In this article we are going to talk about provisions normally found in a residential lease. If you are working with an agent, you may have access to a standard lease form used in the state of Texas. We discussed having an attorney on your team. If you chose your attorney like we talked about – someone who works with single family rental home investors or owns and operates rent houses himself/herself, then they should be able to provide you with a lease template readily. The lease is an important document and so it’s wise to get professional, legal opinion on it. You can use what we talk about here as a cross-check but not as the sole source and it’s not meant to replace legal advice.
For those who are new to this blog, we talk about owning and operating single family rental homes in the Dallas, Fort Worth, Denton area. Creating a correct lease is a significant step in this process and knowledge of local laws is necessary. If you have not yet read the pages on Getting a Mentor and Getting Started, I recommend you do that first so you have a starting point.
The Residential Lease
It is important that your lease be created for single family residential homes. There are all kinds of real estate leases, like commercial leases that talk about owning and operating a business, multifamily residential leases for apartment complexes and like, retirement community documents, land leases and so on. As you can imagine, they are significantly different in what they cover, so get a residential lease for single family rent houses in Texas.
So what are the items in a lease?
1. Identification and Context
First, this lease is created between two parties: landlord and tenant(s). So identify these parties clearly. Use full legal names. Secondly, identify the property clearly. Use both postal address like 123 ABC Street with city, state and zip code. Also state its legal description. The legal description should be in your deed documentation, tax records and survey. It calls out the subdivision name including phase if any, the block and lot number and specifies the county in which property is located and deed is recorded. The third piece is the term of the lease. When does it start and when does it end. Both dates are inclusive. With these three pieces of information you can uniquely identify a lease.
Needless to say this is one of the most important pieces in a lease. However, it must be well established what this is, before the lease is ever signed. Clearly state the rent and when and where it should be paid. Make it clear if the date is the date by when the rent must be received or post-marked. Talk about any pro-rated rents. We discussed earlier in the post on security deposit that you will always collect the first full month’s rent regardless of move-in date and prorate the second month’s rent. So mention any prorated amounts here. If you have stipulations on how the rent should be paid, state that as well. We have talked about collecting the first month’s rent and security deposit as cashier’s check or money order. Starting from the second month, if you process the application like we discussed before and select your tenants carefully, you should not have an issue collecting subsequent month’s rent via personal checks. You may want to state that you will collect only one check per month. That is, if they have to pool money to pay the rent, you don’t get involved in that.
Discuss late charges. State when rent is considered late. Know what the law requires of landlords. You may have a policy that establishes an initial late fee and a per-day fee till the rent is paid in full. State in which order you will apply payments. Will you apply it to the late fees or other fees first or to the rent? State that. Compute what your actual damages are if a tenant pays late. Use that to arrive at your late fees so you can defend your position. If you have a well laid out approval process and make it easy for your tenants to enroll in whatever auto-pay mechanism they may have, this should not be an issue.
3. Security Deposit
Even though you may have collected this amount before you ever created the lease, state the amount in your lease. You may want to make it clear that no interest is paid on security deposit (refer local laws). Also make it clear that security deposit is not last month’s rent. Tenant must pay last month’s rent in full as usual.
Your security deposit policy is one area you should review with your attorney. You are required to return remainder of the deposit within 30 days of property surrender. What you can deduct for, you should arrive at and document. State that here. If you are doing this for the first time, you may want to get with your mentor. Trying to dream up everything that can be damaged or lost won’t work. Over the years, many have compiled a good list of allowed deductions. Try to use that as a starting point. Your agent should have a list as well. If you are using a realtor lease form, that will have a list.
Finally, state that tenants must provide you with a forwarding address, so that you can return the remainder of their security deposit. Mail a company check to that address.
State your pet policy. Again, this is one area that should have been well established before you get to the lease. Your marketing material should say if you allow pets or not and if there are any restrictions. If you have restrictions you should document that in your company policy. It’s always wise to get any restriction reviewed to ensure it is not discriminatory in an illegal manner. So, state your pet policy in the lease. It should cover items like what you allow, what you don’t allow, do you have an additional pet deposit, how you handle violations of the policy and if guests and/or visitors are allowed to bring pets. Talk about tenants taking full responsibility for their pets and their pet’s actions. Discuss how their pets should be handled during showings when the property is on the market.
