Some Questions & Answers

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Q1

Can I ask a tenant to move out (in 30 days) so that needed work may be done on their unit? No current lease or rental agreement is in effect.

A1

There is always a lease or rental agreement in effect. If there is a written document, it likely has a clause that makes it a month-to-month tenancy upon expiration of the original term. If there was no written document, it is an oral lease agreement, with terms that were agreed by the parties and, if it goes to court, the terms that are best proved by circumstantial evidence or whichever party is the better liar.

However, the above being said, if the lease is currently month-to-month, most states do require a 30-day notice of termination. Some states require a longer notice period under certain circumstances. In most (not all) states, no reason for termination need be provided to the tenant and it is usually best to not provide one that might be turned into a fair housing complaint.

Even if there is no written documentation, you should definitely give a written termination notice and serve it in a manner that provides proof of service. This can be either by delivering it in person or via Certified Mail. In either case, it is best to also mail a copy of the notice via a Certificate of Mailing, a PO service that provides the sender proof of mailing without giving the recipient a chance to reject acceptance of Certified Mail.

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Q2

I want to evict tenants (Oregon). How do I do it? They are new tenants that have violated the terms of the lease by having more people and by smoking in the unit, both things not allowed.

A2

What you can do depends on clauses in your lease agreement. The fact that they are new tenants would usually be irrelevant. What counts is whether the tenants materially violated one or more unambiguous clauses in the agreement. If they are month-to-month tenants you can simply terminate the lease with 30 days notice without any reason being given. You could also increase the rent with 30 days notice to allow for damages.

Assuming that they did default on the lease agreement, you will first need to properly serve them with a “cure or quit” notice (not necessarily the exact legal name under Oregon landlord-tenant law). I do not think Oregon allows for an “unconditional quit” notice for such violations as you list, so you cannot necessary evict them. A “cure or quit” notice in Oregon must give the tenants 14 days to cure the default and an additional 16 days to vacate (10 days to remove an illegal pet). If the default is not cured within the 14 days and the tenant has not departed within the following 16 days, you can then begin an eviction action.

Practically speaking, the defaults you mention, as I understand your limited description, are such that they may already be no longer in default. Obviously, they could again commit such violations, always curing them before the end of 14 days after notice. Accordingly, you need to always immediately serve the notices upon first knowledge of the violations. If there are a number of repetitive provable occurrences, it is likely that a judge would allow an eviction even though the violations are always cured within 14-day period. This is something that you could ask of an attorney who regularly does evictions in the court of jurisdiction and such an attorney would likely have a good idea of how many such repetitions might be required.

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Q3

On 6/4/11 the City of Chester, Pa notified me that I am delinquent in payment of the 2000 and 2001 Trash Collection Fees for my rental property. This is my only notification from the city. Is there a Statute of Limitation on this bill?

 A3

It is my understanding that there are four categories of debt collections and each has their own statute of limitation under Pennsylvania law. For oral agreements it’s four years, for written agreements it’s six years. For contract notes (such as mortgages) it’s four years, and for open accounts (such as credit cards) it’s six years. After these periods expire, the creditor can still request payment, however, he usually has no potential for punitive action recovery – i.e., via a lawsuit.

I would think that a city trash collection account would have required a written agreement when signing up for service, but such is not always true. However, since 2001 is considerably longer ago than the longest statute of limitations period, the category is likely immaterial.

The fact that this is your first knowledge of the debt may be irrelevant and a judge may believe the city over you if it claims that not to be so – after all, government entities are considered by some to be efficient and truthful.

The above being said, when dealing with a government entity, there may be other issues. For example, the entity might have a lien right against the real estate and such a right might not be subject to statute of limitations periods. It is possible that a government entity is specifically exempted from the statute of limitations laws even if it doesn’t have a lien right.

You do not specifically mention whether the account was in your name or in the name of a tenant, with the city attempting to collect from you even though you did not agree to the account. The latter is allowed in some jurisdictions, but not in others. From the wording of your question, I’m not certain that the alledged delinquency occurred during your period of ownership.

You also do not mention the amount of the city’s claim or whether they are including possible late charges and/or interest for all those years. The first thing you need to do is decide whether the amount the city claims you owe is worth fighting about, particularly if the amount is greater than the maximum small claims amount allowed, which I believe is $8,000 in PA, except for Philadelphia where it is $10,000. If the city’s total claim is for less than this amount – and I certainly hope it is – you could test things in small claims court at relatively little cost, even if you first spend a relatively few dollars for a consultation with a competent attorney experienced in the subject matter. If the claim does not qualify for small claims court, the cost of contesting it will increase substantially. When dealing with government entities it must always be remembered that they have essentially unlimited taxpayer funds (some coming from you) and likely have staff attorneys who may have less than enough to do to justify their salaries. It’s possible that you could even be subject to city legal costs if you lose.

There may be other issues that are material to the problem.

If you have not sat down with the appropriate city trash collection person, preferably someone at the supervisor level, I suggest that you do so in order to determine just what their options are (e.g., do they claim to have lien rights), how aggressive they intend to be, and whether some significantly reduced settlement is possible. After you fully understand the city’s position, you can decide what to do next.

A Tip for Better Rent Collection

Never Give the Tenant a Reason Not to Pay Rent

Collection of rents is arguably the most important issue related to property management. Most landlords depend upon the monthly rent to cover mortgage payments, property taxes, and other property expenses. When tenants fail to pay rent, these landlords may find themselves scrambling to cover these expenses.

First and foremost – follow the law. The legal relationship between landlord and tenant is spelled out in state statutes, local ordinances, safety and housing codes, common law, contract law and case law. Each party has obligations to the other that must be fulfilled. Both landlord and tenant have a duty to treat each fairly and to act in good faith.

Of particular importance are two rights given to tenants under law that could affect the landlord’s ability to collect his rent. The implied covenant of quiet enjoyment is basic to all leases. It ensures that the tenant’s possession of the property will not be disturbed by the landlord acting or failing to act in a manner that seriously interferes with or destroys the ability of the tenant to use the rental premises.

The implied warrant of habitability provides the tenant decent and sanitary rental housing at the time of rental and throughout the tenancy. A breach of this warrant violates housing codes and may cause constructive eviction of the tenant, allowing the tenant under statute to withhold rent, repair and deduct damages from the rent, and/or recover other damages.

