Ep. #11 - Make Sure Your Lease Protects Your ASSets

Just when you think you’ve heard every ridiculous statement a tenant can make, one says to me last month… “I deposited my rent on Monday the 6th because May 5th was a Sunday and banks were closed, so you shouldn’t charged me a late fee.” – So I proceeded to explain “rent is due on the 1st. It is already late as of the 2nd. But the lease provides a grace period through 6 PM on the 5th before the late fee applies (regardless of what day of the week the 5th happens to fall on). And bank deposit wasn’t the only payment option available to you.” – now thankfully, in addition to this being North Carolina state Law, it’s all spelled out in my lease.

Your rental property is an asset, and your lease needs to protect your ASSets. You need to know your state Landlord and tenant Law and make sure that your lease is in full compliance with the law. But additionally, your lease needs to have certain common sense and likely scenarios spelled out in advance – leaving as little as possible to interpretation, question, doubt or challenge.

I look for quotes I like that relate to the topic of each episode, but I could not find one this week – so I’ll make my own…

“Avoid conflict with your tenants, but should you find yourself in an unprovoked battle, your lease is both your sword and your shield.” – Jonathan Taylor Smith – (having just finished watching Game of Thrones)

Intro…

Welcome to Episode #11 | Make Sure Your Lease Protects Your ASSets
So another one I heard last month from a tenant wanting to go month-to-month instead of renewing the lease for another year was… “Why would you need to increase the rent another 6% just because I want to go month-to-month? That’s not right!” – So I proceeded to explain how our normal increase when signing a new 1-year lease is around 1.5 to 2% (give or take), but if you want to go month-to-month its an additional 6% to help offset the cost of the likely coming vacancy.” – and then I further explained that “we only allow month-to-month occupancy for up to 6 months from February to July. You must then either vacate at the end of July or sign a minimum 6 month lease for August through the end of January of the following year. This is to prevent off-peak (Fall and Winter season) vacancy, which are harder months to find new tenants.” – and again, this is all now spelled out in my lease in advance, including the rent increase amounts and renewal scenarios.

Now this specific tenant was one of the few that had a lease where this was not all stated in advance, as this person has been a tenant for awhile, going back to before I clearly accounted for this scenario in my lease. So I worked out a compromise that we were both happy with, since the person had been a good tenant up to that point and was just unsure of their exact plans for the coming year. But this had recently come up with some other tenants as well, so I had since accounted for this scenario in my lease.

You see, whenever something occurs that is not clearly covered in my lease already, I either add it or change the existing verbiage as needed (reviewed by my attorney) to properly account for the situation going forward. Then as I bring on new tenants and existing tenants renew, I get them all on the latest version of the lease. I actually have a numbering scheme so that I know exactly which lease version each tenant is on. And over time, lease additions and changes have occurred far less frequently as my lease becomes a more perfect document (accounting for most scenarios and situations) to protect my assets, of which I’m referring to both my rental properties and my rental business, Blue Chariot Properties and related companies.

Where did (or should) you get your lease from?

As stated, at this point my lease is highly customized to my specific needs, and those of my clients whose properties I manage on their behalf under Blue Chariot Management. But I first started with a copy of the lease that I had from when I was last a tenant back in 2001. I had also been given a lease by a friend who had a rental property before I got into rentals. Plus, I even found and downloaded a few online, and I was told they can be purchased at Office Depot or Staples. I reviewed each of these and tried to merge them into one document with the basic provisions I liked well enough to proceed. However, at some point I came across the Website at EZLandlordForms.com – which provides state specific leases, in addition to many other useful documents for Landlords. I think the site was mentioned in a book I was reading at the time about being a Landlord. And I’m a Pro Member at BiggerPockets.com – which now also provides state specific leases (although this came after I had already discovered EZLandlordForms.com).

After reviewing all the options, I liked the basic North Carolina specific lease from EZLandlordForms.com – so I started using it after having it reviewed by my attorney. And its a good thing I did, because the customization options (which I love about this system) can create a situation where you’ve added something to the lease that is not permitted by your state law. For example, I selected the option to add a daily late fee and set the amount at $10 per day; however, my attorney informed me (and I confirmed this for myself by reading the statue) that daily late fees are not permitted in North Carolina. So if I had proceeded with the lease containing that provision and ended up in court against a tenant having charged them a daily late fee, it might not have gone well for me.

I was also happy to hear from more than one attorney, that while I could certainly pay them to create a lease for me, it also would be based upon a template (not unlike the one created by EZLandlordForms.com) – which after review was said to be perfectly fine by one, and very good by another.

But will it stand up in court?

