So you want to be a landlord? Part 3 -- The Lease Agreement
Ok, Landlord. By now, you should have accomplished the following:
Obtained a rental license (if your county or local jurisdiction requires one); and,
Found a qualified tenant to whom you entrust your property.
The next step in the process is to negotiate and enter into a Lease Agreement. Be careful with this. I’ve seen many situations where landlords rent property to friends, and on that basis alone, the landlord simply hands over the keys to the rental property with nothing more than a discussion regarding money and a handshake to seal the deal. This kind of behavior at the beginning of a lease paves the way for lots of legal ugliness later.
Lease agreements don’t have to be in writing to be legally binding. Trying to enforce those oral lease agreements will, however, be difficult. In Maryland, as in most states, there’s something known as the “Statute of Frauds" which requires certain contracts to be in writing to be enforceable. Without getting into a discussion on the Statute of Frauds and the types of agreements and/or contracts to which it applies, I’ll say this Landlord: Your Lease Agreements SHOULD be in writing. Investing the time to create a lease that both protects your rights as a landlord and delineates your tenant’s obligations will save you a lot of aggravation in the event of a dispute with your tenant. What happens when a pipe breaks or the stove stops working? Whose responsibility is it to fix? Well, if you have a well-crafted lease, then you know what your obligations are as a Landlord at the outset of the tenancy. (Landlord, you also have statutory obligations, i.e. the “warranty of habitability," but those obligations will be addressed in a different blog).
In the simplest terms, a Lease Agreement is a contract between you and the tenant. In a previous blog (http://bit.ly/Jzzi7U), I outlined certain “must have" elements for business contracts. Many of the rules applicable to business contracts apply to Lease Agreements as well.
Every good Lease Agreement clearly identifies exactly who the Landlord is, who the tenants are, and who is allowed to reside at the leased premises. Every good Lease Agreement should state, in specific details, the following:
Lease Term. When it begins, how it ends, and how long it lasts (i.e. 6 months, one year, two years, etc.)
Rent. The total amount of rent, how payments are made (in monthly installments), when payments are due, and what happens when rent is not paid on time (i.e. late charges are required, additional fees on bounced checks).
Security Deposit. The amount of any security deposit required. By Maryland law, the amount of this deposit cannot be more than two months’ rent and must be deposited into an escrow account. (A more detailed discussion on security deposits will be done in an upcoming blog in the “So you want to be a landlord" series).
Utilities. Who pays the water and sewer bills? The gas and electric? Depending on your arrangement with your tenants, a Landlord may require the tenant to pay all utilities or a Landlord may include utilities in the monthly rental amount. Whatever your agreement is regarding utilities, it needs to be specifically stated.
Repairs and Maintenance. Landlord, you want to keep your property in the best condition possible at all times. What happens when something, like an appliance, breaks? Whose responsibility is it to repair? Typically this responsibility falls upon the landlord, but you may also want to spell out that daily maintenance activities like, mowing the lawn, changing lightbulbs, shoveling sidewalks in the event of snow, etc. are the tenant’s responsibilities. Your Lease Agreement should also obligate a tenant to report maintenance issues (i.e. a leaky pipe) immediately. Lastly, your Lease Agreement should expressly prohibit a tenant from changing the premises’ locks without the landlord’s permission.
Use of Premises. If you’re renting the leased premises as a residence, then be explicit about that. You don’t want to find that your tenant is using the property for anything but a residence.
Condition of Premises. Document what the leased premises look like at the beginning of the lease. Explain that the tenants agree to keep the premises in the same condition as when the Lease Agreement begins. Require the tenants to pay for any and all damage they cause to the premises through misuse, negligence, or neglect.
Inspection and Repair. Detail that you, as a Landlord, may enter and inspect the leased premises (and make repairs if necessary) upon certain notice.
