Monday, January 3, 2011

Things to consider when writing a lease

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Have you ever heard the term a "Tenant's lease" or a "Landlords lease"?  Ever wonder what that means?

A Tenant's Lease is written with favorable terms to the Tenant and a Landlord's Lease is written with terms that are favorable to the Landlord.

Here are some things each side should consider when writing a lease:

Complying with the rules and regulations of the Condo Association:

A Landlord may want to make the Tenant liable for complying with all rules and regulations of the condominium association which personally I find very reasonable.  I see this one missed a lot and Landlords get saddled with fines because Tenants are not complying with the Association rules yet the Landlord has no right to pass the fine on. 

I also manage properties and recently one of my buildings put in an air conditioner removal policy.  The new regulation passed by the Board states that the owners are responsible for removing all window and wall air conditioners between the months of October thru March.  All unit owners are fined $150 per month if they leave an air conditioner in during this period.  I think this is a reasonable way for the building to save money on heat and to get everyone to comply.

The Landlord is responsible for the actions of his/her Tenants.  The way to ensure that the Tenant comply, is to pass the fine onto the Tenant by way of the lease.  If it's not in lease, the landlord will have a much harder time passing on the fine and perhaps compliance.  A term in the lease to the effect, "The Tenant must comply with all rules and regulations of the condominium association and all resulting fines and consequences of non compliance", should be included in the lease to hold tenants accountable.

Landlord's tightly, perhaps too tightly, controlling use:

Landlord terms that I find unreasonable include such clauses that limit or control the number of guests a Tenant can have.  I have seen leases where the Landlord tries to control the number of visitors.  I personally think that if you are renting a place, you should be able to have guests, at will, as long as you don't go over the maximum capacity of the unit.  Yes, if they stay more than a given number of weeks, I suppose it can create greater wear and tear.  Part of deciding to rent it to a particular person or persons, may be the number of people who go on the lease initially.  That is, wear and tear may be a factor in the Landlord's decision to rent the property to you.   Perhaps it's ok to state that you can't have a guest for more than a certain number of consecutive weeks.  Again, just read your lease and be aware of what you are signing.

Passing off maintenance responsibilities to the Tenant:

I have also seen Landlord's try to pass some repairs and maintenance off onto the Tenant - repairs under a certain dollar amount and/or maintenance of a backyard, snow removal or garbage disposal.  The Tenant should read the lease carefully before signing.  At a minimum, you want to make sure you understand if you are going to be accountable for these things.  You may be amenable to these things as it might result in a favorable rent and if you are living in the unit it may be far more convenient to take care of these things than the Landlord + you won't have someone walking through your house when you are not home.  It could be easier for you just to fix smaller items.   Having said that many prefer to rent so that they don't have to think about such things.  Just make sure you understand what you are agreeing to.


Selling a property with Tenants in it:

An item that I see Landlord's neglect in a lease is protecting themselves in the event they want to sell the property with Tenants in it.  A big hesitation of potential buyers of an investment property is buying a property with existing Tenants.  Because rarely do Landlords report the payment history of a Tenant to one of the credit bureaus, there is no way that a prospective buyer can find out, through a 3rd party, how well a Tenant paid the rent or in general what kind of payment risk he/she presents.  One thing Landlord's should consider when writing a lease is to put in a clause that gives them the right to pull the Tenant's credit bureau at any time for credit monitoring purposes.  They should also write in the lease that the Landlord has the right to share the credit bureau with any prospective buyer.  To make it reasonable, the Landlord should be restricted to sharing the credit bureau only to prospective buyers who have signed a contract of sale indicating the buyer is serious and is in attorney review which in fact is the due diligence phase of a purchase.   The Landlord may want to reserve the right to evict the Tenant should the Tenant's Fair Isaacs Company (FICO) score go below a stated level. 



If the Landlord wants to write in such a clause please be careful to consult a knowledgeable attorney so that you not violating any regulations.   For example, under the new Dodd-Frank Recovery Act, a bank cannot charge a credit user for what they call "off us default".  In other words, you can not charge more just because a customer has paid poorly on other debts and/or his/her FICO has gone down.  Consult a knowledgeable attorney to understand if and how this impacts rental payments.  You may or may not be able to charge a surcharge (not technically rent as rent is controlled by rent control but an additional risk fee for being a higher risk than when the Tenant originally signed the lease)  if the FICO score has gone down below a level set in the lease.  The Frank-Dodd legislation was targeted towards credit card companies and may or may not preclude Landlords from using this technique.  Again, this is new ground.  Consult a lawyer.

Personally, I think a Landlord should be able to evict based on a deteriorating payment history on other debts.  The eviction process is long and the quality of the Tenants impacts the value of the property.  With a credit card, a bank can just close the account if they feel that the credit card holder is too risky even if they can no longer surcharge for poorer "off us" payment history.  It would be an interesting case if it were ever brought to court. 

The key is, if you have provided the ability to pull and share a bureau with a prospective buyer AND you have good paying Tenants (good paying on other debts) you will increase your chances tremendously of being able to sell the property with Tenants in it and therefore support a better price.  If a place has poor paying Tenants or there is no way of validating that they are good paying Tenants and that are unwilling to leave voluntarily and a Landlord really must sell, ultimately, it will be reflected in the price.

This is a sensitive subject given Hoboken's history documented in the documentary "Delivered Vacant".  I believe it's, among other reasons, the inability of a prospective buyer to assess risk that compelled Landlords to push Tenants out before selling it.  It's a shame as many of the Tenants may be just fine and a small provision in a lease may make it feasible to assess that risk.  The Landlord would not have to go through a period of vacancy to sell either and there would be less Tenants harassed to leave.  We are all better off if we create value.  Vacancy doesn't help anyone.  Some property taxes on rentals are contingent on rent receipts.  The city collects less on properties with vacancies and the rest of us have to make up the budget gap. 

