Lease Agreements – Part 2
Lease Agreements – Part 2
We ended part 1 of this series with a brief discussion of the four commonly used types of tenancy. We continue with discussions of several other basic concepts.
Oral or Written Lease Agreement
In general, contracts of almost any kind can be either “oral” or “written” and each can be equally valid and enforceable no matter what the legal purpose or dollar amount involved. Although often done, it is not really correct to refer to an oral lease as a “verbal” lease because the term “verbal” means words and both oral and written leases involve words.
States have adopted a legal doctrine called the Statute of Frauds (SOF) and put the doctrine into their statutes. These laws are fairly uniform among the states. Among other things, SOF laws require that contracts related to sale of real estate be in writing. As examples, contracts to list real estate for sale or lease with a broker and agreements to sell/purchase real property must be in writing to be enforceable in Court and oral contracts for those purposes are worthless. This is so even though there might be indisputable non-written evidence as to the contracts, for example, unrelated third party witnesses. Many states specify certain items that must be included in such contracts.
Statute of Frauds laws of most states also require that a lease of real estate for a term of more than one year be in writing. An oral lease for a term of one year or less is binding and will be enforceable regarding most terms normally found in a lease. An oral lease can be amended orally.
As a practical matter, all leases of any duration should be in writing because the written document provides a record of the terms of the landlord-tenant relationship so that its terms and conditions can be easily and clearly discernible by the parties, their heirs, or assignees.
As for any type of oral contract, oral leases regularly cause problems for both landlords and tenants because it is often difficult to determine what the terms of the lease are. This can be the result of a number of factors, including the following:
- Misunderstandings by either party at inception of the agreement,
- Misremembering or forgetting terms later by either party,
- Purposeful distortion of terms by one party or the other, and/or
- Limited or no ways of proving the lease terms.
Often a witness to the oral lease can be of value, but that may require that the witness be impartial or at least not a beneficiary of the lease in any way. Furthermore, the witness usually must be able to appear at a trial, something not always possible perhaps years after being witness to an oral contract.
When an oral lease ends up in Court, the judge can sometimes make a reasonable decision based on circumstantial evidence. For example, if the disagreement between landlord and tenant related to the amount of rent, cancelled checks or receipts would prove what the rent was for those past months. However, it would usually not support or deny any rent increase.
Sometimes a judge makes the decision based on which party can provide the best circumstantial evidence whether or not that evidence is directly relevant to the disputed issue. However, when there is no clear evidence of who might be telling the truth he may end up making a decision based on who was the best liar. If both parties are equally believable or equally unbelievable, the decision is probably most likely to be in favor of the tenant.
Judges sometimes will not enforce certain terms of an oral lease. Non-typical lease terms will likely not be enforced. Even certain typical terms may not be enforced. For example, it is not uncommon that a judge will refuse to enforce a late penalty provision that is not in writing.
A month-to-month oral lease can continue for many years so long as it remains a month-to-month lease or a lease for a term of no longer than one year at a time, with oral renewals.
The bottom line is that oral leases are only as good as the paper they are written on.
Fixed-Term vs. Month-to-Month Lease
Most landlords will want to choose either a periodic tenancy (month-to-month) or a tenancy for years (fixed term).
To help decide between these two types of leaseholds, the landlord should consider a number of factors, including: (1) advantages or disadvantage under the law of that state, (2) the current condition of the local rental market including vacancy rates, (3) the type of applicants expected for the particular location and property type, (4) whether rental rates in the area are increasing or declining, and (5) the anticipated future local rental market as affected by general economic trends, population growth predictions, and new rental construction coming on line.
A month-to-month tenancy allows the landlord to raise rents or otherwise renegotiate the lease more often and provides more opportunities to terminate tenancy of a less-than-satisfactory tenant. This is advantageous when the rental market is strong. A fixed-term tenancy prevents frequent rental increases, but is more favorable to a property owner in a declining or over-built rental market. Fixed term leases can be either an asset or a liability in the event of a sale or refinance, depending on a buyer’s plans and where rents are relative to market rents.
Residential leases can be written for any term length. Although we assume month-to-month or multi-month fixed-term leases in this lesson, keep in mind that residential leases can be weekly, bi-weekly, semi-monthly or any other rent period or length of tenancy desired, and like commercial leases, can have options for renewal, although not usual.
There are reasons to utilize multi-month fixed-term leases and there are reasons to utilize to month-to-month leases.
Many landlords require a fixed term lease of six months or one year, for the following reasons:
- Turnover is expensive and there is usually less of it with longer lease terms compared to month-to-month. However, long-term leases do not always mean long-term tenancy. In addition to tenants breaking their lease, federal
law allows military personnel to terminate leases under certain conditions, and some states have laws allowing unilateral termination for other reasons. For example, some states allow termination for a tenant who is moving to a care facility or where domestic violence is involved. - Tenants tend to be more respectful of the landlord’s property and the rights of other tenants because they expect to be and want to be a tenant for a longer fixed period.
Other landlords favor month-to-month leases for the following reasons:
- Rent can be raised with the proper notice, usually 30 days in most states although a few states require a longer notice period, some only in certain circumstances. This is particularly desirable in tight urban rental markets where rents can regularly be raised and vacancies easily filled.
- Allows the landlord to modify other lease terms to deal with new problems that have surfaced.
- Troublesome tenants can be terminated with the proper notice, usually 30 days in most states, even though they have not violated a significant lease clause, although an eviction may still be necessary.
There is no reason why a landlord must fill every vacancy or renew every lease for the same period of time. Landlords are free to change periods because of market conditions or for other business reasons. However, as with every other landlord issue, landlords must take care that the reasons do not hint at discrimination – that is, a different period is used for particular protected classes and not for others.
Types of Leases
The subject of Leases must be divided into the categories of Residential and Commercial because the two types are significantly different in many respects. Commercial can be further divided into several sub-categories including office, retail, industrial, and warehouse, with significant differences among each of them. Some of these sub-categories are often further subdivided, for example, general office and medical office.
Size of the Document
Lease agreements vary widely in size, from a single page to dozens of pages in small print. The number of pages will depend on the type of property involved as well as whether printed on legal or letter size paper and the font size used. Many feel that residential lease agreements should be short because tenants don’t want to have to read a long lease agreement prior to signing. However, we feel that the more detail in the agreement, the less the landlord-tenant relationship is subject to misunderstandings.