Archive for the ‘Uncategorized’ Category

Rental Price Regulations

May, 2022

Rental price regulations are laws to protect tenants from unwarranted large rent increases and to help maintain access to existing affordable housing. Rent control and rent stabilization laws regulate rents that a landlord can charge tenants and limit the reasons for tenant evictions. A landlord cannot use eviction as a means to circumvent rental price regulations.

Early rent controls adopted in the 1920s and extending through the next few decades set strict price ceilings and rent freezes to lock in rental prices. With the postwar 1950s housing boom, these strict policies, commonly referred to as first generation rent control, were abandoned by most cities.

New efforts for rental price regulations in the 1970s led to 2nd generation price regulations which took a more moderate approach. Rent stabilization policies allowed periodic rent increases during tenancy and applied to certain building types rather than all tenant occupied housing within the city. Rent stabilization allowed rents to increase to market rate between tenancies. A new tenant paid market rent with a limited fixed amount of rent increase as set by ordinance and administered by a governing board.

Most rent price regulations are set by municipalities and counties and vary by location for statutory requirements, type of property, age of the property, tenant income, and other jurisdictional issues such as calculation of maximum rent, exempt properties, eviction restrictions, and enforcement polices and penalties.

Most states have preemptive laws regarding rent regulations. Preemption occurs when a law at a higher level of government overrules authority at a lower level. In the case of rent regulations, preemption means state law prohibits municipalities from passing any type of rent control legislation. A few states follow Dillon’s Rule which requires states to expressly grant powers to local governments to adopt rent regulations. Some states do not address the issue of rent control by statute.

Currently only five states have some form of rent regulations of which two, Oregon and California, have statewide rent control regulations. The other 3 states have laws authorizing local government to adopt rent control ordinances. Approximately 200 municipalities have adopted some form of rent regulations.

Rental price regulations provide benefits to tenants, such as:

  • Affordable housing,
  • Stable rents, predictable regulated rent increases,
  • Automatic lease renewal, and
  • Long term tenancies – costs of moving are avoided.

However rental price regulations can present challenges to landlords, such as:

  • Regulations may limit or restrict ability to make a profit or meet current financial business obligations since regulated units are often priced below fair market rents,
  • Expenses for maintenance and upkeep are rising – some tasks may be deferred,
  • Less incentive for updates and renovations, and
  • Less tenant turnover but no new renters may mean keeping a troublesome tenant on renewal.

Rent regulation can also impact construction of new rental housing. Developers may be hesitant to commit to new construction in certain areas since the new housing market rent would be in competition with stabilized rents.

State Regulations

Oregon

In 2019 Oregon became the first state to enact statewide rent control establishing a broad-based relatively high cap on annual rent increases. Oregon’s law generally limits rent increases, bars landlords from raising rent during the first year after tenancy begins and requires landlords to give tenants 90 days written notice before raising rent after the first year of tenancy.

These protections of rental increase cap and a tightening of rules for eviction apply only to multi- unit buildings constructed more than 15 years ago whose rent is not subsidized by the government.

The law prohibits landlords from raising current rent by more than 7% plus inflation, a version of the Consumer Price Index (CPI) published by the US Bureau of Labor Statistics during any 12-month period. The Oregon Office of Economic Analysis is required to calculate and publish by September 30 each year the maximum annual rent increase percentage for the coming year. Allowable rent increase for 2022 is 9.9%. The maximum allowable annual rent increase is uniform across Oregon.

California

Effective in 2020 California enacted statewide rent control legislation to target steep rent increases. Statewide rent control law generally caps annual rent increases for qualifying units, limits the number of allowable annual rent increases and includes additional tenant eviction protections. Specifically the law limits annual rent increase at 5% plus the change in the regional CPI over a specified time period or no more than 10% of the lowest rent charged during any year long period before the date of the increase and prohibits landlords from increasing rent in more than two increments annually if a tenant occupies the unit for at least a year.

California statewide rent control laws will sunset January 1, 2030 unless renewed by the legislature.

Municipalities

New York City

New York City is the most widely recognized municipality with rental price regulations, having both rent control and rent stabilization policies.

Rent control regulations New York City requires:

  • The building must have been constructed before 1947.
  • The same family must have occupied the unit since 1971.
  • Tenants can only pass down their rent-controlled apartment to family members.
  • The tenant’s family member (the individual inheriting the rental) must live in the apartment for at least two consecutive years before ownership can transfer to them.