It is possible for both rights to be violated at the same time. For example, if the landlord causes the rental premises to become uninhabitable, such as allowing unsanitary conditions, waste, or nuisance, the landlord has committed a breach of the lease agreement and may have caused constructive eviction of the tenant. By his breach, the landlord may have given the tenant the right to withhold rent, terminate the lease, or both.

Disputes between landlords and tenants must be resolved by prescribed legal means, not through unilateral actions.

State laws govern most rent issues and the laws vary significantly among the states. There may be statutes regarding the amount of rent that can be charged (in rent control jurisdictions), the amount of deposit that can be required, when and where to pay the rent, grace periods, late rent charges, returned check charges and rent increases. These laws will apply unless the landlord’s lease agreement stipulates different conditions that are not in conflict with the laws. Once the landlord understands what is required by applicable landlord-tenant statutes, he can write his lease agreement to meet or exceed legal requirements in order to better protect his business interests including collection of rents.

A landlord must thoroughly understand his lease agreement and apply the lease terms uniformly and firmly to all tenants who have signed that lease agreement. While the landlord holds the tenant responsible for the terms of the lease agreement, the landlord must hold himself equally accountable under the lease agreement for his duties and responsibilities.

The lease should clearly define all issues related to rent in order to avoid misunderstandings and disputes with the tenant at a later date, perhaps when the payment of rent has already become an issue.

The lease agreement should have clauses that clearly address the issues of:

• Amount of rent
• Due date
• Grace period, if any
• Type of funds
• How/where to pay
• Late charges
• Returned check charges

Lease agreements must include tools for enforcing timely payment of rents and management of the property. For example, if default provisions aren’t adequate, the landlord may be unable to evict a tenant who defaults on rent payments or other lease obligations.

Communication about rent rules is crucial to getting the rent money. Clearly defined rules help the tenant understand what is required and the consequences of non-performance. Landlords must not be afraid to ask for their money and to follow through with appropriate action if the tenant defaults.

There are some landlords who, as long as they receive the rent within a week or two of the due date, don’t make a big fuss about rent collection. They allow the tenant to develop bad payment habits by not enforcing the landlord’s own rent rules. Lackadaisical behaviors by landlords contribute to unwanted tenant behaviors. If rent collection is not important to the landlord, it will not be important to the tenant. Some tenants take maximum advantage of permissive rent collection. Until rules are enforced by applying consequences to undesired behaviors, the tenant will remain convinced that if he ignores the landlord’s requests the landlord will go away and perhaps even forget about it. Control has passed from the landlord to the tenant. Professional property managers recognize this issue and have standard procedures in place to fairly and consistently enforce the rules for all tenants. Tenants obey the rules because there appear to be serious consequences.

The process of evicting a tenant for nonpayment of rent is usually among the quickest and most streamlined of all legal proceedings in most states, assuming the legal procedures are properly followed in a timely manner. A common mistake is that the landlord delays taking action against tenants when they default on their lease or cause problems for other tenants. A “pay or quit” notice should usually be served on a tenant the day after the rent is due or after any grace period provided in the lease or by law. If the tenant fails to pay by the end of the notice period required by state law the landlord should immediately begin eviction.

Landlords are justifiably concerned that serving the “pay or quit” notice immediately may alienate the tenant or create unwanted disputes about maintenance or other issues regarding the tenancy. They hope that waiting to serve the notice, on the other hand, may allow the problem to resolve itself because the tenant will eventually pay the late rent.

However, it is best to serve notices as soon as possible. The landlord can always waive the notice if the tenant pays the rent and applicable late charges or cures any other default and can always terminate the eviction process if the problem is resolved only after proceeding to court. Delaying action only increases losses in the case of a tenant who will never again pay the rent and will cause additional financial and/or other problems for many other types of defaults. For example, the longer a tenant is allowed to disturb other tenants, the more likely good tenants will be leaving.

Furthermore, if a landlord doesn’t routinely serve the notice immediately each time a rent is past due, a tenant could claim during the eviction proceedings that the landlord “waived” the right to receive the rent on the first of the month or that you orally “worked a deal” for rent to be paid late. The tenant can even claim that the lease has been permanently modified and that the landlord can no longer demand the rent on the first of the month because he accepted the rent late and did nothing in the past.

When you always serve the “pay or quit” notice promptly you maintain complete control of whether to allow the tenant additional time to pay the rent or not. There should always be a written agreement when giving permission for late payment.

Some Questions & Answers

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Q1

Can you provide information on foreclosure vs. short sale for rental properties we own and cannot get the loan modified to rent?

A1

You have asked a question which would require thousands of words to adequately answer because there are several separate primary issues involved and each potentially involves a number of secondary issues. Primary issues include impact on credit record, income tax consequences, and, depending on the state and other factors, the possibility of deficiency judgments from lawsuits against you by the lenders.

I will briefly discuss some of the issues, but for a complete understanding of all the issues using adequate facts related to your particular situation and for your particular state, I strongly advise you to consult with a competent real estate attorney of your state and with a CPA or other competent tax advisor.

Credit Record

Lenders will almost certainly report both foreclosures and short sales to the credit bureaus. In calculating credit scores, every negative on a credit report is assessed by three factors: how recently the negative event occurred; the severity of the negative (how late is the payment); and the frequency of negatives (how many times you’ve been reported delinquent on credit obligations).

A recent bankruptcy does the most damage to your score. If lenders report all of your mortgages as in default, the damage to your credit score would be akin to declaring bankruptcy on all accounts.

Although a short sale, where the lender agrees to take less than owed on the mortgage, will drop your credit score as much as will a foreclosure, there is one advantage to it  when a principal residence is involved. This is that you may be eligible to buy a home with an institutional loan backed by Fannie Mae or Freddie Mac more quickly than you would if it went into foreclosure. Borrowers can be considered for loans after 24 months following a short sale if the sale was caused by extenuating circumstances outside of a borrowers’ control, or after 48 months if it was the result of financial mismanagement by the borrower.

The manner in which title to properties are held could affect the impact on your credit score.

