month unless written notice is given. Depending on the state, tenants may be required to provide written notice up to 30 days before they wish to vacate. 

With a month-to-month tenancy, both the tenant and the landlord have greater flexibility. A tenant can typically leave with one month's notice. On the flip side, the landlord may be able to increase the rent more frequently, subject to local rent control laws. 

Year-to-Year Tenancy: A year-to-year tenancy is an agreement in which the landlord leases property to a tenant for up to a year. This tenancy offers less flexibility but more stability. For the landlord it may mean less turn-over, while for the tenant it means the rent is fixed for one year. 

Term Tenancy: A term tenancy is an agreement in which the landlord leases property to a tenant for a set term. This tenancy offers almost no flexibility but a lot of stability. Typically, the only way out of this type of lease, apart from mutual agreement, is for one party to break the contract. For the landlord it means less turn-over, while for the tenant it means the rent is fixed for the entire term.

 

Security Deposit

Security Deposits – An Overview: As a landlord, you are entrusting your property to the care of the tenant, and many things can and do go wrong. The security deposit helps you cover damages, excessive wear and tear, unpaid rent or other unmet conditions of the lease. It also acts as an incentive for the tenant to pay rent on time and to avoid damaging the property. 

Determining the Amount: The laws on security deposits vary from state to state, but in most cases, the dollar amount you can require from tenants is based on the monthly rental value. While some states set no fixed amount, many states enforce a maximum that is anywhere from one to three month's rent. 

Holding a Security Deposit: State laws often specify how security deposits should be held and whether interest must be paid. In many states, a security deposit must be placed in a separate trust or escrow account and cannot be co-mingled with your personal or other business accounts. Some states will even require you to place the security deposit in an interest bearing trust account and award any accrued interest to the tenant. 

Applying a Security Deposit: State laws may also dictate how a landlord applies the security deposit at the time of move-out. Depending on your state, a security deposit may be used to cover unpaid rent as well as any damages to the property beyond reasonable or expected wear and tear. You may also be entitled to use a security deposit to cover unpaid utilities or to clean the premises when the tenant vacates the property. In some cases, you may even use the security deposit to restore or replace personal property rented to the tenant. Check with your local housing agency for additional information on using security deposits.

Returning a Security Deposit: As with other state regulations, the timeframe for returning a security deposit varies, ranging anywhere from 10 to 45 days or more after the tenant has vacated the property. When withholding money from a security deposit, landlords are usually required to account for any deductions with an itemized list of damages to the unit. This list is typically sent to the tenant's last known mailing address 2 to 3 weeks after the tenant moves out. 

Normal Wear and Tear: "Normal wear and tear" is a subjective assessment based on the total time a tenant occupied the premises, the condition of the unit on move-in, the use of the premises, and whether pets were allowed. The longer a tenant lives in a rental unit, the more likely it is that "normal" wear and tear will occur. Examples of normal wear and tear include worn floors, chipped paint, dirty air filters and broken hinges. Excessive wear and tear may include damage to walls (holes), cigarette burns in carpeting, damaged plumbing and "removed" items. In order to get a fair assessment on move-out, many landlords conduct a walk-through before the tenant vacates the unit and notifies the tenant of any damage he or she deems "abnormal." Some states actually require you to give tenants notice of the inspection and allow them to attend. To find out the laws in your state, contact your local housing agency.

Security deposit limit by state

Alabama

One months' rent (as of 1/1/07)

Alaska

Up to two months' rent. Does not apply to rent that exceeds $2,000 per month.

Arizona

One and a half months' unless tenant voluntarily agrees to pay more

Arkansas

Two months' rent

California

Two months' rent (unfurnished), 3 months' rent (furnished).

Colorado

No statutory limit

Connecticut

Two months' rent (tenant under 62 years of age), one month's rent (tenant 62 years of age or older)

Delaware

One month's rent on leases for one year or more

District of Columbia

One month's rent

Florida

No statutory limit

Georgia

No statutory limit

Hawaii

One month's rent

Idaho

No statutory limit

Illinois

No statutory limit

Indiana

No statutory limit

Iowa

Two months' rent

Kansas

One month's rent (unfurnished), one and a half month's rent (furnished)

Kentucky

No statutory limit

Louisiana

No statutory limit

Maine

Two months' rent

Maryland

Two months' rent

Massachusetts

One month's rent

Michigan

One and one half month's rent

Minnesota

No statutory limit

Mississippi

No statutory limit

Missouri

Two months' rent

Montana

No statutory limit

Nebraska

One month's rent

Nevada

Three month's rent

New Hampshire

One month's rent or $100, whichever is greater. When landlord and tenant share facilities, no statutory limit

New Jersey

One and one half months' rent

New Mexico

One month's rent for lease of less than one year, no limit for leases of one year or more

New York

1 month's rent

North Carolina

No statutory limit

North Dakota

No statute

Ohio

No statutory limit

Oregon

No statutory limit

Pennsylvania

Two months' rent for first year, one month's rent during second and subsequent years of renting

Rhode Island

One month's rent

South Carolina

No statutory limit

South Dakota

No statutory limit

Tennessee

No statute

Texas

No statutory limit

Utah

No statutory limit

Vermont

No statutory limit

Virginia

No statutory limit

Washington

No statutory limit

West Virginia

No statute

Wisconsin

No statutory limit

Wyoming

No statute

 

Pet Deposit

A pet deposit is an additional security deposit to cover any damage caused by a pet. If a tenant causes damage (and it is NOT due to the pet), you generally cannot withhold the pet deposit and apply it to the damage. In some states, a pet deposit is an allowable amount over the maximum security deposit

 

Rent Due Dates

Setting the due date for the rent is generally left to the landlord. Whatever you decide, it is always best to clearly state the due date in the lease. In many states, if the lease does not indicate a specific due date, state law will designate one. You may also want to indicate all acceptable forms of payment, such as personal checks, cashier's checks or money orders.