The rent price is a fixed amount and the landlord cannot legally increase rent when the original lease expires. Moreover the tenant has the right to automatic lease renewals.

Rent stabilization regulations in New York City require:

  • The building must have been constructed before 1974 with six or more units.
  • The rest must be less than $2,700 a month
  • The tenant must earn less than $200,000 a year.

Rent stabilization allows a small increase in rent per year according to guidelines established by a governing board. A mid-year rent increase may be allowed in certain circumstances such as improvements or increased services made to rental unit, major capital improvements, or the landlord’s economic hardship.

In some situations a landlord may be able to deregulate a rent stabilized unit, such as:

  • Landlord or immediate family member needs unit for their primary residence,
  • Building is in disrepair and should be demolished,
  • A high rent vacancy deregulation – legal, regulated rent exceeds $2700/month and the tenant voluntarily relinquishes unit,
  • A high rent, high income deregulation – regulated rent is $2733.75 or more per month and the tenant’s annual income is $200,000 annually in each of the two preceding calendar years, (high rent, high income amounts may vary based on the governing municipality and may change every year),
  • Individual unit improvement — once the unit is vacated voluntarily or through eviction, the landlord can increase rent equal to a specified portion of the cost of any renovations and improvements on the unit in addition to any other vacancy increases applied,
  • Conversion of building to a co-op – any regulated units in the building are deregulated upon vacancy,
  • Expiration of tax abatement – landlords are allowed to charge market rate rents,
  • Tenant buy-out by landlord to pay tenant to vacate regulated unit.

St. Paul MN

In 2021, via a ballot initiative, St. Paul voters passed the first rent control policy in the Midwest. The rent control policy effective May 2022 prevents landlord from raising rents more than 3% a year. The ordinance does not include exemptions for new construction. The cap rate of 3% is not tied to inflation and applies even if the tenant vacates the rental unit. A landlord however may request an exception based upon a limited criteria. Landlords have the right to a reasonable rate of return on their investment. This is defined as the property’s net operating income (NOI) of the base year 2019 adjusted by subsequent changes in the Consumer Price Index.

The city has published factors that will be taken into account for exception requests by landlords. Factors include improvement projects, increased operating expenses or increased taxes. Landlords can self-certify requests for rent increases between 3% and 8% by completing the exemption request online. Landlord exemption requests for rent increases greater than 8% will be processed by city administration staff. Landlords have the right to appeal exemption decisions. A landlord cannot increase a tenant’s rent more than 15% in one year, although, if justified, increases beyond that limit can be deferred to the subsequent year.

Considerations

The above states and municipalities examples reference only major points in their specific rental price regulations. Landlords will need to conduct due diligence for their own property locations and determine complete requirements for administration and compliances. While many landlords are not currently in markets with rent regulations, rental price regulations are an issue to be aware of as more states and municipalities consider/reconsider rent regulations to address affordable housing issues and housing shortages in many areas of the county.

Credit Risk Analysis Using Credit Scoring Models

April, 2022

There is an element of financial risk to the landlord’s business in the installation of a new tenant. Tenant screenings provide risk management tools to assess credit risk by estimating the probability of tenant default on rent obligations. With credit risk analysis, the landlord can make an informed decision acceptable to the landlord’s business model. With adequate due diligence using screenings for a credit report and credit score, a landlord can reduce potential financial business risk by objectively analyzing the applicant’s credit history and credit management.

There is good reason for the landlord to protect his business from credit risk. Credit risk occurs when a tenant fails to meet his debt obligations. Rent defaults disrupt the landlord’s cash flow and can increase operational costs if the debt is sent for collection.

Credit risk analysis uses credit scoring models as marketed by the three national credit reporting companies, Equifax, Experian, and Transunion. The credit reporting companies analyze information in the consumer’s credit file as of the date of the credit score request. The analysis estimates the probability of a credit default triggered by an event such as consumer failure to pay as agreed. The probability of default is expressed as a three-digit number that represents creditworthiness. A lower score indicates a more likely credit risk while a higher score indicates a lower risk of credit default. A landlord may utilize credit scores to help evaluate an applicant’s ability to meet rent obligations in compliance with lease terms and conditions.

Credit Risk Scoring Models

How a credit score is calculated is dependent upon the credit scoring model used and the applicable version of the scoring model. There are many different credit scoring models targeting various credit populations, industry applications, and specific credit products.

Each credit reporting company generates its own scores by running the consumer’s credit data through a proprietary modeling process. Credit risk analysis models are predictive tools that can be based on either financial statement analysis, default probability, or machine learning.

