Why is it important to have a lease?

When you own a rental property, making sure every tenant has a formal lease should be a top priority. Having a lease in place allows you to set expectations for the tenants and identify house rules for the rental term. It also provides you legal leverage in the event your tenants step outside the agreed upon terms — potentially saving you a lot of time and money. You should review the lease with them prior to move-in to ensure they understand all the terms. According to plain language law, the lease must be easy to read and easily understood by all parties. Read about that law here: The Pennsylvania Plain Language Law.

What are the most important items to remember when drafting a lease?

Besides having the most obvious, foundational items — start/end term, amount of rent, and payment date — you want to be sure the lease explicitly states all of the terms of occupancy. The list below are additional must-haves for preparing an ironclad lease:

• Waiver of “Notice to Quit”: Having this language allows you to file for eviction without first having to give the tenant a written posted notice under the Landlord Tenant Act. It can save you weeks worth of time in a standard eviction proceeding. By adding a waiver of notice, the tenant agrees to immediate action by the landlord should the tenant breech any term of the lease.

• Renewal Term: Include a clause stating what happens at the end of the lease period to protect your property and interests. A year-long lease, for example, might specify that when the lease expires, it automatically renews for one year or converts to a month-to-month lease. Having no clear or defined renewal term is a big mistake. You additionally want to make sure you have a holdover clause.

  • Holdover Tenant: A holdover tenant is a renter who remains in a property after the expiration of the lease. If the Landlord continues to accept rent payments, the holdover tenant can continue to legally occupy the property, and state laws and court rulings determine the length of the holdover tenant’s new rental term. If the landlord does not accept further rent payments, the tenant is considered to be trespassing, and if they do not promptly move out, an eviction may be necessary. Here is an example of a holdover clause: holdover damages are charged at three times the monthly rent plus any lodging expenses of a new occupant, eviction costs and attorney fees, paid on a daily basis without demand.

• Utilities: This specifies which bills tenants and landlords are both responsible for.

• Security deposit: You’ll want to include the security deposit amount and the banking institution name and address where the deposit is held. In Pennsylvania, the security deposit amount cannot exceed two month’s rent for the first year or exceed one month’s rent beyond the first year of occupancy. Remember, security deposits are legally the tenant’s money and are not to be used for personal or financial gain. They must be held in a separate account and not commingled with any other funds.

• Pets: Are pets allowed? If so, you’ll want to state the additional pet fee, if applicable. Some landlords charge a higher security deposit for tenants with pets or pet fees. While an additional deposit would be good if the pet were to damage the property, I prefer to charge a monthly pet fee. No matter what you call a deposit, the security deposits still cannot exceed the amounts listed above. That said, any deposit not used for damages will go back to the tenant once their tenancy has ended. If you charge a monthly fee instead, that fee goes directly into your pocket and increases your bottom line. With more than 50% of the renter population having pets, you will need to carefully consider your stance on this topic.

• Renter’s Insurance Requirement: It is important to require your tenants to carry renter’s insurance. Renter’s insurance covers the cost of replacing the tenant’s personal belongings in the event they are damaged, destroyed, or stolen, which your owner’s policy does not cover. It also might cover the cost of temporary housing due to natural disasters or fires, and may cover damages or injuries caused by pets to others’ property — mitigating the landlord’s risk. Most important though, it provides additional liability and property damage coverage for your building due to tenant negligence.

• Tenant-caused Damages: This should give the tenant a clear understanding of costs they may be responsible for regarding damages to the property. For example, if roaches and/or bed bugs are present, it is likely due to the tenant’s uncleanliness. Therefore, the costs of pest control is the tenant’s responsibility.

• Snow Removal & Lawn Care: Who is responsible for snow and lawn care? Don’t forget to draft this into your leases. If it is not stated as a tenant responsibility, it becomes the responsibility of the landlord. There are many clever ways to cut costs of snow and lawn care. Passing the responsibility onto the tenant is one option. You can also give your tenant a rent rebate, to cut down on this cost versus hiring an outside vendor. Whatever the choice, consider your liability if someone falls on ice or snow because the tenant failed to clear a walkway — the small savings may not be worth the risk.

• House Rules: This is the do’s and don’ts section of the lease. If there is a specific requirement you wish the tenant to abide to, this is a good section to write it in. An example of this would be: no hazardous materials may be kept in or around the building — like gasoline or other flammable liquids.

• Lead Based Paint: In Pennsylvania, if your property was built prior to 1978, you are required to provide a Lead Based Paint information pamphlet and a completed disclosure. If your property was tested for lead paint, you must disclose the results of the test. Even if your property has never been tested, you are still required to provide the tenant with information on how to protect their family from lead poisoning.

• Occupants: You’ll want to list the names and ages of all the occupants allowed to live at the property. Do not forget to include occupants under the age of 18, as well. This allows you to identify any “illegal occupancy” and keep the tenants from turning your property into a boarding house.

• Sale of Property: This area would state what the landlord’s rights and responsibilities are if/when the property sold during the term of the lease. I typically suggest you specify your right to terminate the lease with a 30 days notice in the event of a sale.

• Automatic Renewal Increase: This isn’t required by any means, but rather, good practice. Prices on everything increase year to year — gas prices go up, taxes increase, etc. Make sure your property is always competitive and in line with market values. If you never increase rent, you lose money — it’s that simple! I suggest you build in an automatic 5% rent increase each year. You can choose not to increase the full 5% and negotiate this at each renewal term but the discipline of having it be a part of your renewal terms is the first step. Don’t be afraid — this is your passive income we are talking about here!

• Default Clause: This should state what happens if the tenant defaults on the lease or terminates early. You can allow tenants to terminate early, but be sure that it is only with landlord’s written permission and after they pay a hefty fee. Additionally, they should have to pay their monthly rent until a new tenant is secured. You will have costs to secure a new tenant — keep this in mind when considering an early termination fee.

Tips for Success:

Leases are the first foundational step to a positive landlord-tenant relationship, legal security, and overall peace of mind. Here are some additional tips to consider:

1. Research local and state-level laws. Make sure you know the law and how it affects your lease terms.

2. Remember that verbal agreements, month to month leases, and expired lease are not leases that provide you with any protection. They do not hold nearly the same weight as written, signed, hard-copy leases with a specific term. Always have a lease with a term.

3. Thoroughly review any lease you obtain through an investment property purchase. If you bought a property while tenants are still living there, you have to honor their lease through the end date of that lease before making changes. In this instance, I am in favor of month to month leases as they can be changed upon new ownership with a 30 day notice.

4. Have an attorney review your lease. This will ensure you are complying with local and state regulated Landlord/Tenant Laws as well as protecting yourself in the proper manner.

5. Have the tenant sign the lease before handing over the keys.

Now that you have a solid lease, don’t forget to think about how you intent to respond or deal with a problem tenant. The most important steps to minimize problems are to act quickly, be consistent and be clear on how to correct the problem when a lease violation happens. You likely will experience this at least one time in your ownership. Be prepared. If you are not confident in your ability to deal with lease violations effectively, you should hire a property manager or consider retaining an attorney that specializes in Landlord/Tenant Laws in your state.

NOTICE: This article is not a substitute for legal advice and you should consult an attorney.