Rental and Lease Agreement
A rental/lease agreement is a legally binding document that outlines the arrangement between a landlord/lessor and a tenant/lessee. It specifies the conditions of the occupation of real estate in exchange for rent. This agreement guarantees the lessee, the use of the space, and the lessor regular payments for the space. Since it is a legally binding document, any of the two parties can move to court to enforce any condition outlined in it. Thus before signing, both parties should read carefully and negotiate any clauses in the agreement before signing.
A lease can go by various names, which broadly mean the same thing:
- Rental Agreement
- Rental Lease Agreement
- Lease Agreement
- Lease Form
- Rental Contract
- Tenancy Agreement
- Apartment Lease
- House Rental Agreement
All these terms mean the same thing. Some are commonly used for residential leases, while others are more common for commercial agreements. In some instances, a rental agreement is used when outlining a short-term arrangement while a lease is used for longer-term arrangements.
At the onset, we’d like to make it clear that this guide covers writing lease agreements for you and your tenant. You may have found this guide while searching for an overview on how to secure the first commercial space for your business. Renting your first commercial space and moving your business out of your garage or your backyard shed is a bold move and represents a significant increase in your business’ upkeep cost moving forward. We want to help you by providing you key decision information for securing your first commercial space. As such, we would like to redirect you to one of our other guides here on Business Frame resources in the very near future.
In the interim check out this detailed guide on getting your first commercial space produced by Credit Card Wars.
The Leasing Process
Due to the legally binding nature of a lease, both parties, lessor and lessee, must go about it in accordance with established procedures. This ensures that each party understands what they are getting in and their obligations. This leasing process applies to both residential and commercial properties.
1. Showing the rental space
This is the first step. The tenant needs to view the rental unit and decide if it meets their needs. If it doesn’t, the process ends here. If they are pleased with it, they can proceed to the next step.
2. Filling out a rental application form
This is a very important form. It captures details such as the name of the potential tenant, address, type of business, employment details, income level, and, most importantly, rental references.
Some landlords and property managers may charge a small fee for processing the rental application.
The form offers the landlord the chance to get to know the tenant more. They may call the rental references to gauge the type of person they are or the type of business. They should run a background check, credit check, and any other check they may deem necessary to satisfy their requirements. However, landlords should always be careful of breaching Federal and State anti-discrimination laws.
If the landlord decides that the tenant is a good fit for their property, then the process moves to the next step.
3. Creating and negotiating the lease agreement
Typically, the landlord creates the lease and gives it to the tenant for their perusal. If any clause is unclear, they will discuss it and either clarify it or remove it. This is the stage where either party should pay attention to the small details. Many landlords use online templates without adjusting them to fit their personal circumstances.
4. Signing the lease
Once both parties are satisfied with the lease and understand their rights, obligations, and consequences should they fail to uphold them, they should proceed to sign the document and retain a copy.
5. Handing over the property
The last step is the handover of the property to the tenant. The tenant pays the security deposit and rent specified and starts occupying the space. A pre-move-in rental inspection checklist should be conducted, and any areas of concern noted so that the tenant is not charged for existing damage.
Differences between Residential and Commercial leases
Residential leases are meant to offer the tenant a living space. On the other hand, a commercial lease is entered between a business and a landlord for the purpose of conducting business. The lease may specify the type of business allowed and what is not allowed. Normally, this space should not be used as a living space for any person, including the business owner or the employees.
The law offers more legal protections to residential tenants than it does to commercial tenants. The reason for this is pretty simple. Residential space is somewhere where people live. The space has to be habitable and decent for human beings to live in. Necessities such as water, electricity, heating, security, etc. must be provided. Another reason the law protects the residential tenant is that it rightly assumes that there exists a power imbalance between a landlord and a tenant. For commercial leases, the law views both parties as on an equal footing.
What this therefore means is that for residential leases, the tenant enjoys more rights that will be enforced by operation of the law even when not outlined in the lease. For commercial leases, the business generally enjoys the rights negotiated for and outlined in the lease.
Length of the agreement
Residential leases are generally shorter than commercial leases. It is common to find residential leases going for one and two years. Most commercial leases are long term.