As a basic discussion of a conventional scoring model, model development takes into consideration a sample population of consumer accounts large enough to make the model statistically valid yet characteristic of the population to which the model’s scorecard will be applied. Accounts in the selected population would be statistically analyzed to identify the characteristics and attributes that relate to creditworthiness. These characteristics would then be further refined into a smaller group of predictive variables which could best indicate how a credit applicant could be categorized as a credit risk. Predictive variables could include, but would not be limited to, prior credit performance, current level of debt, amount of time that credit has been in use, and new credit. Any characteristic or attribute that is prohibited by law for credit decisioning or that lacks predictive value would be excluded from scoring.

The scoring model would summarize the relevant available consumer credit data into a set of ordered categories that predict an outcome. This ordered set, a numerical score, is a snapshot of estimated credit risk at a specific date in time. The credit score is a statistical assessment of the consumer’s risk within the context of the total risk for the credit population being scored.

However there are limitations in the effectiveness of any credit scoring model. Models are developed, calibrated, and validated using lengthy historical data. If relevant un-modeled conditions change, models may not correctly predict credit behaviors out of sample. And, while a model forecasts the probability of credit default, it is not necessarily a predictor of the level of risk, i.e., the magnitude of loss. For tenant screening purposes landlords, as a matter of business policy for risk reduction, still need to assess the amount of risk posed by the rental applicant in relation to the amount of risk the landlord is willing to absorb.

The sample population size, changing economic conditions, global and domestic business environments, and the reactive nature of consumer credit behaviors can also be constraining factors influencing model effectiveness.

This has led developers to refresh credit scoring models periodically to reflect changes in the industry, consumer behavioral data, and product trends to provide relevant data for credit modeling.

As part of this relevancy, credit scoring models have been optimized to align with the National Consumer Assistance Plan (NCAP) to make credit reports more accurate, transparent, and easier for the consumer, including consumer ability to correct errors on the consumer’s report. As examples, tax liens and public records data reporting were historically used for conventional scoring. Now, tax liens and public records data have been removed from consumer credit files if they failed to meet the enhanced data quality standards as set out in the NCAP guidelines.

While there are many credit risk scoring models and many versions of the scoring models, the scoring models most commonly used to determine credit scores are FICO and VantageScore Solutions.

The current versions of FICO and VantageScore models incorporate trended credit data in their modeling process. Trended data is credit data that reflects patterns in a consumer’s behavior, as example, how the consumer borrows credit and repays credit over time. This is different than conventional credit scoring models that captured static credit events, e.g., looking to the most recently reported utilization rate to calculate the credit score.

FICO and VantageScore use a point credit scoring scale from 300 to 850. The scoring scale has five credit score ranges which determine the likelihood of creditworthiness and what credit products could be made available to the consumer, such as loans and interest rates.

The ranges differ between the two models, and also have different descriptive labels associated with each range. For example, a credit score range above 780 may be labelled exceptional by the FICO model and excellent by the VantageScore model. Other credit scoring models such as those of Experian and Equifax have their own proprietary scoring models and likewise credit scoring scales and descriptive credit range labeling.

The most common credit behaviors that influence credit scores are:

  • Payment history
  • Credit utilization
  • Length of credit history
  • Type of credit
  • New credit

A FICO scoring model may assign score factors such as:

  • 35% Payment History
  • 30% Credit Utilization
  • 15% Credit History
  • 10% Credit Use
  • 10% New Credit

A VantageScore scoring model may assign score factors such as :

  • 40% Payment history
  • 21% Age and type of credit
  • 20% Percentage of credit limit used
  • 11% Total balances
  • 5% Recent credit behavior
  • 3% Available credit

Differences in scoring models will affect only a credit score, not a credit report. Information on a credit report is based on data contained in the consumer’s credit file at the consumer reporting company as of a specific date. The credit report is not a calculated report derived from a credit scoring model. The credit report contains only information about the consumer’s credit usage such as:

  • A summary of the applicant’s positive and negative credit accounts
  • Payment history
  • Prior credit inquiries by date
  • Total estimated past due and monthly debts
  • Listing of credit accounts

A credit score is not an absolute statement of a consumer’s credit risk, financial strength, or stability. However credit reports and credit scores when used in conjunction with other tenant screenings and risk reduction policies may help a landlord to become more confident in tenant selection decisions.

Landlords are advised to conduct their own research and due diligence regarding credit risk analysis and credit scoring models. Those landlords utilizing third party tenant screening services may wish to consult with their screening partner to determine how the screening process is conducted, including the source of credit reporting, the type of credit report, and the availability of credit scoring.