 

Designating Where the Rent Will Be Paid

As a landlord, you have the right to decide how rent is collected. You could instruct your tenants to mail a check to your home or office, or set up an on-site office where tenants can hand deliver their rent. Another option is to personally collect the rent by going door to door or setting up a drop box. A locked drop box allows tenants to pay their rent after hours and also helps you to easily determine by the next day who has paid on time. In an age of increased online banking, you may even have the option of drawing rent directly from the tenant's bank account. You can check with each bank to determine if this is feasible.

 

Late Charges

As a landlord, you may also want to establish policies for late rent payments. No matter how well you screen your applicants, the odds are at some time or another you'll be faced with a tenant who fails to make payments on time. The most effective policies specify a reasonable late fee. Explain that the late fee will be charged after a certain "grace period" following the rent due date. 

The actual amount you can charge for a late fee varies from state to state. Some states require you to charge a flat rate for a late payment. Others allow you to charge a percentage, sometimes up to 15% of the monthly rental amount.

 

Inspections and Checklists

Before your tenant moves into the unit, you should always take the time to inspect the premises. Some states actually require you to describe the condition of the rental in writing and provide a "checklist" for each unit. 

When describing the unit, clearly identify all of the features from window treatments to flooring. Next, identify the condition of each feature. List not only the scrapes, scuffs and other imperfections, but also any upgrades you've made to the unit. Are there new appliances? Have you repainted or re-carpeted? Did you install a new garbage disposal? A formal move-in checklist will help you avoid any disagreements down the line should you need to withhold funds from the security deposit to cover damages. 

At this point, you will also want to take photographs of the unit before the tenant moves in. By documenting improvements and existing features, you can easily identify any changes, including damages that may have been made to the unit at the time of move-out.

 

Sublease and Assignments

A sublease allows your tenant to lease out the premises to a third party and act as the landlord. In an assignment (often mislabeled a sublease), your tenant legally substitutes a third party who assumes all of the rights and responsibilities of the lease. In other words, the third party simply steps into the shoes of the old tenant.

 

Utilities

Generally, landlords decide whether or not to cover the cost of utilities or to allow the tenant to assume responsibility for his or her own utilities. In many cases, a landlord will cover the cost of water and garbage pick-up, while a tenant will cover other utilities such as electricity, gas, cable TV or internet service.

 

Rights & Obligations

Maintenance: As a landlord, it is your legal responsibility to keep the rental unit in good repair. This means the premises must be safe, sanitary and habitable throughout the course of the tenancy. Habitability includes "livable" conditions such as working doors, faucets, toilets and heaters. In other words, the rental unit must remain comfortable to live in. As a landlord, it is also your responsibility to care for any common areas, including stairwells, hallways, laundry rooms and walkways. 

Entry into the Unit: Depending on your state, a landlord may enter a leased unit under certain situations. For example, some states allow you to enter in emergency circumstances to make necessary repairs or improvements, or to show the unit to prospective renters. States may also require you to provide at least 24 to 48 hours notice before entering the unit. Other states allow same-day notice or no notice at all. Check your specific state laws for details about when, and under what circumstances, it is appropriate to enter a rental unit. 

Abandonment: Legally, the term "abandonment" refers to a tenant moving out of a rental unit, although it is often specifically used to describe situations in which the tenant leaves before the lease officially ends. In other words, the tenant has "abandoned" his or her obligations under the lease agreement. As a landlord, you should always prepare for tenant abandonment by clearly stating the rules up front in the lease agreement. 

Generally, if a tenant abandons a rental unit before the lease expires, you are entitled to enter the property and re-lease it. Abandonment laws also regulate when you may begin disposing of any property left in the unit.

 

Arbitration

Arbitration is an alternate way to resolve disputes without having to go to court. Instead of a judge, an intermediary renders a final decision. And unlike a trial decision, which can be appealed, a decision rendered in arbitration is generally binding and not subject to judicial review. 

One of the main benefits of arbitration is privacy. Disputes settled through arbitration will not be heard in a public court, and any information disclosed during the proceeding is not available to the press or any outside parties. Another benefit is speed. Because the arbitration process is less formal than a court proceeding, disputes can be resolved much more quickly. Finally, arbitration is more likely to produce mutually beneficial results. Unlike a judge, an arbitrator is free to work out compromises that are not always possible within a strict reading of the law. 

On the other hand, the two parties generally have only one opportunity to resolve the dispute in their favor. This one-shot aspect of arbitration can make it complicated and costly because both parties want to ensure they have the best attorneys and experts on their side.

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