Subletting and Assignment. Landlord, unless you want to wake up one day and find tenants other than the ones to whom you agreed to rent your property living in the leased premises, your lease needs to contain a clause prohibiting the tenants from subletting and/or assigning their rights under the lease to someone else without your consent. Sometimes subletting or assigning a lease can be a good thing. Say your tenant is relocated by his job out-of-state. You don’t want to lose rental income, so your tenant helps you to find another quality tenant to occupy the leased premises. In this situation, the tenant’s assignment of his Lease Agreement to another qualified tenant could be a good thing for you, Landlord.
Alterations and Improvements. First, every lease should have a clause that prohibits any alterations and improvements to the property unless, you as a Landlord, provide permission for those alterations and improvements. Landlord, you don’t want to walk into the leased property one day and find walls, which you knew to be white, now mauve. In addition, Landlord, sometimes tenants really take a liking to the premises and try to make it their own. While a tenant’s TLC of the property can be a good thing, improvements made by a tenant such as the installation of a ceiling fan, always seem to cause issues, especially when the tenant wants that ceiling fan back upon the end of the tenancy. Thus, you want your Lease Agreement to be clear that when a tenant makes improvements to the property at the tenant’s own expense, those improvements remain part of the property of the landlord when the tenant leaves.
Default. Your Lease Agreement needs to specify the circumstances in which a tenant has defaulted under the Lease Agreement. You also want to make it clear, Landlord, that you have the right to terminate a lease after proper notice to a tenant regarding the tenant’s default. Has your tenant breached the lease by failing to pay rent? What happens if a tenant brings a pet to the property when your Lease Agreement prohibits pets? What penalties are imposed upon a tenant when that tenant defaults? Spell out exactly what happens in the event of a default.
Termination and Renewal. Your lease already states the duration of the term, i.e. one year. Do you want to require a tenant to give 60 days’ notice before deciding to renew the lease? Do you want the Lease Agreement automatically to renew if notice is not given? If your tenant plans on moving, you probably want to require the tenant to provide notice of that as well so that you, Landlord, can endeavor to find another quality tenant once your present tenant has vacated the premises. If your lease expires and your tenant remains at the premises not having renewed the lease, that tenant is considered to be “holding over" and is now on a month-to-month basis, which is certainly not the most ideal situation for a landlord.
Like any good contract, in addition to those specific landlord/tenant provisions stated above, good Lease Agreements should include an Indemnification clause, clauses relating to Insurance, an attorneys’ fees provision, a proper notice provision, a severability clause, a non-waiver clause, a governing law provision, and a modification provision (that all modifications are to be in writing signed by both parties).
Note that in Maryland, a landlord’s obligations are also governed by statute. That is, in Maryland, landlords MUST pay particular attention to Section 8 of the Real Property Article (http://www.lexisnexis.com/hottopics/mdcode/) of the Maryland Annotated Code. Section 8-208(c) of the Real Property article sets forth the specific items that a Maryland Lease must include, and it also sets forth certain provisions that are prohibited by Maryland law. Failure to comply with Maryland’s landlord/tenant statute can result in some harsh penalties being imposed upon landlords.
I’d also like to add a small admonishment to you, Landlord. Boilerplate, form documents are a good place to start for any agreement or contract. But, don’t just buy or download a form from the internet. The Maryland Residential Lease Agreement can be found in numerous places online as well as through your realtor, yet it may not encompass your unique agreement with your prospective tenant. You may want to include specific maintenance provisions. You may want to waive a tenant’s payment of a security deposit. DO NOT sign a form document without reading it and making sure that it covers exactly the terms you want included in your Lease Agreement. In Maryland, ambiguities in any contract are construed against the drafter. That means, Landlord, if you or your realtor provides a tenant with your proposed Lease Agreement, then you’d better ensure it contains exactly what you want it to contain. Otherwise, if and when that Lease Agreement is disputed and subsequently construed by a court, you’ll find yourself on the losing end of of a legal argument.