CEO/Founder of Smart Property Systems, Jack of all Trades in charge of delivering a best in class solution to customers.
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I was on the phone one day with a property manager from Chicago. He called to talk about some problems he was having with getting his tenants to pay rent. I asked him what the terms of his leases were. He responded, “Leases? What leases? I never use a lease and I never will.” I politely told him that there was nothing more I could do to help him.
Residential Leases
Lease agreements are the contracts that define the terms of the rental between the property owner/manager and a tenant. Without a signed lease agreement, there are no parameters that will govern what happens during the term of the rental if the event of disagreements or failure to pay rent.
Every type of rental needs a signed rental agreement, contract or lease. The agreement should contain language that defines the responsibilities of both the owner/manager and the tenant(s). It should also protect the owner/managers from the actions of negligent tenants. And at the very least it should define the term of the lease (start and finish date), fees, deposits, rent and what, if any, furnishings are included. If there are utilities included in rent they should be listed; it should also be stated if utilities are the tenant’s responsibility. The names of all who will occupy the residential property should be listed and anyone over the age of 18 should be required to sign the lease. If there are amenities, like a pool or exercise room, meeting space, assigned parking or extra storage, there should be language explaining those amenities, approved usage and fees or rent to use them. A lease agreement may consist of several documents that are considered part of the lease agreement.
• The main lease agreement: This spells out the items I mentioned above. There could also be the following documents included for a residential lease:
• Addendum: Specific items like pools, washer dryer maintenance, storage units and parking assignments may not be included in the body of the lease agreement.
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• Pet agreement: This states the details about approved types of pets, the pet’s name, description, breed and license number. This comes in handy if more or different pets are found during an inspection or as a result of a complaint.
• Policies and vacating instructions: This document could contain general rules, like noise restriction times, phone numbers for utility companies that the tenant needs to contact for service and a schedule of wear-and-tear items, like painting and carpet, so that the tenant has an upfront idea of the type of amortization those items will have if damaged or needing replacement. Move-out instructions tell the tenant what the inspection will be and what needs to be done to pass that inspection for the various items.
• Guarantor agreement: Occasionally someone, especially first-time renters, does not have credit established or may have very bad credit. Usually, landlords will require someone to guarantee that rent is paid every month. Sometimes the tenant gives the guarantor rent money and the guarantor pays that rent on the tenant’s behalf. In this case, a signed guarantor agreement must be included in the lease documents.
Any other document to describe special circumstances — for example, a waterbed agreement if the tenant is given permission to use a waterbed — can be added. Addendums can be added mid-lease if a situation comes up that requires a mutual agreement between the landlord/manager and the tenant.
The best leases explain where the deposits are held in trust, where to report repairs that are needed and who to contact in case of emergency. It will explain that the tenant is responsible for tenant-caused damage (usually called commissive waste) and how that bill for damage will be handled. If there are late fees charged for rent paid late, that amount or percentage should also be clearly stated in the lease.
Leases should also include information relevant to inspection frequency, amount of notice needed when vacating, and any other rules that the manager/landlord feels are needed to let the tenant know what is expected during the tenancy.
Commercial Leases
There are several different kinds of commercial leases. There are net leases and gross leases and modified net leases. Most commercial leases can be made for multiple years. They will include escalation of rent clauses and dates that those escalations happen year over year. Other costs are also defined with terms and conditions. Usually, commercial tenants are responsible for making any improvements to the space at their own expense and for putting up their own signage. The lease may explain any rules or restrictions for signage. The lease agreement will usually include request and approval paperwork for tenant improvements and signage. The lease should also contain a description and floor plan of the space to be leased and may have a parking space diagram showing designated parking spaces.
Commercial leases are often written by lawyers who represent the owner of the commercial space. There can be all levels of complexity in the lease, from a one-page contract for a storage unit to a 36-page or longer lease document for an industrial manufacturing plant, spelling out every possible detail. The process of signing is slightly different than for residential rentals, in that the tenant/company renting has the opportunity to review and make changes to the lease, which the manager can then approve or modify. This process is considered essential because some leases for commercial space can be made for as long as 99 years.
Good lease agreements are a necessary part of the business of renting investment property, whether they are commercial, residential, storage, mini storage, mobile home parks, etc. Skipping this important step, or having inferior lease agreements when renting your property, could make the difference between the success or failure of the investment.
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