Income Tax

The Mortgage Forgiveness Debt Relief Act of 2007 and the recently passed Emergency Economic Stabilization Act, provides for exclusion of up to $2 million of income ($1 million if married filing separately) from debt that’s discharged through mortgage restructuring, or that’s forgiven in connection with foreclosure, for the years 2007 through 2012. The exclusion must be connected with a decline in the home’s value or the taxpayer’s financial condition, and only applies to a principal residence, not investment properties.

There may be other provisions in the law that can help. For example, some or all of that debt may not be taxable if one is insolvent when the debt is cancelled.

Again, the manner in which title to a property is held could affect income tax consequences.

Deficiency Judgment

Depending on the state, there may be the possibility of lenders filing lawsuits and obtaining deficiency judgments following foreclosures. There may also be the same possibility for short sales, so it is important that there be an anti-deficiency clause in the short sale agreement. Since lenders generally net more from short sales compared to foreclosures, they are usually willing to agree to no deficiency action. A few states may prohibit deficiency judgments by statute (modified by court cases). For example, Arizona prohibits deficiency judgments for purchase money loans on one- or two-family homes on no more than 2 acres. For Arizona, the law applies to either one’s personal residence or for rental units.

Again, the manner in which title to properties are held could affect deficiency judgment risks.

Other Options

Some states may provide for other options, so, again you need to seek advice from competent professionals. Competent real estate agents who do significant short sale work may be able to provide information about any state benefits.

Depending upon the specific financial numbers related to particular properties, a lender might also be open to accepting a deed in lieu of foreclosure. This will also have potential income tax consequences and may affect your credit record, but it can be the best solution when possible.

Conclusion

As seen from my very brief discussions of a few of the possible issues, it is important that you make decisions based on your particular situation and on the laws of your state. Given the complexity of the subject, do not attempt to deal with this situation on your own.

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Q2

The tenant that signed the lease (WA state) has a girl friend that will be moving in in a month. Should we have her sign the lease and run a check on her also? What are the benefits and the downside?

A2

The basic rule is that every adult (18+ and emancipated minors) who will reside in a unit should have been checked using every screening method used for any applicant – i.e., identity verification, credit report, eviction record search, criminal record search, and inquiry of previous landlords. This applies to both original applicants and those added at a later date. Every adult applicant should be required to sign the lease, both original occupants and those added later.

Identity verification is a primary screening mechanism, as it is of no value to end up with great reports on an identity thief. Also, a credit report alone is not sufficient, as a convicted drug dealer who is successful in his business and would continue in his business while residing in your rental unit can have an excellent credit record and pass all other screening checks.

Screening every potential occupant reduces the chance of ending up with a very bad tenant if/when the only screened one skips, dies, or files for bankruptcy. Requiring every adult occupant to sign the lease provides additional people to go after if there are later problems, as each lease signatory should be jointly and severally liable for the terms of the lease, including for unpaid rent and damages. Also, having adequately screened each lease signatory provides information that can be useful if/when occupants skip.

Screening every occupant and requiring each one to sign the lease has many upsides. I know of no downside. There are likely landlords who purposely do not have all occupants sign the lease because they mistakenly think it will be easier to evict the non-signing occupants if ever necessary. However, such is not the case because they will have to be removed via eviction if they choose to not voluntarily leave when the lease expires or has been terminated for cause by the landlord, just as will the occupants who signed the lease. The cost of screening should not be a reason to avoid it, as most states allow landlords to charge for processing of applications, including screening and, even when in a state that restricts how much can be charged, the cost is relatively negligible. The time and money for adequate screening are both a lot less than the cost of a trashed unit.

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Q3

My tenant painted the exterior wall without my permission. She wants me to pay for the cost, but on rental agreement she signed indicated that tenants shall not paint, wallpaper, add or change, etc. without owner’s prior written consent. What is the best way to refuse her? Please advise.

A3

Assuming that the lease clause you mention is adequately stated, you should not need to even consider reimbursement for the painting. In fact, if the painting is unacceptable to you – due to color chosen, quality of workmanship, or other reason – you could probably require that the tenant pay you for the cost of correcting the work or even returning the wall to its previous condition. Depending on a number of factors you might even be able to terminate her lease if you wished. However, even if you did not provide written permission, anything you had said related to the matter that may have implied permission, even your prior knowledge of intent to perform the work and not actively protesting the work could negate your right to take such actions against her. In deciding how far to push their rights, particularly when the Landlord has not been significantly damaged, Landlords must always consider that judges do not always worry about legal technicalities. That is, the judge may consider oral notice without your protest to be acceptable in spite of the lease’s requirement of written permission.

Assuming that you did not in anyway orally agree, either explicitly or by implication, that she would be reimbursed, you can simply give her a written notice that she has violated the terms of the lease and that you will not be reimbursing her for the painting. If the work is unsatisfactory and you want to attempt to charge her for the cost of correcting it, you could include that information in the same notice.

Lead-Based Paint Disclosure Penalty Increased

In a final rule published in the Federal Register on June 22, 2011, the Department of Housing and Urban Development (HUD) raised the maximum civil money penalty for failure to disclose lead-based paint hazards. The increase adjusted for inflation as required by the Debt Collection Improvement Act of 1996. The rule increases the maximum penalty from $11,000 (in effect since 1996) to $16,000 effective July 22, 2011.

Considering this recent 45.5 percent increase in maximum penalty, it is worthwhile to review the law which has been in effect since 1996

Under federal law owners and sellers (and their agents) of single-family and multi-unit housing constructed prior to 1978 are required to follow certain disclosure procedures when leasing or selling. The HUD and the U.S. Environmental Protection Agency (EPA) jointly adopted lead-based paint disclosure regulations to implement the Federal Residential Lead-Based Paint Hazard Reduction Act.

The Residential Lead-Based Paint Hazard Reduction Act, commonly known as Title X, was enacted in the U.S. in 1992. EPA regulations implementing Title X as to rental property became effective September 6, 1996 for owners of rental housing containing more than four (4) units. The effective date was December 6, 1996 for owners of housing containing one to four (4) units (including single family homes).

The following types of housing are not covered by Title X:

• Housing certified as lead-free by an inspector certified under a federal certification program,
• Zero-bedroom (efficiencies, studios, dormitories, and single room occupancy units),
• Short-term vacation rentals, non-renewable leases of 100 days or less,
• A single room rented in a residential dwelling,
• Housing designed for seniors or for persons with disabilities, unless children under the age of 6 are regularly present,
• Foreclosure sales, and
• Lease renewals when the landlord has previously provided full disclosure.