Now in full disclosure, I have not had to evict anyone yet, and so my lease from EZLandlordForms.com (and further customized by me) has NOT been tested in court yet. So I cannot say that a judge has heard a dispute between me and a tenant, read my lease as it relates to the dispute (and overall), and then ruled in my favor. But what I can say is that my lease from EZLandlordForms.com (along with my various customizations, which are extensive) has been reviewed by my attorney. And it is that same attorney who is likely to represent me in court, when (or if) I ever end up there. And since this attorney could have charged me to create a lease on my behalf, but instead just charged the time to review and tweak certain aspects of my customized lease as obtained from EZLandlordForms.com – I’m confident it will stand up in court. I also know that my business practices are above reproach, so if I ever do end up in court, I’m certain any judgement will be in my favor.

But then that is also another benefit of having a strong lease along with ethical business practices… It makes it far less likely that I ever will end up in court. Multiple times during the tenant screening and on-boarding process, I tell tenants to read the lease (TWICE) – and make sure they fully understand and agree with ALL provisions. I provide certain critical excerpts from the lease at first contact, and I provide a sample lease for review early in the process.

By the time a person reaches the point of becoming a tenant in one of my owned or managed rental homes, they should be well aware of all rules, policies, procedures and the various lease provisions. They go into tenancy with their eyes wide-open. There is even a line for tenant initials on the lease that confirms they have read the lease in full – TWICE.

This then frames all conversations and potential conflicts in the undeniable fact that the matter is likely already covered in the lease to which they agreed and confirmed to have read TWICE before signing. I can thus respond to any such matters (always in writing through our ticketing system, NEVER by phone) with the exact page and bullet point number that the lease speaks on the matter and how it is to be handled, who is responsible for what, etc… If necessary, reminding them that they signed this lease after initialing that they had read it TWICE – so none of how this is to be handled should be any kind of surprise to them, and so if they don’t agree with this handling, why did you sign the lease and proceed to occupy the home?

Therefore if dealing with even a moderately reasonable person, while having ethical and professional business practices, speaking and treating people with respectful kindness and following the lease to the letter – it is unlikely to end up in court in the first place. A reasonable person would not likely push things that far knowing their going to lose in court and then have to pay all the court and legal fees on top of whatever the original dispute was.

But reasonableness needs to exist on both sides of any contract…

A contract (which is all a lease really is) provides a frame work for setting expectations, establishing policies and procedures, handling disputes, penalties, remedies, etc… And while I mentioned the need to follow the lease to the letter, there should be room for reasonableness on both sides of the contract. Now there is a need to treat everyone equally, so as not to violate fair housing regulations – but at the same time, I do make room for the occasional exception (in the tenant’s favor) as to how a potential dispute may be handled. YES, the lease can be your sword as suggested in my earlier quote, but a sword is not the best means of handling every dispute… You know, “he who lives by the sword, dies by the sword.”

An example of an exception I’ve made… My lease has a provision that the tenant is responsible for the first $50 of any repair; and they are entirely responsible for any repair that falls below this amount or that was caused by negligence or abuse on their part or by their visitors or guest (regardless of the amount). This provision provides an incentive for the tenant to treat the home with care. They cannot just treat the home any kind of way, break things and then make a repair request and expect for it to be handled solely out of my pocket. It will either be their responsibility to handle entirely, or they will be charged $50 towards the repair cost (which then becomes rent due in the subsequent month, and treated as late rent if not paid).

But in many cases when a tenant makes a repair request, with all else being good – I may choose to handle the repair on their behalf (without imposing the $50 fee as a goodwill gesture). But make sure to point out in the lease where I was within my right to do so (and likely will be imposing the fee the next time). So even when it is reasonable for me to NOT follow the lease, I make sure to point out when and why I am electing not to do so (in writing) – to avoid any claim of equal housing violation or favoritism or anything like that – and to make it clear that this is NOT an established precedent of me ignoring the lease, but a one-time or limited goodwill exception. And if I ever did end up in court, showing a willingness to make a reasonable goodwill exception further increases my likely-hood of prevailing in court – as the reasonable party on the right side of both the contract and law.

So I don’t want to be a bully or otherwise unreasonable, but most Landlord / Tenant conflicts can be avoided and your rental property (which is your asset) protected, by having well established policies – that your tenant fully understands and has agreed to. And if you do make an exception to those policies, make it seem as if you are rewarding their otherwise great tenancy – and that you are doing so as a one-time or limited exception.

For example, last year I had a few incidents of tenants making me aware a week or so before rent was due, that they would not be able to pay the full amount, and would therefore be late. Two of these tenants had never been late before. In each case I informed the tenant that I must impose the late fee as detailed in the lease, which is 5% of the total rent due. But if they paid at least 1/2 of the amount by the 5th, as a one-time exception for their first time being late (and having let me know in advance) – I would allow them to pay the remaining amount along with the following month’s rent, without sending or posting the 10-Day Pay or Vacate Notice. And I would therefore not pursue eviction on the 17th as stated in the lease, but the late fee would still apply.