National Fair Housing Month 2022

April, 2022

April 2022 marks the 54th anniversary of the Fair Housing Act (FHA). During Fair Housing Month the Department of Housing and Urban Development (HUD), fair housing organizations, and fair housing advocates host fair housing activities in local communities to enhance public awareness of fair housing rights.

The federal Fair Housing Act (FHA) prohibits discrimination in the sale, rental and financing of housing on the basis of race, color, religion, sex, national origin, familial status and disability. In 2021 the Biden Administration issued Executive Order 13988 which directed all federal agencies to interpret protections against discrimination based on sex to include discrimination based on sexual orientation, gender identity, and gender expression. In the sale and rental of housing, no one may take any of the following actions based on the federal protected classes:

  • Refuse to rent or sell housing
  • Refuse to negotiate for housing
  • Make housing unavailable
  • Deny a dwelling
  • Set different terms, conditions or privileges for sale or rental of a dwelling
  • Provide different housing services or facilities
  • Falsely deny that housing is available for inspection, sale, or rental
  • For profit, persuade owners to sell or rent (blockbusting) or
  • Deny anyone access to or membership in a facility or service (such as a multiple listing service) related to the sale or rental of housing.

It is illegal for anyone to:

  • Threaten, coerce, intimidate or interfere with anyone exercising a fair housing right or assisting others who exercise that right.
  • Advertise or make any statement that indicates a limitation or preference 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.

Fair Housing Law exemptions

The Fair Housing Act covers most housing. In very limited circumstances, the Act exempts owner-occupied buildings with no more than four units, single-family houses sold or rented by the owner without the use of an agent, and housing operated by religious organizations and private clubs that limit occupancy to members.

Fair Housing Trends Data for 2020

The annual report released by the National Fair Housing Alliance (NFHA) provides an overview of housing discrimination complaint data by type of agency, protected class, and type of transaction. There were 28,712 fair housing complaints received in 2020. There were 15,664 complaints of discrimination against a person with a disability, or 54.56 percent of all housing complaints.

Disability

Federal nondiscrimination laws define a person with a disability to include any (1) individual with a physical or mental impairment that substantially limits one or more major life activities; (2) individual with a record of such impairment; or (3) individual who is regarded as having such an impairment.

Examples of disability may include mental or physical impairment such as hearing loss, restricted mobility, visual impairment, chronic mental illness, chronic alcoholism, AIDS, AIDS Related Complex, and mental retardation that substantially limits one or more major life activities.

Applicants and tenants with disabilities have rights and protections under the Fair Housing Act to ask for reasonable accommodations or reasonable modifications in rental housing.

Reasonable accommodation

Under the Fair Housing Act, a reasonable accommodation is a change, exception, or adjustment to a rule, policy, practice, or service that may be necessary to afford persons with disabilities an equal opportunity to use and enjoy a dwelling, including public and common use areas. Each accommodation request should be evaluated on a case-by-case basis. There must be an identifiable relationship, or nexus, between the request and the individual’s disability. A request may be denied if providing the accommodation is not reasonable – i.e., if it would impose an undue financial and administrative burden on the landlord or it would fundamentally alter the nature of the landlord’s operations.

A reasonable accommodation is a request to make an accommodation or change in rules, policies, practices, procedures or services to allow an individual with a disability an equal opportunity to use and enjoy a rental unit. Some common reasonable accommodation requests are for assistance animals or for a parking space close-in to the rental unit.

An accommodation must be requested by the disabled tenant or applicant. The accommodation request must be related to the tenant’s or applicant’s disability. A landlord does not have the obligation to ask applicants or tenants if they need reasonable accommodation or to determine what a reasonable accommodation might be.

A tenant or applicant may request a reasonable accommodation at any time, including at the time of application, at the time of lease signing, or after the tenant has moved into the rental unit.

Federal and state fair housing laws give tenants and applicants who have disabilities the right to request reasonable accommodations in landlord rules, policies, practices, or procedures if the changes make it possible for them to:

  • Complete an application,
  • Qualify for tenancy,
  • Have full use and enjoyment of the unit, and
  • Comply with rental or lease agreements.

Reasonable modification

A reasonable modification is a physical change to the public or common use areas of a building or a physical change to the structure of a dwelling unit. The most common examples of reasonable modification are requests to install grab bars in a bathroom or to install a wheelchair ramp.