Here you discuss what your property can be used as – basically as a residential home. State all occupants by full name and age (not just tenants, all occupants.) You may define tenant as one that’s the responsible party in the lease. You may define their children as occupants. All tenants are occupants as well. Talk about what’s allowed, what’s not allowed, the guest policy – how many guests are allowed at a time, how long can they stay without notifying the landlord, how many cars are allowed at one time. You may want to refer to already established community or HoA rules as well. Talk about smoking. Do you allow it or not. If you allow smoking in the yard, how are they required to dispose of cigarette butts – discuss that.
There’s the second side to use – which is how others use property around them. They are neighbors, school kids, general public, whatever the case may be. As a corollary to the Use clause state that you have no control over how surrounding property gets used. Your ownership rights and influence may be limited to your property.
6. Property Condition
Talk about move in and move out condition. This is a good place to mention that you have a property condition addendum and it must be returned to you within so many days of moving in. Essentially the move out condition must be the same as move in condition allowing for wear and tear. If you fix up a property before you rent it like we talk about in these posts, and you select tenants like we discussed earlier, then for short term leases, like a year or so, you should expect property condition to be pretty much identical to when you gave it to them.
Call out what the tenants are required to do. This is not repair. This is periodic and normal maintenance, like mowing, cleaning the pool, replacing light bulbs and batteries, A/C filters, WATERING THE FOUNDATION, etc. Talk about how you handle tenant’s failure to maintain property.
Again, if you fix everything and hand them a clean, updated, all functional property, you should not have many repair requests. However, it’s entirely likely that through no fault of anyone, things can sometimes break. So here, talk about how they report the problem to you, how soon you will schedule it and who will pay for it. Yes, who will pay for it. There are several repairs that landlords are required to pay. However, not all conditions are required to be repaired by law (check what’s required in your area) and for all that’s repaired it’s not required that landlord pay for it all. For example, if a damage is caused by tenant, then tenant pays for it. Also, discuss what tenants are allowed to repair and what they must get permission from the landlord to do.
9. Renewal and Termination
State what happens when you approach lease end. For instance, 30 days before lease end, tenant must provide landlord a written move out notice. Or, landlord will provide tenant auto-renewal form, 30 days prior to lease end. You may want to only extend for another lease term and not allow a month-to-month, if you think that uncertainty is not a good business policy. State how the tenant should cooperate during showings. State how access to the property will be made – lock box at the door, tenant present showings etc. Again, address how pets will be handled during showings.
There are other important items to the lease that define what defaults, landlord remedies, penalties and liabilities apply. I would urge you to get legal counsel to draft these sections if you are not using a standard promulgated lease form or a template that your attorney has provided you. Even if you use these, it’s best to get at least your first full lease legally reviewed anyway.
You may create addenda that go with the lease. The lease will call out these addenda. For example, if you are using a standard promulgated lease and you feel that some items are missing, you may create your own lease addenda to capture those. If you want to provide some guidance to your tenants in specialty areas like maintaining the pool or foundation, you can create an addenda for that. So that you can get that signed. If the property was built before 1978 you may have to create a lead based paint disclosure addenda. There are other disclosure/waiver addenda you may need. Your attorney or agent should be able to tell you what’s normally used in your area for your style of property.
Signatures and Finalizing
After you draft the lease, send it to your tenant. This happens well before their move in, after you have collected their security deposit. After all tenants sign, the landlord signs the lease upon which it is considered “executed” and in full force. Send your tenants a copy of the executed lease. When you meet with your tenants to collect the property condition form, walk the lease with them and answer any questions they may have.
Do your tenants read their lease?
Even though your lease may say in bold to read the lease before they sign, it’s entirely possible that your tenant merely checked what the stated rent was. In these days of standard docs and no scratch out clauses, not to mention the “I Agree” button on every web page and downloaded app, reading before signing has become a lost art. There’s nothing much you can do about it. I raise this point here merely to state that just because something is in your lease, do not expect that it has been communicated. If something is important to you, specifically bring it up when you meet your tenants and go over the lease. Unless you at least get a head nod, don’t expect them to know.