Maintenance and repairs
For residential properties, most of the maintenance and repair works are done by the landlord. In commercial leases, the tenant is responsible for most of the repairs and maintenance required on the premises. The extent of which will be specified on the lease.
Commercial leases are very flexible. Businesses typically spend a lot of time negotiating the lease. Each business has its own unique needs.
What to Include in a Lease Agreement
Leases or rental agreements are not standard forms and vary widely from one landlord to another. Federal, state, and local laws also inform the details that must be contained in such an agreement. However, there are some essential terms that all leases should have. Before we go into the details of what to include in your Lease Agreement, check out this overview of the different inclusions and exclusions in a commercial lease agreement produced by eForms. This will help set the context for the different items in this section.
Correctly identify the Parties to the agreement
The landlord and the tenant should correctly be identified. If more than one tenant lives in the residential property, then all occupants should be named. For commercial leases, the legal entity is normally enough to enter into a legally binding lease. However, some landlords may want personal guarantees from the owner as well.
Contact information of both parties and the preferable mode of communication should be addressed here. For emergency purposes, other modes may be permitted.
Description of the rental unit
The rental unit that is the subject of the lease should be identified. The address and name, if applicable, building number, and unit number.
Term of the tenancy
The term of the tenancy should be stated. For rental agreements that are renewable month on month, this should be enough. For leases, the exact number of months/years should be put in writing. Additionally, the date the lease lapses should be defined.
The amount payable, mode of payment, and the frequency of payments is a vital detail in the agreement. The date the rent is due and what should happen if payment is not made should also be included.
Security Deposit and other fees
Security deposits are often a source of arguments between tenants and landlords. The amount of security deposit needed, when it should be paid, circumstances it should be used for repairs, when the balance should be paid back, and if any interests are due should be clearly outlined in the lease. Landlords should be careful not to breach state laws on this.
If any other fees are to be paid by the tenant, they should be clearly outlined.
Repair and maintenance
Who should bear the costs of what repairs and general maintenance can be a thorny issue. But it is better put in writing. For residential leases, the law stipulates that the landlord undertakes any routine repairs and maintenance works. The tenant is liable for repairs caused by negligence.
For commercial leases, it all depends on what was agreed upon in the lease. The business can take over the maintenance of the premise, or the landlord can do it. It is a major consideration in determining the amount of rent to be paid.
Landlord’s right of entry
As a landlord, you can’t access your property as you wish. You must notify the tenant of the reasons why you want to access the premise and give adequate advance notice. To avoid conflict, the reasons and the length of the advance notice should be provided for in the lease.
If pets are not allowed, it should be clear to the tenant even before they sign the lease. This is a deal-breaker for some people.
Other rules besides no pets such as no smoking, no illegal activity, etc. should be put in writing.
Breaking a Lease
A lease is a legally and mutually binding contract between the landlord and the tenant. In most cases, there will be a clause that stipulates what circumstances can lead to either party breaking the lease. If you want to break the lease early, you may end up paying up rent for the rest of the lease period, which can be very expensive. Check out this 3-minute overview of whether or not there is an obligation to pay uncollected rent after a broken lease.
However, there are some cases not outlined in the lease which allow you to legally break a lease. These are provided for in the law.
- Call to military service
- Landlord fails to carry out necessary repairs
- Moving out as a result of domestic violence, sexual assault, or stalking
- Threats resulting in an arrest from a neighbor with a deadly weapon, and the landlord fails to evict the offending tenant
- Threats from a deadly weapon by the landlord leading in an arrest
In addition to these situations envisioned for by the law, a landlord and a tenant may agree to insert a buyout clause in the lease. The clause will stipulate what each party must do to break the lease, what amount of notice to give, and the amount of penalty, if any, they have to pay the other party.
In some cases, a tenant may want to break a lease due to private reasons that the lease agreement doesn’t provide for. In such a case, you may attempt to negotiate with the landlord to release you from the lease early. You may even offer to help them find a new tenant and cater to the advertisement costs. The landlord is not obliged to accept this arrangement.
Evicting a tenant
Eviction is not a desirable ending of a relationship between a landlord and a tenant, but at times it becomes inevitable. There are several legal grounds for eviction and also a proper way to go about it. Landlords should take care as many have found themselves in trouble for evicting a tenant and not following the proper procedure for doing so.