Before a tenant or buyer becomes obligated under a lease agreement or a sale contract, the owner or owner’s agent must provide the buyer or tenant with the pamphlet prepared by the EPA titled “Protect Your Family from Lead in Your Home” and disclose to the prospective tenant or buyer and to any leasing or selling agent the presence of any known lead-based paint and/or lead-based paint hazards in the property.

Even if the owner didn’t cause or know about lead-based paint or pipes in a rental building, he/she has an obligation to give potential buyers and tenants notice that such hazards might exist.

The owner must also provide the leasing or selling agent and the buyer or tenant any available records or reports related to lead-based paint and/or lead-based paint hazards in the property.

Every sale contract or lease agreement must include as a separate page an EPA-approved disclosure form containing a specified lead warning statement and required acknowledgments. The form must be signed by all of the parties to the transaction, including the owner’s selling or leasing agent. Sellers, landlords, and their agents must retain copies of the signed forms for 3 years from the closing date of sale or the commencement date of the lease.

Before a buyer becomes obligated under a sale contract the seller must give the buyer a ten (10) day period to conduct a lead-based paint inspection or risk assessment (unless the parties have agreed in writing to a longer or shorter period or to waive such inspection rights).

The EPA and HUD have authority under the regulations to impose monetary penalties – now up to $16,000 – on any landlord, seller, or agent who knowingly violates the lead-based paint disclosure requirements. A violator may also be may be sued for an amount equal to 3 times the actual damages suffered by the tenant or the buyer and may also be subject to criminal fines and imprisonment.

Landlords and sellers have no obligation under the federal regulations to inspect their properties for lead-based paint or to remove lead-based paint or abate any lead-based hazards that may exist on their properties. That is, the federal regulations impose only a duty to disclose known lead-based paint facts.

In addition to the federal regulations, some states and cities also have their own lead paint laws, usually more stringent than the federal, so investors in pre-1978 residential income property should be sure to understand the lead paint laws of the state in which they invest.

While violations of the disclosure requirements expose an owner to potential civil and criminal penalties, the fact that a buyer discovers that a seller knew of lead-based paint hazards and did not make a disclosure, does not invalidate a sale contract, lease agreement, or property transfer and does not give the buyer or tenant a right of rescission after the sale contract or lease has become effective.

In addition to the disclosure requirements described above, there are a variety of requirements at the federal, state, and local levels involving inspection and abatement of lead-based paint hazards if and when an owner deals with lead-based paint issues at their properties.

There are two specific lead-based paint disclosure issues that a buyer should be concerned with. One is the disclosure to the buyer that is required for the sale. The other is the disclosure required when the seller rented to the current tenants. The latter is important because a buyer may be named in a lawsuit for failure of the seller to have provided proper disclosure to the tenants.

If the form indicates that the seller has had any lead-based paint inspection, testing, or remedial work performed, the buyer should be sure to get copies of the reports and/or certificates. If there are any concerns, the buyer might want to consult with an expert to avoid being stuck with many thousands of dollars worth of required abatement work after close of escrow. Regulations of some jurisdictions do not allow an owner the option of correcting or not correcting problems as do federal regulations.

The buyer will want to ensure that the seller provides copies of executed lead-based paint disclosure forms for all tenants. Without these, the buyer could become legally liable due to violations of the law by the previous owner.

If the seller had not followed the law regarding disclosure for each tenant, the seller should be required to obtain them immediately to provide them to buyer soon after acceptance of the contract. However, the buyer must consider that buying a property for which disclosure was not obtained in accordance with the law prior to tenants moving in is not without possible risks. Tenants who were unaware of the hazard may want to now terminate their leases. Considering the potential penalties and legal risks, a landlord should think carefully before arguing with a tenant who wishes to terminate occupancy because of the issue even if the tenant doesn’t have a right to do so under law.

Some Questions & Answers

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Q1

I received a notice from our HOA saying a tenant had a BBQ in the common area which needed moving. I let the tenant know by phone. He ignored calls and now we have HOA fines. Does Arizona law require me to give tenant written notice?

A1

Whether a written notice is required may primarily depend on what your lease agreement says. State law will usually require that the notice be written if the landlord proceeds with a court action based on the notice unless the tenant acknowledges receiving your messages.

Just as important is the issue of whether the tenant was aware of the rule that was broken. Although most generic agreements don’t cover the HOA issue, for any rental property covered by a HOA the tenant should be provided a copy of the HOA documentation, including Bylaws and Rules/Regulations prior to signing of the lease and the lease agreement should include a clause stating that the tenant has read the documentation, agrees to abide by the terms of the documentation, and will be liable for any penalties assessed against the landlord due to violations by the tenant.

If the tenant has not been provided such documentation, a judge may refuse to penalize a tenant for failure to abide by the terms of that documentation, particularly if there is no proof that he was told of the violation and given the period required by law to correct the problem.

Written notice should always be provided along with proof of mailing or personal service for any matter related to any default on the lease or other issue of importance to the landlord, especially any matters that the landlord may want to pursue in court. Unless personally served, the notice should be sent with a “Certificate of Mailing” which gives the landlord proof of having mailed something to the tenant without the tenant knowing of the proof and refusing delivery, as can be done for “Certified Mail.” Use of both proofs is even better.

Oral notices are difficult to prove in court if the tenant claims to have not received the notice. Oral notices are particularly problematical when a landlord leaves a message on the tenant’s voice mail, as the landlord cannot even prove that the message was sent, let alone was received by the tenant. Mailed notices for which there is proof of sending do not usually require proof of receipt because, whether true or not, the U.S. Mail is considered infallible.

Similarly, emailed notices do not have universal court acceptance. While there are ways to prove an email was sent that might be acceptable to some judges, few judges may assign the same presumption of receipt for a sent email as for a sent piece of U.S. Mail.

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Q2

My tenant is breaking a 1-year lease agreement, moving out 4 months prior to end of lease. What are my legal rights for remaining months on the lease and the security deposit?

