It has been said so often it is trite but nonetheless true: An oral contract isn’t
Residential Leases
What should residential
landlords not include in their leases? Specifically, a newly-enacted Massachusetts
law prohibits landlords from charging their broker’s fees to tenants.
Focusing on clauses that leases
should include, one stands out because it is so often overlooked by condominium
owners who rent their units. These leases should specify that the tenant is
required to comply with condo association governing documents. Failure to include this language can create
problems for both the condo association and the unit owner.
A common example: A
tenant who has a dog moves into a community that prohibits them. If it was the owner who had the dog, the
board could simply order him or her to remove the pet and impose fines for
every day the owner fails to comply.
But the association has
no relationship with tenants and little authority to enforce association rules
against them. The board can tell the
owner to require the tenant to remove the dog, fine the owner if the tenant
doesn’t comply, and seek a court order, if necessary, directing the landlord to
evict the tenant if the owner doesn’t take corrective action on his own. Here’s where the lease the owner has, or
should have, with the tenant comes into play.
If the lease contains
language requiring the tenant to comply with association rules and the tenant insists
on keeping the dog, the landlord will have a solid legal argument for removal
and/or possible eviction. If the lease
doesn’t contain this language, however, the tenant can argue reasonably that he
was unaware of the no-pet rule. As a
practical matter, many tenants will argue ignorance of the rule even if they
were aware of it. But a ‘compliance with
association rules’ clause will strengthen the owner’s position even in the
housing courts, where judges tend to favor tenants. Likewise, demand letters from the association’s
counsel seeking enforcement of the condominium’s pet restriction can also
strengthen the owner’s case.
·
To protect the association, boards should
require owners who rent their units to:
· Have
written leases with tenants for a term of at least a year;
· Attach
a copy of the association’s governing documents to the lease; and
· Require
tenants to sign a statement acknowledging that they have both received and read
the governing documents.
With or without a lease, the eviction process is going to be lengthy and (for the owner) expensive. But a well-drafted lease with the appropriate language will increase the owner’s prospects of winning an eviction and winning it more quickly, benefiting both the owner and the association.
Commercial Leases
Many clauses in
commercial leases are essential for landlords but in an uncertain economic
climate, a few stand out.
Early Termination
The lease should specify
the damages tenants will incur if they break the lease for any reason before
the end of the term. A standard clause
makes the tenant responsible for the rent and all other costs for the duration
of the lease term. The landlord is typically
required to mitigate these damages by making reasonable efforts to find another
tenant, but this provision doesn’t require landlords to accept any tenant who
applies. A good lease would also hold the current tenant responsible for all
costs incurred by the landlord to re-rent the space (i.e. broker’s commission,
legal fees, cleaning, repairs, etc.).
The language should also specify that if the new rent is lower, the
tenant is required to pay the difference. Instead of making the tenant’s
potential liability open-ended, some landlords specify a flat fee for breaking
the lease (known as a “liquidated damages” clause or “lease break fee”),
requiring, for example, six months of rent at the highest possible rate. Whatever the language, the goal is to ensure
that the landlord will not suffer financially if the lease is terminated early.
Reimbursement of Legal
Fees
Under standard contract
law, plaintiffs are entitled to recover legal fees only if the contract or an
applicable statute allows them. The Massachusetts condominium statute specifies
that associations are entitled to legal fees related to their collection of
common area fees, but no comparable statute applies to lease enforcement
actions in either the residential or commercial rental arena. If the lease doesn’t allow the recovery of
legal fees, landlords will have great difficulty demanding them. This is an issue primarily for commercial
leases; the chances that a housing court judge will order an evicted tenant to
pay the landlord’s legal fees are roughly slim to less than none.
Rent Escalation Clauses
Landlords don’t need a
crystal ball to predict that their operating costs, insurance, taxes and other
expenses will increase over time and they want their rental income to keep
up. In Massachusetts, landlords can’t
impose a rent increase unless tenants accept it. This isn’t a
significant issue for residential leases, which typically have one-year
terms. Tenants who don’t want to accept
the increase must move.
But commercial leases are
written for much longer terms – 10 years is standard. Predicting how much costs will increase that
far out is challenging, to say the least.
One option is to specify that the rent will increase by a specified
amount every year during the lease term.
Alternatively, landlords can write the lease initially for five years
with an option for the tenant to renew for another five years at a rate to be
specified at that time. This approach reduces the time a landlord might be
locked into a rent that doesn’t cover rising costs.
Personal Guarantee
Residential and
commercial landlords vet prospective tenants carefully to ensure their ability
to pay the rent. Residential landlords look
primarily at income, credit reports, employment and rental history. There are
no guarantees, of course. Tenants can
lose their jobs or encounter medical or other financial challenges no one can
predict. But if
things go south over the course of a one-year lease, it’s not the end of the
world – at least, not for the landlord who should usually be able to re-rent
the apartment quickly. For
commercial landlords dealing with 10-year leases, the calculations are more
complicated.
Landlords can verify that
a company is highly successful at the beginning of a lease, but they can’t
predict whether the company will still be successful – or even still be in
business -- after five years or even after a year, for that matter. Conditions can change quickly.
That is why commercial
leases should require a “personal guarantee” making someone responsible for covering
the lease payments if the company does not.
On a long-term, “triple net” lease (including rent, insurance and
taxes), absent an enforceable guarantee, landlords could find themselves out
hundreds of thousands of dollars with little prospect of recovering much, if
any, of that loss.
If you have any questions
regarding landlord tenant law, please contact Dillon Brown at dbrown@meeb.com.