One tenant took me up on this offer, paying 1/2 of that month’s rent; and they did pay the remainder along with the following month’s rent on time, including the prior month’s late fee. The other tenant somehow found a means to pay their entire rent on time, no doubt to avoid the late fee. Had I been willing to waive the late fee, they would have certainly been late that month also – but I became a higher priority in their finances when learning it was going to cost them an additional 5% (which is a LOT, if you are already struggling).

But there was also yet another tenant in this same situation. And that tenant had a history of having been late (often). So in their case, I thanked them for letting me know in advance, but I did not make the offer to allow them to pay 1/2. Instead, based upon their established track record, I told them the entire amount would be due by the 5th, or they would get a 10-Day Pay or Vacate Notice on the 6th and my attorney would have to file for eviction on the first business day that is on or after the 17th. And as had become common for this person, they did not pay their rent by the 5th, they got the notice on the 6th – but they did pay in full before the 17th, so we did not have to pursue eviction.

So now because of tenants like that one who frequently pay late, my lease has been updated to state something to the effect of “multiple occurrences of late rent payment during the lease term may result in lease non-renewal and requirement to vacate or if renewal is offered, it will be at a higher rent increase of 3% instead of the typical 1.5% to 2%.” – so I am giving them even further incentive to pay rent on time.

You need to learn from the past to improve the future…

Each time I have a new occurrence with a tenant that is not well or best covered by my current lease version, I update the lease accordingly – and run it by my attorney. I also adjust my business processes (as it relates) to improve upon or prevent the situation going forward. I mentioned in last week’s episode on accepting Section 8, that most of my custom lease provisions originate from two problem tenants. But everything I’ve experienced in the past has in some way adjusted what I do and how I run my rental and management businesses going forward. It truly is “whatever doesn’t kill me (or put me out of business), makes me stronger.”

I learn from every occurrence of the past and present to improve my future. And whatever I could have done differently (hindsight being 20/20), I make the adjustment. And where that adjustment relates to my lease, I make the change or improvement there as well (getting the blessing of my attorney) – and then work to get all tenants on that latest lease version upon renewal or new tenant placement. And if it were something urgently critical, I guess I could also require the signing of an amendment – although I’ve yet to do so.

So always be working to improve your rental business and the lease that supports that business and helps to protect your rental home asset. Or for a shameless plug, if you are located in Raleigh / Durham (the Triangle area of North Carolina), you can hire me and Blue Chariot Management to apply our learned expertise and put our latest lease version to work at protection your renal home assets to avoid the effort of having to do so yourself.

So how will you handle your lease?

Again, I recommend BiggerPockets.com or EZLandLordForms.com (that’s the letter E and the letter Z). Both will give you state specific leases. And there is a small fee for both. BiggerPockets requires a Pro level membership, but if you are serious about Real Estate Investing, you should likely have a membership and be active on BiggerPockets anyway. EZLandLordForms.com is less essential to your day to day mastery of Real Estate Investing, but its ease of customization and all the additional forms it provides makes it well worth the cost.

Additionally, EZLandLordForms.com provides eSigning ability, and literally every form you may ever need to send your tenants, in an easy to use system supporting full customization. But with either option, BiggerPockets and EZLandlordForms.com – you’ll be getting a state specific lease that is attorney reviewed, and you can customize it as needed. The customization is just a little easier with EZLandlordForms.com. So make sure that you have your own attorney review the lease along with any customizations you’ve made.

Then go above and beyond to make sure that your tenant reads and understands the lease and has no means of saying otherwise, should you ever end up in court. Make sure all your communications are in written form that is automatically dated, time-stamped and preserved. And in such communication, refer back to the specific page and provision of your lease that relates to the matter being discussed.

And if for any reason you should alter from the handling as detailed in your lease, make sure the precise reason for doing so is explained. And do so in a manner that prevents it from being seen as a precedent for future handling or anything that could be considered a equal housing violation. You can’t be seen as treating one tenant differently from another, especially where it could be said to be based upon discrimination, bias or favoritism for or against a protected class. Such as, you can’t hold true to your lease provision against pets, in a multi-family property for example – and then allow one tenant to have a pet, while denying the same for another (that is excluding the completely separate topic of service animals – OMG).

So I could go on, but I think you’ve got the idea…

Just make sure to keep your lease up to date, and improve it as you go to account for the various situations you have and will encounter as a Landlord – because to paraphrase the great man I quoted earlier in the podcast,

“… your lease is both your sword and your shield.”

And a closing quote from Sarah Strohmeyer…

“Life is a Lease and God is the Landlord.”

Closing…
Disclaimer…