Your Guide to a Basic Rental Agreement
Meta Description: Individuals who want to diversify assets and earn money often decide to become landlords. After all, in addition to earning monthly rental income, rental property often appreciates in value over time. To protect themselves from costly lawsuits, most landlords choose to use a basic rental agreement with specific terms. Stock Image: If you are looking for a way to diversify your assets and make some serious cash, you may be thinking about becoming a landlord. Not only are rental properties a good source of monthly income, they usually appreciate over time. Before renting your property to a tenant, you need to have a solid rental agreement. As you probably know, there are thousands of rental agreement templates online. You must be careful with form contracts, though, as they often fail to comply with state and federal laws. If you use a form, be sure you get one from a reputable source. In this article, we give you some fundamental information about rental agreements. While there is no substitute for competent legal counsel, you can use this guide to create your own basic rental agreement. Please note that while we provide you with some important information, nothing in this article constitutes legal advice. You should always seek competent legal counsel before creating or executing any contract, including a basic rental agreement. What Is a Rental Agreement? You may hear the terms lease agreement and rental agreement used interchangeably. While similar, these two agreements are fundamentally different. Both lease and rental agreements are legally binding contracts between landlords and tenants. As such they are often completed before a tenant begins to occupy a landlord-owned property. A lease agreement is a contract that defines the landlord-tenant relationship. These agreements usually have a term. Most are for 12 months, although some can be for longer or shorter periods. A lease agreement outlines the responsibilities of both parties. It also usually indicates how much rent is due and when the tenant should pay it. A rental agreement also describes the landlord-tenant relationship. Unlike a lease agreement, though, a rental agreement usually does not have a specified term. Instead, most rental agreements are month-to-month contracts. Rental agreements often expire at the end of the month and are renewed only when the tenant pays rent for the next month. While the title of your landlord-tenant agreement matters, it is not dispositive. Courts usually look at the text of the contract to determine if it is a lease agreement or a rental agreement. The distinction matters as different laws may apply to each type of contract. As a landlord, you must decide whether you want a lease agreement or a rental agreement. While leases are more common, landlords often use rental agreements in two important situations. First, rental agreements are commonplace when securing a long-term lease is difficult or impossible. Second, they are popular for landlords who own property in areas where rent amounts are on the rise. Because rental agreements are usually month-to-month contracts, landlords can renegotiate rent amounts without having to wait for a long-term lease to expire. Why Do Landlords Execute Rental Agreements? As mentioned above, rental agreements can be advantageous for landlords. In addition to allowing landlords to rent hard-to-rent properties and renegotiate rent amounts, landlords execute rental agreements to protect themselves and their properties. To be effective, rental agreements must be legally binding. Remember, most property law is state-specific. Therefore, you should make sure you understand the landlord-tenant jurisprudence in the place where your rental property is located. Generally, though, for a rental agreement to be binding it must include the three elements of a contract: offer, acceptance and consideration. The offer in any rental agreement is occupancy of the property. This may include living in a home or using its land. A renter may also occupy a property by having exclusive right to be there even if he or she prefers to stay away. Landlords and tenants signify they accept the rental agreement by signing it. Therefore, for a rental agreement to be binding, it must list the parties to the agreement. The parties are, of course, the landlord and the tenant or tenants. In most places, the agreement must be signed by all parties to be enforceable. Consideration is legalese for giving up something. The rental agreement requires the landlord to give up the property for use by the tenant. The tenant must give up rent each month. Finally, the rental agreement must be sufficiently specific to relate to the property. That means they usually include the address or legal description of the property. It also has specific information about rent payment and other details. You should know that in most places courts construe rental agreement ambiguities against the party that drafted the rental agreement. As the landlord that is probably you. Therefore, you should be certain your rental agreement is as clear as possible. This is often the source of the problem with form rental agreements from the internet. Since these agreements are written to be general rather than specific, they create ambiguities that end up causing headaches for landlords. What Terms Should Be In Rental Agreements? While any basic rental agreement must have the essential contract terms that demonstrate offer, acceptance and consideration, diligent landlords often include other essential terms to better protect themselves. While the following list isn’t exhaustive, it includes some important language for rental agreements. Here are six additional topics we think your basic rental agreement should cover. 1. Security Deposit Language A security deposit helps you manage risk. Essentially a tenant pays a certain amount up front. You hold this money in trust and use it to make any essential repairs after the tenant vacates your property. Most landlords ask the tenant to pay one month’s rent as a security deposit. Remember, you generally cannot use the security deposit to cover ordinary wear and tear. You also can’t use it for scheduled maintenance that is your responsibility. Because security deposits often get landlords in legal hot water, you should speak to a property attorney before withholding any money from your tenant. 2. Subleasing Clauses As a landlord you want to have as much control as possible over your property. You may not want your tenant subleasing to someone else. By including a subleasing clause in your rental agreement, you define the conditions in which a sublease is appropriate. You may even choose to forbid subleasing entirely. 3. Maintenance Obligations When your tenant is using your property pursuant to a rental agreement, you want to be sure he or she maintains it. Detail in writing the maintenance obligations. This should include maintaining landscaping, abiding by noise ordinances, avoiding nuisances and other restrictions. Note, though, that as a landlord you have some maintenance requirements. If the house needs a new roof, for example, you probably have to put one on. If your tenant fails to maintain the property, you may be able to initiate eviction proceedings. If you fail to maintain it, you may be responsible for costly damages. 4. Warnings Because you own the property you have insider knowledge about it. If you know of a dangerous area, you likely have a duty to warn the tenant. While warning tenants of concealed defects is your responsibility, it is a good idea to make repairs before the tenant takes occupancy. 5. Termination Your basic rental agreement should outline the terms by which you have the right to terminate the rental. It should also describe the process for providing notice should the tenant decide to end the rental relationship. Remember, most rental agreements are month-to-month contracts. As such they naturally terminate at the end of the month if the tenant fails to pay for the next month’s occupancy. Requiring your tenant to give you notice prior to ending a rental agreement that ends on its own could be legally significant. That is, a court may view your rental agreement as a lease agreement. Therefore, collaborate with a real estate attorney to know how to end a rental agreement properly without triggering legal ramifications. 6. Post-Occupancy Matters All rental agreements should cover a few post-occupancy matters. Generally, you want to alert tenants to any additional costs. Often landlords choose to charge tenants a cleaning fee after they vacate. Deducting this amount from the tenant’s security deposit may be possible, but it may also be illegal. You may also want to inform your tenant of how you plan to dispose of any personal property he or she leaves behind. Laws can be strict in this area, so you must make sure you fully understand the rules and regulations in your area. Why Should You Get Your Basic Rental Agreement Right? Rental agreements are legally binding contracts. As mentioned earlier, most ambiguous terms in rental agreements are construed against landlords. Moreover, renter advocacy organizations exist in virtually all cities and states across the United States. That means your renter will likely have access to resources that can give you headaches. Your best bet for protecting yourself from a lawsuit is to have a good rental agreement. By including basic terms and some additional ones, you can likely draft an enforceable contract. Because online rental agreement templates are usually overly broad, you should resist the urge to use them. If you choose to use a form rental agreement, be sure you trust the source.