A2

In general, absent anything unusual in the lease agreement and absent any indication given to the tenant that you are allowing him/her to leave early, you would have the right to hold the tenant to the terms of the lease agreement. This means that you can charge rent for the remaining term of the lease in addition to any damages.

However, many states require that the landlord make reasonable effort to find a replacement tenant as soon as possible, with the definition of “reasonable” depending on a number of things such as the local rental market, the time required to get the unit ready for marketing related to the condition in which the tenant left the unit, and, if the matter goes to court, the opinion of the judge. You can usually also charge the tenant for a portion of any marketing costs and/or leasing commissions paid, with the charge being adjusted for the period remaining on the tenant’s lease after you have begun collecting rent from a new tenant. If the matter went to court many judges would not allow you to collect rent from both the old and new tenants for the same period of time, although the laws of a few states allow the landlord to do so.

Be sure to provide an accounting of the amount of the security deposit not being returned (=deposit less unpaid rent + damages + other costs) within the time required by the law of your state.

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Q3

Can a landlord ask for a pet deposit in addition to 1-1/2 month’s rent security deposit in NJ?

A3

Although you should read the law yourself, my understanding of NJ law is as follows:

It appears that NJ law allows for pet deposits, but the security deposit, including the pet deposit, cannot exceed one and a half times the monthly rent. Furthermore, if the rent is increased, the most additional security deposit money that a landlord can get in any one year is 10 percent of the current total deposit no matter if the rent is raised by more than 10 percent. Landlords should also understand that the word “deposit” means that the funds are refundable if all conditions of the lease are fulfilled.

Although some are of the opinion that one can get around the maximum deposit allowed by simply calling it a “pet fee” rather than a “pet deposit” and clearly state that it is a non-fundable fee, I doubt that this is so. Many states specify that all funds received beyond the first month’s rent are included within the maximum security deposit and, although I haven’t read the statute itself regarding that issue, I would expect that the maximum security deposit in NJ likely includes most items called fees. Furthermore, it is possible that a court would so hold even if the issue is not covered by statute.

It is my understanding that the landlord can charge additional rent for pets, but it would be better to simply charge a higher rent than to have a separate pet rent so as to avoid the issue as well as allow for a higher security deposit without worrying about whether the maximum security deposit must be calculated based on the regular rent without considering a pet rent.

Be sure to remember that no pet fee or pet rent can be charged someone who is in the protected class of disabled under fair housing laws and has an assistance animal.

It is always advisable to utilize an adequate “pet agreement,” either as a stand alone document that is referenced in and made part of the lease agreement or included within the lease agreement itself.

Finally, you should also check with your city or township, as sometimes they have additional rules regarding leases and security deposits. This is particularly true for rental units that are under any type of rent control.

Expenditures – Part 1

In a recent newsletter, we discussed which receipts are income and which are not income and when income must be reported. In this newsletter we will begin a discussion of expenditures. Because expenditures can be of different types with different reporting procedures, the subject of expenditures is more complex than the subject of income. Accordingly, the discussion will be spread over several newsletters, starting with some basics in this issue and those expenditures that are deductible in the year paid.

Deduct, Capitalize, Section 179, Amortize, or Add to Basis?

Landlords make lots of expenditures throughout the year related to operating, preserving, and upgrading their properties. Most landlords know that (1) some expenditures may be expensed (deducted in the year made), (2) others must be capitalized and depreciated over the period specified by the IRS, (3) some that would normally have to be capitalized can, with certain limitations, be deducted under Section 179, (4) yet others must be amortized over a particular period, and (5) still others must be added to cost basis, affecting income taxation only in the year the property is sold.

Personal vs. Business

Generally, one cannot deduct personal, living, or family expenses. Those that are considered Schedule A expenses – including the total of primary and second home loan interest and property taxes; those medical expenses and casualty losses that exceed specified amounts; and expenses related to special events – can be effective deductions if the itemized deductions total more than the standard deduction for the given year. However, for an expenditure for something that is used partly for business and partly for personal purposes, the total cost must be allocated between the business and personal parts and you can deduct or depreciate the business part. Section 179 cannot be utilized for property used less than 50 percent in business.

Prepayment       

You generally cannot deduct expenses in advance, even if you pay them in advance. This rule applies to both the cash and accrual methods of accounting. It applies to prepaid interest, prepaid insurance premiums, and any other expense paid far enough in advance to, in effect, create an asset with a useful life extending beyond the end of the current tax year.

Personal use of rental property

If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. Also, your rental expense deductions may be limited. For a vacation/second home that is rented for a very limited number of days each year, the rules are different.

Partial interest

If you own a part interest in rental property, you can deduct the part of the expenses that is allocated to your interest.

Portion of Property is Rented

If less than an entire property is rented, with the remainder used personally, you can deduct the expenses in proportion to the part that is dedicated to rental use.

Property Rented For Part of a Year

If you convert a personal residence to rental use, you can deduct expenses from the date you change your property to rental use.

When to Deduct

You generally deduct your rental expenses in the year you pay them.

What Is Deductible

To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.

For many rental property expenditures, it is easy to decide whether it can be expensed or must be depreciated. As examples, the cost of repairing a leaking faucet can be expensed, while the cost of building a new concrete block wall around the backyard must be depreciated. However, treatment of some expenditures – for example, the repair or replacement of flooring or roofing – is not always so clear.

Vacant Rental Property

If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. However, as a cash basis taxpayer you cannot deduct any loss of rental income for the period the property is vacant.

Pre-Rental Expenses

You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent.

Depreciation

You can begin to depreciate rental property when it is ready and available for rent.

Expenses for Rental Property Sold

If you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing, conserving, or maintaining the property until it is sold.

Uncollected rent

If you are a cash basis taxpayer, you do not report uncollected rent. Because you do not include it in your income, you cannot deduct it. If you use an accrual method, you report income when you earn it. If you are unable to collect the rent, you may be able to deduct it as a business bad debt.

Some Questions & Answers

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Q1

Is the landlord responsible for the cost of food spoilage if a tenant’s refrigerator breaks down?

A1

Your question says “tenant’s refrigerator.” If the refrigerator truly belongs to the tenant, the landlord would usually have no liability. If the problem resulted from lack of electricity rather than mechanical failure, the landlord would not be liable unless the landlord was personally responsible for the loss of electricity.