Consider a clause that creates this ability, you may create tremendous value.  

Late Fees: 

Unless the property is under a bank holding company, the Landlord cannot charge interest.  This is why you always see a flat fee late charge on leases (or at least you should).   Again check your lease.  If you see that the Landlord is charging interest for late payments, you may want to leave it and then challenge it if you are charged.  Or, you can point out during negotiations that the Landlord cannot charge interest (unless the property is owned by a bank who can charge interest).  Again, consult an attorney. 



Clauses that create fees on top of rent:


Move-in and Application fees:

Keep in mind that many condo associations have "move in fees" and/or application fees in the case of co-ops.  Move-in fees go to cover damage caused by moving in and out - things like paying for touch up painting, carpet spills, or even staff that have to manage a move.  You see this more in larger buildings.  Be aware that the Landlord via the lease may make the Tenant accountable for these charges.

Pet Deposits:



I have also seen pet deposits/fees.  This is a tough one.  They seem like a way of circumventing the law about charging a maximum of 1.5 months of security deposit.  However, if an animal does damage it's usually a lot of money.  If a cat creates an ammonia smell it can not only permeate the entire apartment but sometimes the hallway as well.  The only way to get rid of it is to change any carpet and paint.  The same is true if a dog chews through a carpet or wall.  The damage can be quite high and a typical pet nor regular security deposit can't nearly cover the damage yet it feels like a superfluous fee.

Be aware that sometimes it's a deposit that the Tenant can get back if no damage was done.  More often, I am seeing this as a non refundable fee.  The idea is that it goes into a kitty so when that one apartment has damage caused by a pet, it's enough money to cover it.  Again, read carefully.  If it's a one time fee, you won't get it back. 
 
I have seen pet deposits range from anywhere from $150 to $400.   Having said this, paying an extra deposit for a pet may open up a lot of buildings that wouldn't allow pets otherwise and given the real impact of damage, this may be reasonable to pay.  Again, just be aware of it and always read your lease thoroughly.


Manipulating rent control:

In my article on rent control, I have mentioned how some Landlords may use a parcel not controlled by rent control such as a parking spot to adjust the effective rent of the apartment + amenity to market.  I used the example of a parking spot.  For example, let's say the market rent on a given unit before the crash was $2,700 with an additional $200 for parking.  After the crash, the market will only bare $2,550 for the unit.   Instead of reducing the rent to $2,550, the Landlord offered the rent at $2,700 and reduced the parking to $50.  Tenants need to be aware that when the market comes back, the landlord can adjust up the rent on the parking spot all at once.  Likewise, since it's a separate parcel, you don't have to take the parking if that occurs.  Presumably, however, the Tenant rented an apartment with a parking spot because he/she has a car.  A car is a luxury and unfortunately, this is one of the consequences of owning a car in an urban environment.  Tenants should consider things like using Corner Cars or Zip cars to reduce costs and give themselves more flexibility. 

I have also seen this technique used with storage space.  A Landlord is renting an old building superintendent space - a basement unit.  Along with the tiny apartment, the Landlord rents a sizable storage space in basement to the same Tenant that he uses as a living room (he cannot sleep in it).  The storage space is not subject to rent control and can be adjusted at will.  If the Tenant does not want to agree to the increased rent on the storage space, he doesn't have to rent the space however his effective living space would be cut in half and the building could rent that storage space out to anyone who wants to rent it.

Technically, the same technique can be used with things like refrigerators.  That is, the landlord is not obligated by law to provide a fridge.  (In the state of NJ, they have to provide a stove for safety reasons but no other appliances)  They obviously often do to make his/her unit attractive in the marketplace.  They could charge a separate rent for the fridge on top of the rent.  Renting kitchen appliances is, in fact, common in places like Canada and Europe since appliances have to be replaced over time and are considered durable but consumable goods.  The Tenant is free to say he/she doesn't want to rent the fridge and then what is the Landlord going to do with the refrigerator??  If renting the apartment were contingent on renting the fridge, it very well may be ruled as apartment rent and may not hold up in a court of law.  The only way to know if it would hold water is to have it contested in court.  Your guess is as good as mine on how a judge would rule on this. 

This is just some food for thought based on my observations.  As always, you should consult an attorney on all of these matters.

Hire a good agent:

All of this is good reason to hire an agent as a "Tenants Agent".  Agents are sometimes criticized for not pro-actively raising these issues.  Renters need to understand the different types of agency.  If you are not signing an agreement where you commit to using a particular agent for a given period of time, you are interacting with the agent as a transaction broker ie asking for assistance with the completing the standard state approved lease form (that doesn't cover custom terms) and the underlying legal assumption is that the Tenant has done his/her own due diligence.  An agent is not obligated to proactively raise these concerns and it's cost prohibited to do so without a commitment from the Tenant to use the Agent exclusively.  Many Agents don't want to work with Tenants because of how disloyal (perhaps naively) they can be.  A renter goes from agency to agency looking for rentals and education on the process.  Unless there is a commitment, the agent can't afford to provide all of this guidance for free.  They need to move quickly to paying clients. 

Commit to an Agent by signing an agreement and they will not only willingly provide guidance, they will be legally obligated to do so.

The rent control article tells you more about Hoboken's Rent Control Ordinance.  It also has a legal description of what the differences are between the types of agency.

Here is the article on Hoboken Rent Control.  
Rent Control Article


Information Provided by Donna Antonucci
Prudential Castle Point Realty
201-240-6832

donnaantonucci@gmail.com
http://www.hobokenrealestatemonitor.com/
http://www.hobokenrealestatevalue.com/



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