Grounds for eviction:
- Nonpayment of rent/habitual late payment
- Violation of lease terms
- Causing damage to property through negligence or otherwise
- Disturbing/posing a threat to other tenants
- Carrying out illegal activity in the property
The eviction process
You have to serve the tenant with a Notice to Quit stipulating that you intend to terminate their lease. You must give the grounds for termination and eviction. You’ll then provide them with a notice and the date by which they should have vacated the property. The tenant may decide to challenge the eviction notice before competent authorities.
If, after the said date, they have not evicted the property, you should obtain a court order and then involve law enforcement to escort them out. Trying to evict them yourself is illegal in almost all jurisdictions. Actions like changing the locks or shutting off utilities are unlawful ways to evict a tenant that may land you in trouble.
Sometimes, you want the tenant to remedy a certain violation and not necessarily quit. In such a case, you may serve them a notice indicating the violation and how they should remedy it and let them know if they don’t, you’ll evict them. Such notices include:
- Pay rent or quit notice
- Notice of lease violation
Disclosures that should be made to a Tenant
Federal, state, and local laws require that the landlord make some disclosures to tenants before they sign a lease and move in. These disclosures vary widely by jurisdiction, but there are some common ones. Most landlords include the discourse in the lease agreement, while others offer it as an addendum. The primary purpose of the disclosure is to inform the tenant of some facts about the property. Let’s look at some common disclosures:
- Lead-based paints for houses built before 1978
- Identity of the owner of the property
- Details of the security deposit (like how it will be held and if any interest will accrue)
- Any fees and utility charges separate from the rent
- Any existing damage before the move-in
- Bedbug history on the property
- Murder/death of a previous tenant in the property
- Presence of mold in the property
- Propensity of flooding
Note that some of the entries in this list may not apply in your state. There may also be some additional requirements for your state. Please check local and state laws or consult an attorney for legal advice.
Rights and Duties of both Landlord and Tenant
The landlord and tenant relationship is one bound by duties and responsibilities to each other. Each party must ensure they uphold their end of the bargain to maintain the relationship.
- Receive regular rent payments
- Enter property for inspection, repair and maintenance upon adequate notice and time agreed
- Increase rent in accordance with the lease and the law
- Right to evict a tenant who violates the lease agreement or conducts illegal activity
- Relinquish possession of the property to the tenant upon executing a lease
- Maintain the property in habitable conditions and adhere to all building codes
- Noninterference with use
- Maintain the property to the extent envisioned by the lease and applicable laws
- Manage security deposit and prepaid rent
- Make any material disclosure to the tenant
- Not to discriminate against any tenant
- Take possession of the property for use upon signing of lease and payment of rent
- Privacy and security while enjoying possession
- Contact details of the landlord or property manager
- Right to have their security deposit returned
- Right to have the property maintained and repaired
- Right to adequate notice for any adverse action
- Pay rent on time
- Uphold all terms of the lease
- Not carry out illegal activity in the property
- Not do anything that may interfere with the structural integrity of the property
- Take care of the property and not cause damage through negligence
When arranging leases, landlords must manage their liabilities, assets, income, and expenses effectively. Failing to do so could lead to unprofitable lease terms and ever-expanding costs.
Landlord bookkeeping in relation to leases generally includes the following activities:
- Applying late fees and additional charges to tenants
- Recording monthly rental receipts
- Sending monthly rental invoices to tenants (if applicable)
- Setting rental income funds aside for mortgage repayments, taxes, and other vendor fees
- Reconciling monthly bank statements
- Classifying expenses and capital costs
- Tracking depreciation accrued over the course of the lease
- Reporting changes in owner equity
Any rental receipts you collect should include basic information, such as the tenants’ names, addresses (if you manage more than one property), the amount of rent paid, and late fees applied to the remaining balances. You should also record transaction dates for your records to justify any additional costs you impose on renters or in case of tax audits in the future.
Real Estate Bookkeeping Methods
Most landlords use a regular small business accounting setup. However, there are several methods available.
The most popular is to use accounting software, like QuickBooks. These solutions let you perform most lease-related bookkeeping tasks more easily, such as recording receipts and calculating net income. The software can generate reports for you automatically and provide tutorials specific to the property leasing sector.