However, I think you might mean a refrigerator owned by the landlord and provided by the landlord for the use of the tenant. In this case, it could go either way depending on various facts regarding the refrigerator and to the landlord’s reaction to the event.

One factor would be whether the lease agreement makes the tenant responsible for repairs to the refrigerator and, if so, whether it is legal to do so in the jurisdiction where the rental unit is located for the type of unit involved. In some jurisdictions, landlords are limited in what maintenance the tenant can be made responsible for unless the rental is a single-family home for which there is considerably less limitation.

Another factor would be whether the landlord made reasonable effort to have the refrigerator repaired within a reasonable time after the tenant reported the problem to the landlord. Of course, there could be a lot of secondary issues that would be considered to decide whether reasonable effort was made and whether the delay in repair was reasonable. Issues might include (1) when the tenant knew there was a problem compared to when the problem started – if the tenant discovered his food was spoiled upon returning from vacation, the landlord would not likely be found liable; (2) when the landlord became aware of the problem and the time required to solve it – delays beyond the landlord’s control would likely not make the landlord liable; (3) whether or not the landlord had someone taking care of such issues while the landlord is out of town or otherwise not reachable; (4) whether the tenant ever tried to exercise his rights to have the repair made when the landlord could not be reached within a reasonable time with reasonable effort; (5) whether or not the tenant exercised restraint against opening the refrigerator after discovering the problem before spoilage had begun; and/or (6) if the problem occurs when repair services are not available are in the area where the property is located. Whether or not the extra cost of repair at non-business-hours times might be an acceptable excuse for not getting the matter quickly taken care of would depend on a judge if the matter went to trial.

Regarding items 4 and 5 above, a tenant should be expected to take steps to minimize damages. If the tenant cannot contact the landlord, the tenant could himself call for repair service, pay for it himself, and expect reimbursement from the landlord. If the refrigerator door is not opened, the time before spoilage will be significantly longer than if the door is opened often after the failure occurs.

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Q2

I’m looking for a tenant application form for screening on a commercial building.

A2

I will assume that you are talking about commercial property that will have relatively small to medium size businesses as tenants rather than General Motors or Microsoft. For such property, one usually needn’t have an application form which is significantly different than that for residential. Usually the major differences would be to have lines for providing the business name; the business activities of the applicant business; the names of the principals (the proprietor of a sole proprietorship doing business under a fictitious name, the general partners of a limited or general partnership, the officers of a corporation, the managing members of a LLC); and, in all cases, the names of those who will be signing for the entity.

I assume that you are relatively new to commercial property management, so I’ll mention a few other things regarding commercial leasing that are related to application forms.

For small business tenants, you will almost always be depending on the personal financial strength and the credit and rental history of the individual business principals (and/or one or more guarantors when the principals don’t fully qualify on their own) because the business entity itself will usually have no significant assets. Accordingly, you will want to do credit screening on the principals rather than on the business itself, whether the business entity is a limited liability entity such as a corporation or LLC or is a sole proprietorship doing business under a fictitious name (dba).

If a sole proprietorship or if a general or limited partnership, simply obtain credit reports and perform any other screening (including identity verifications, previous landlord checks, financial condition, etc.) on the sole proprietor or on each individual general partner. If the business is operated by a corporation, LLC, or other limited liability entity you need to do screening on one or more individuals who have the financial condition (individually or collectively) that will make it likely you will receive timely rent payment even when business is bad and who otherwise meet your qualifying criteria.

Different types of limited liability entities may have somewhat different requirements regarding who signs the lease. For a corporation, this might be the President, Secretary, Treasurer, Directors, major shareholders, a combination thereof, and/or any other party or parties necessary to qualify the business to your standards. For a LLC, this might be managing members and/or other members. In either case, managing parties are preferable to non-managing parties because those who are liable may be more careful managers.

One should never lease to a limited liability entity without requiring a personal guaranty from each of those parties who are necessary to qualifying financially unless the entity itself is financially qualified and reasonably certain to be around past the end of the lease period. When I managed commercial properties, I required credit reports (and other screening) on and personal guaranties from at least two officers or directors for corporations and two managing members of LLCs.

For other than sole proprietorships, one should always require written proof of authority for those signing the lease to bind the entity regarding the lease no matter what the financial strength of the business entity. For a corporation, this might consist of the appropriate pages of the Corporate Bylaws or, if necessary under the bylaws, an adequate special Corporate Resolution. For a LLC or similar entity, this might be the appropriate pages of the Articles of Organization, Operating Agreement, and/or Management Agreement. Some entities may also require a specific resolution or other action to bind the entity for specific items such as lease agreements.

For even a general or limited partnership, even though the general partners are by law usually liable for all partnership acts by any one general partner, it is still a good idea to see the paragraphs of the partnership agreement that specify signing authority. This is because a partnership agreement might require the signature of more than one partner in order to legally bind the partnership for certain transactions. Signature of fewer than required partners would bind the signing parties, but may not make the non-signing general partners liable for the lease.

For reasons beyond the scope of this reply, the spouse’s signature should be required along with the principal’s on the lease or on guaranties by any married guarantors.

Finally, be sure that the lease agreement clearly states that the qualifying individuals are personally liable and not just signing on behalf of the business or accomplish this via guaranty agreements.

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Q3

Do you have a sample form for a month to month rental agreement?

A3

There is a “State” Residential Lease Agreement form for each state. The form can be used for either a month-to-month or a long-term rental agreement depending on the ending date inserted into the “TERM” clause. The Word document version can also be modified as needed for specific rental properties.

After logging in, click “Forms by State” under “Landlord Legal Forms,” and select the state of interest.

Advertising Your Rental Vacancy

Hello?  – Any applicants out there? If you’re not getting applications, do potential renters even know you have a vacancy? Are you missing out on rental income because your advertising doesn’t reach your target market? Tenant selection will be a moot point if you do not have applicants to screen and, if you get only one or two applicants, your chances of getting a good tenant are significantly reduced. Your goal is to attract as many rental prospects as you can, sell them on the benefits of your community, and encourage them to complete a rental application for consideration as your next tenant.

Advertising helps you do that. Through advertising you can get the word out to as many people in as many ways possible that you are open for business and welcome the opportunity to be of service.

