Owners of residential property must be careful in preparing and signing leases with tenants. Beyond the dollars and cents of the agreement and the income or financial statement analyses, an owner must consider how to protect themselves before, during and after the term of the lease. The following represent key considerations in any residential lease agreement:
1. Use Limitations: While the intended use of the property has undoubtedly been considered well in advance of the signing of the lease agreement, it is essential that an owner include detailed limitations on the tenant’s rights to use the premises. Due to assumptions, prior informal conversations and failure to consider potential ramifications, an owner may overlook this important portion of any lease.
(1) Specify Residential Use. A residential lease should indicate that the property is to be used solely for residential purposes and for no business, retail or other commercial uses.
(2) Limit the Number / Type of Occupants. An owner should consider what limitations should be placed on the number of occupants, the relationship between occupants and the permissibility of overnight and/or long-term guests. Limitations on group gatherings may also be desirable depending on circumstances.
(3) Require Certain Obligations of Tenant. A residential lease should obligate the tenant to maintain the property in good and clean condition and may limit period in which the property can be left vacant during the term of the tenancy.
2. Required Insurance Provisions: A well-drafted lease should spell out the insurance requirements of both the owner and the tenant. A property owner must be diligent in being sure that its property (and pocketbook) are protected upon the occurrence of events ranging from a fire or a slip-and-fall accident to a disgruntled tenant or negligent (or malicious) acts of a tenant or other party. An owner must consider requiring a residential tenant to obtain certain basic types of insurance policies. If these policies are required, the landlord should require that proof of insurance be provided to the landlord. The following basic coverage* should be considered in a residential setting:
(a) General Liability
(b) Real Property Insurance
(c) Renters Insurance
*Insurance limit amounts should be determined in consultation with a qualified professional.
3. Protections in the Event of Tenant’s Default: No matter how well-drafted a lease is or how well-situated a tenant might be, there will unfortunately be instances where a tenant defaults on its obligations under the lease. Whether due to cash flow shortfalls, misunderstandings regarding lease terms or simply a negligent (or malicious) tenant, every owner faces the very real risk of a tenant not living up to their contractual obligations. It should be noted that defaulting on a lease encompasses much more than late (or unpaid) rent—it also includes such events as misuse of the property, failure to obtain required insurance or violating other specific terms of the lease agreement.
A residential lease should broadly define what constitutes default, including the following: (i) failure to make timely rent payments, (ii) failure to perform any covenants under the lease after a period of written notice from landlord, (iii) an event indicating tenant bankruptcy, and (iv) the existence of a writ of execution against the premises or the tenant’s leasehold interest. A properly-drafted lease should also detail the rights that the owner has against the property and the tenant, including the following:
(a) Owner has right to declare the lease terminated and repossess the property.
(b) Owner has the right to recover all amount s due under the lease and those that will become due.
(c) Tenant shall be responsible for all costs (including attorneys fees) expended by owner in the termination of the lease and vacation of the property.
(d) Owner may re-enter the premises and lease them to a new tenant .
(e) Tenant shall be responsible for all costs associated with re-leasing the property.
Landlord’s Default: It is not typically necessary to include specific provisions regarding landlord default. In the event that tenant insists on such provisions, they should be narrowly defined with limited potential remedies granted to tenant. An attorney should be consulted.
4. Necessity of a Personal Guaranty: An owner must seriously consider a personal guaranty for both commercial and residential leases. A guaranty provides an owner with added security regarding payment of rent and other expenses (and liability) while also committing the tenant to further responsibility and investment in the use of the property. There are no practical downsides of a guaranty for an owner. If a residential tenant does not have adequate income and/or personal credit history, an owner should seriously consider requiring a personal guaranty from a separate individual with more a more secure financial position. The content of a personal guaranty requires the advice of an experienced attorney.
5. Sale of the Property During the Lease Term: Any owner of property knows that the day will come when they will want to sell the property. With respect to the lease, the owner needs to be sure to protect its right to transfer (i.e. sell, give away, or transfer to a related business entity) the property while not terminating the lease.
Four predominate issues arise in the event a landlord wishes to sell leased property: (i) the continuation of the lease, (ii) continued liability of the landlord, (iii) the obligations of the tenant with respect to the new owner and (iv) the providing of relevant lease information to prospective purchasers. Each of these issues need to be addressed directly.