Occasionally, landlords use spreadsheet software to record financial transactions, payments, and expenses. However, this method is becoming less popular due to the power of software.
Finally, you might want to consider outsourced bookkeeping. With this option, you provide an accountant with all your financial documentation and they then meet all your statutory requirements on your behalf.
Why Landlords Should Choose Effective Bookkeeping For Lease Agreements
Signing a lease agreement with a tenant is potentially risky. There is no guarantee they will pay you on time, or at all.
Therefore, you should adopt effective bookkeeping practices. Doing so protects you and your business.
Proper bookkeeping also improves your planning and forecasting. When you have more accurate records, it becomes easier to predict your future cash flow and expenses.
Furthermore, it also improves your tax reporting. Tax arrangements on property leases can be complex, but with a systematic approach by professional accountants, you are much more likely to meet all your legal obligations.
Tax Preparation For Rental And Lease Agreements
Landlords renting our properties must report rental income on their tax returns and pay income on it. Authorities classify rental income as any income received on your tax return, regardless of how it was paid to you.
To calculate your tax liability from a lease you will first need to add up your total income. You can do this by adding up all your rental receipts and any additional payments generated by your property.
Next, you need to calculate your deductible expenses. These are all the necessary costs you incur as part of your property rental business. Examples of permitted expenses include insurance premiums, property taxes, mortgage interest, advertising costs, maintenance and repairs.
As a landlord, tax authorities also let you claim depreciation expenses on your capital assets – or wear and tear on your property over time. To do this, you divide the property’s cost basis by its useful life.
For example, if your property’s cost basis was $250,000 and it had an expected remaining life of 50 years, then you can deduct $5,000 per year from your taxable income.
Next, ask whether you can deduct home office expenses from your own property. For example, if you work in your home, you may be able to claim some office expenses back from the authorities.
Once you calculate all your costs, you can then deduct them from your revenues to calculate your net income or earnings from your business. You can then use software or an accountant to tell you how much tax you need to pay.
Landlord Lease Agreement Best Practices
Landlords should engage in various best practices to benefit from the lease agreements they create.
In general, you should:
- Fully understand the law and how it applies in your situation, given your location, business type, and legal history
- Regularly conduct background checks on all your tenants to make sure they have sufficient funds to pay the rent and don’t have a criminal past
- Use a legally-verified template agreement with all tenants to avoid loopholes that could potentially leave you disadvantaged financially
- Tailor-make all your agreements to meet your specific needs, taking into account local market conditions, property type, and your personal financial priorities
- Include all necessary provisions in your rental agreement while avoiding the use of jargon or difficult-to-understand English
Rental/Lease Agreement FAQs
1. Can a landlord and a tenant have a verbal lease?
Verbal leases are recognized by the law but are difficult to enforce in case of a dispute. A court will find it difficult to rely on either party’s account of the lease. It is highly advisable for the lease agreement to be in writing, and for each party to retain a copy.
2. Can a rental agreement be used as a proof of address?
Yes, a lease or rental agreement can be used as a proof of address.
3. I am a landlord; can I include a provision in the lease agreement that the tenant should never sue me?
No, such a provision would be illegal and would invalidate the entire lease agreement. Other provisions that are unlawful include:
- Discrimination of tenants based on race, nationality, sex, and orientation
- Banning of children in the property
- Provision waiving any fundamental obligation, particularly in making the premises habitable
- Provision waiving the right to a refund of the security deposit
4. Can I increase the rent on my property on the same tenant?
Yes, you can increase the rent after a certain period of time, mostly after the lease term and before renewing it. You have to give the tenant notice as per the lease agreement or as per local and state laws.
5. What will happen to the lease if the property is sold?
The new landlord will have to assume the responsibilities of the previous landlord, including relating to the security deposit, all provisions of the lease, and maintaining the property in habitable conditions. The tenant should be notified of the change of ownership in writing.
Lease and rental agreements, like most commercial contracts, are dependent upon putting the circumstances under which the minds of both parties meet onto paper. Presumptions of law favor the tenant in residential lease agreements while the landlord and the tenant are on equal footing in commercial agreements. Whether you are the tenant or the landlord, we hope that this guide has provided you with enough knowledge to make informed decisions when crafting your contract. Put that knowledge to good use by making a copy of this template for yourself!