Most likely your advertising dollars are in short supply and you need the most bang for the buck. Knowing how to advertise and where to advertise is crucial to staying within your advertising budget. Where do you start?

What Works?

What works best often depends on the type of property, location, competition, local market conditions, and even seasons of the year. Most landlords find that it takes a combination of advertising methods to produce an adequate pool of qualified applicants.

Although there are many different approaches to advertising rental properties, a broad approach is the most commonly used.

A broad approach blankets the potential market with information made available to all parties, whether suspects, prospects, or applicants, whether interested or not, whether qualified or not. Newspaper classified ads are good examples of the broad approach to advertising. Using a metropolitan newspaper with a large circulation reaches a great number of readers (newsstand, home delivery, and online) but it is difficult to determine how many of those readers are actively looking for a rental home or searching during the exact period of time that your classified ad is accessible. A disadvantage of classified advertising in major metropolitan newspapers is that it may be expensive.

You may decide that a more defined advertising approach is appropriate for your property and target market. Word of mouth advertising and placing “For Rent” signs on the property are examples of a narrow approach to advertising. A disadvantage of narrowly defined advertising is that it may take longer to fill a vacancy.

Truth in Advertising

Take care not to exaggerate the features of the rental property, puffing it up to impress potential renters. While it might sound good to wax eloquent on the property’s amenities, particularly when the amenities play to the needs and desires of future tenants, the choice of words (oral or written) or even the manner in which the words are spoken can potentially cause problems for the landlord. A landlord can increase his liabilities and responsibilities by his actions and his promises.

Location

Location, location, location – a golden opportunity ready made for advertising. A desirable location is definitely a strong selling point and can mean big bucks for you – if you’ve got location, flaunt it (as long as you’re truthful). If potential renters want to be located there, they are also more likely to want to stay there and they may have friends. Don’t discount the power of “want over need.”

Don’t Forget Curb Appeal

If you’re looking for some free help in advertising your vacancies, don’t forget curb appeal. The exterior of your property gives a pretty good indication of the condition of the interior. As prospects drive by and picture themselves living there, they are also being conditioned to the standard that is expected to maintain the property. If your property is clean, well-kept with fresh paint, pretty landscaping with grass and flowers, cash in on the value of that first impression.

Distinctive Characteristics

Visit your property as if you were a prospective renter. What do you see? What don’t you see? Would your property’s amenities favorably compare with other rentals in the area? Amenities play a large role in the final selection of a rental unit. Ideally your property should have amenities that appeal to the widest market of potential renters. Pools, green-belt areas, game room, or a fitness center can be as important as in-unit laundry facilities, latest model appliances, or reserved parking. Many renters look for properties with easy driving access to major highways while others look for property locations on public transportation routes. The availability of hospitals, medical offices, schools, shopping centers, or other retail businesses may play a part in the decision to “live here, not there.”

Local Markets

Supply and demand in a local market has a direct impact on the depth and quality of applicant pools. Before you adjust your standards determine the cause and effect of such a decision. Adjusting your standards is not the same as deviating from your standard. Don’t risk a fair housing complaint by treating applicants differently. Even if there is only one applicant, you are not compelled to take the applicant if he/she does not qualify under your standards. Installing a bad tenant is a bad decision every time.

Setting market rent is a better strategy for the long-term. However, you may decide to offer “specials” or other incentives to try to beat the competition. Words of caution for this strategy – make sure you can afford to discount the rent and make sure you do not violate any state or local laws regarding such programs.

Rules and Regulations

There are federal, state, and local laws governing most aspects of landlording. Most states have detailed landlord-tenant statutes and some local municipalities regulate certain aspects of rental housing as well. State and local laws are almost always more restrictive than are federal laws. You will be required to comply with the most stringent of laws. Of particular importance to landlords in their advertising is complying with federal Fair Housing requirement Section 804(c).

Section 804(c)of the Fair Housing Act specifically makes it unlawful to make, print, or publish, (or cause to be made, printed, or published), any notice, statement, or advertisement, with respect to the sale or rental of a dwelling, that indicates any preference, limitation, or discrimination based on race, color, national origin, religion, sex, familial status, or handicap. This prohibition against discriminatory advertising applies to single-family and owner-occupied housing that is otherwise exempt from the Fair Housing Act.

Traditional Advertising Methods

These tried and true advertising methods have long been the cornerstone of many landlords’ advertising plans.

• Word of Mouth
• For Rent signs
• Newspaper / Magazine Advertising
• Bulletin Boards
• Local Employers
• College housing placement office
• Military Base Housing Coordinator
• Section 8 Office
• Networking / Landlord Associations
• Mailers – Direct Mail, E-Mail
• Flyers
• Signage
• Websites – your own and/or others
• Vacancy listing services
• Social media networks
• Radio / TV
• Cold calls to local business to generate referrals
• Pay per click web advertising

Evaluation

You should evaluate your advertising effectiveness in order to determine what works and what doesn’t. Keep written documentation of your advertising efforts, including a print copy of each ad placed, the number of responses received from each medium, the number of qualified applicants obtained from each medium, and the cost (including time) of each medium. From this information you can get at least a rough idea of what advertising media are best for your particular property under various market conditions.

Document Retention

You should keep all advertising copy and information regarding responses for at least two years in order to show that you have non-discriminatory advertising policies in the event that a prospect or applicant files discrimination charges.

Some Questions & Answers

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Q1

As a landlord in Baltimore, MD, where can I get information on what I need to know when acting as my own agent to sell my property; i.e., sale by owner? How do I negotiate with another real estate agent representing a buyer?

A1

An owner always has the right to sell the property without hiring a licensed real estate broker – i.e., act as his/her own agent. However, there are reasons why doing so is often not advisable. I will mention a couple of them.

One is, of course, when the owner is not sufficiently knowledgeable and experienced to protect himself/herself in (1) setting the price, (2) qualifying potential buyers, and (3) negotiating a final contract that contains adequate contingencies regarding a number of issues, particularly when dealing with a sophisticated potential buyer who has a sharp agent.

Another is when the property is other than a few residential units. It is usually difficult for someone who is not a licensed agent to obtain sufficient information regarding market value of commercial properties and larger residential properties, which can result in pricing it too high and not obtaining offers or too low and giving away some potential profit. The number of units where this is a significant issue depends on the type of property, the location of the property, and the degree of assistance the owner might be able to obtain from acquaintances who are active licensed agents, appraisers, or sophisticated investors. Also, larger properties are usually sold via networking among licensed agents who have somewhat captive buyer and seller clients. Most owners do not have access to that network or to other marketing tools available to professionals who deal in large properties.

It is possible to end up with a higher net sale price when using a competent experienced agent that more than offsets the commission being paid.

Regarding the issue of negotiating with real estate agent representing a buyer, the best protection is: (1) understanding the process as well as a professional would and acting professionally; (2) pricing the property correctly; (3) providing adequate financial and other information, including a complete detailed info package if it is more than a duplex; (4) try to detach yourself from the personal issues as if you were acting as agent for the owner; and (5) don’t let an agent, who may have done dozens of similar deals, intimidate you or push you into unacceptable terms.

For a review of buying and selling issues and some insight into the issues that you might not be aware of see our “Buying & Selling Income Property” eCourse, of which I am the author. Keep in mind that most buying issues are relevant also as seller issues, just viewed from the other side of the fence.

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Q2

I am owner of a rental property in Phoenix, AZ and am interested in selling the property while I still have a tenant in it. Do I need to offer the tenant first right of refusal to buy the property? If so, what formal document or form must I use to confirm my wish and confirm the tenant’s decision to buy or not buy?

A2

Unless there is a written document giving the tenant a first right of refusal, either in the lease agreement itself or via separate written contract, you do not have to even tell the tenant that you are selling the property, although it might result in a better relationship when needing to show the property or have inspections performed if you keep the tenant informed. Absent some explicit clause in the lease agreement specifying otherwise, the lease follows the property. That is, the buyer would have to honor the lease agreement and the tenant would have to continue fulfilling the terms of the lease.

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Q3

I have renters who signed a “no pets” lease. They are now keeping pets. I would appreciate suggestions on course of action.

A3

I assume that you just discovered the violation and that the tenants know that you know. It is important that you now take immediate action to correct the problem in order to avoid the possibility that your inaction could be taken by the tenants and even by a judge to mean that you have waived your rights to enforce that lease provision.

Your first step is to serve written notice on the tenants with the notice demanding that they immediately get rid of the pets. In many states you can serve a notice that both demands that they cure the default within a certain number of days, the period varying among states, or immediately vacate the premises. Some states have a format referred to as a “Cure or Quit Notice” while other states have other names for a type of notice that can be used to accomplish the same thing. For example, the appropriate notice might also be titled “X-Day Notice of Violation of Lease.”

Failure of the tenants to cure the default within the period specified by state law allows the landlord to immediately file for eviction. Although most states require the landlord to allow continued tenancy if the tenants cure the default; some states allow the landlord to demand that the tenants leave even though they have cured the default. For example, Nevada has both “Notice of Breach with Right to Cure” and “Notice of Breach with No Right to Cure” types of notices. Without knowing the state in which the rental property is located, I can’t be more specific on this issue. I suggest that you click on the “Forms by State” link under “Landlord Legal Forms section of your membership home page and check what’s available for your state.

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Income – What Is & What Isn’t

Landlords take in money, some being taxable, some not. In addition to amounts you receive as normal rent payments, there are other amounts that may be rental income. There are other receipts that are not rent including deposits and vending machines amounts.

Rents                                                                                    

You generally must include in your gross income all amounts you receive as rent. Rental income is any payment you receive for the use or occupation of property.

When to report – When you report rental income on your return depends on whether you are a cash basis taxpayer or use an accrual method. If you are a cash basis taxpayer, you report rental income on your return for the year you actually or constructively receive it.

You are a cash basis taxpayer if you report income in the year you receive it, regardless of when it was earned. You constructively receive income when it is made available to you, for example, by being credited to your bank account. If you use an accrual method, you generally report income when you earn it, rather than when you receive it. You generally deduct your expenses when you incur them, rather than when you pay them. For more information about when you constructively receive income and accrual methods of accounting, see IRS Publication 538 (“Accounting Periods and Methods”).

Advance rent – Advance rent is any amount you receive before the period that it covers. Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use. For example, you sign a 2-year lease for your property and receive $800 for the first month’s rent and $800 as rent for the last month of the lease. You must include $1,600 in your income in the first year as well as any other rents received during that calendar year.

Other rent related receipt – Some receipts that are related to rent can be included in rents. Late charges are probably the most-often received income in this category.

Deposits

Do not include a security deposit or other truly deposit amounts in your income when you receive it if you plan to return it to your tenant at the end of the lease absent any claim for damages or unpaid rent at the end of the lease. Non-refundable fees, even if called deposits must be reported in the year received.

However, if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year. If an amount is to be used as a final payment of rent, then, even though called a security deposit, it is advance rent that must be included in your income when you convert the deposit to rent.

Payment for Canceling a Lease

If your tenant pays you to cancel a lease, the amount you receive is rent and must be included in your income in the year you receive it regardless of your method of accounting.

Expenses Paid by Tenant

If your tenant pays any of your expenses the payments are rental income. You must include them in your income. You can deduct the expenses if they are deductible rental expenses although there can be cases where the payments are income but the amount must be capitalized and depreciated over a number of years.

As an example, the furnace in your rental property stops working while you’re out of town and your tenant pays for the necessary repairs and deducts the repair bill from the rent payment. Include the repair bill paid by the tenant and any amount received as a rent payment in your rental income. You can deduct the repair payment made by your tenant as a rental expense.

As another example, your tenant pays the water and sewage bill for your rental property and deducts it from the normal rent payment. Under the terms of the lease, your tenant does not have to pay this bill. Include the utility bill paid by the tenant and any amount received as a rent payment in your rental income. You can deduct the utility payment made by your tenant as a rental expense.

Although one could not include as income the amount paid by the tenant and not deduct the amount on an income tax return, it is usually better to do both in order to provide a paper trail of what actually occurred.

Property or Services

If you receive property or services, instead of money, as rent, include the fair market value of the property or services in your rental income. If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary.

For example, your tenant is a painter and you accept his offer to paint your rental property instead of paying 2 months’ rent. Include in your rental income the amount the tenant would have paid for 2 months’ rent. You can usually deduct that same amount as a maintenance expense.