A reasonable modification if approved would make the rental unit a more comfortable and safe home for the disabled tenant. All modifications are subject to the landlord’s approval. The landlord may ask for a description of the proposed modification and any necessary building permits.

If the modification will create a problem for the next tenant, the landlord may require the disabled tenant to restore the rental unit to its original condition at the end of the lease term.

A landlord cannot impose the expense of providing a reasonable accommodation on to the tenant, either directly or indirectly. The landlord assumes the costs for reasonable accommodations. The cost of a reasonable modification as approved would be borne by the tenant or applicant.

Hoarding

Hoarding is a recognized disability under the Fair Housing Act as Amended. The Fair Housing Amendments Act (FHAA) defines a person with a disability to include (1) individuals with a physical or mental impairment that substantially limits one or more major life activities; (2) individuals who are regarded as having such an impairment; and (3) individuals with a record of such impairment. The diagnostic criteria of hoarding include:

  • Persistent difficulty discarding or parting with possessions regardless of actual value;
  • A perceived need to save items and distress associated with discarding them;
  • The accumulation of possessions that congest and clutter living areas and substantially compromises their intended use; and
  • Clinically significant distress or impairment in social, occupational or other important areas of functioning (including maintaining an environment safe for oneself and others).

A hoarder tenant has the right to request a reasonable accommodation from the landlord to modify the landlord’s rental policies to minimize or eliminate the threat of hoarding in order to cure his default and bring his lease into compliance.

Harassment

In 2020, 1,071 complaints of harassment were reported, the highest number of harassment complaints reported since NFHA began collecting detailed harassment data in 2012.

Harassment is illegal under the Fair Housing Act, both in the provision of housing and in a housing setting. There has been a significant increase in the number of complaints alleging harassment on the basis of disability and sex. Harassment based on protected class may take the form of coercion, intimidation, threats, or interference.

The Fair Housing Act prohibits sex discrimina­tion that impacts the terms or condi­tions of housing; is used as a basis for housing decisions; or otherwise has the purpose or effect of unreasonably interfering with housing rights, or creates an intimidating, hostile, or offensive environment.

Sexual harassment includes any unwanted sexual advance, request for sexual favors, or other unwelcome verbal or physical contact of a sexual nature. It also can take the form of offensive remarks, derogatory statements or expressions of a sexual nature, or other hostile behavior because of a person’s sex. Harassment can consist of oral, written, or other conduct and does not require physical contact between the harasser and victim. Harassment can be directed to any person, male or female, by someone of the same sex or the opposite sex. Sexual harassment does not have to be motivated by sexual desire in order to violate the Fair Housing Act. Sexual harassment could be motivated by hostility toward a particular sex, even if the harasser is the same sex.

HUD Anti-harassment Rule

HUD has issued” Quid Pro Quo and Hostile Environment Harassment and Liability for Discriminatory Housing Practices under the Fair Housing Act”, (the Rule), as the standard to evaluate complaints of quid pro quo (“this for that”) harassment and hostile environment harassment under the Fair Housing Act.

Quid pro quo sexual harassment occurs when a landlord, property manager, employee, or agent conditions access to housing or retention of housing or housing-related services to an applicant or tenant’s submission to an unwelcome request or demand to engage in sexual conduct or sexual favors. .An unwelcome request or demand may constitute quid pro quo harassment even if a person acquiesces in the unwelcome request or demand.

Hostile environment sexual harassment refers to unwelcome sexual conduct that is sufficiently severe or pervasive as to interfere with the terms and conditions of tenancy or deprives the tenant of his right to use and enjoy the housing, resulting in an environment that is intimidating, hostile, offensive, or substantially less desirable.

Hostile environment harassment can also occur when a tenant is sexually harassed by another tenant and the harassment is not addressed by the housing provider.

State and Local Fair Housing Laws

State and local fair housing laws also provide protections from housing discrimination. State and local city and county fair housing laws often provide broader coverage for additional protected classes such as sexual preference, gender identity, occupation, source of income, Section 8 voucher participation, educational status, medical status, marital status, military service, political affiliation, or other classes as noted by statue. Fair housing compliance should always be to those fair housing laws providing the greatest protections against discrimination.

Additional Information

For additional discussions regarding a wide variety of real estate investing and management issues see our eCourses and our Mini Training Guides.

Ending a Lease

March, 2022

A lease may be terminated for a variety of reasons. The process of terminating a lease requires landlord and tenant to follow certain procedures to ensure the termination is conducted in a legally compliant manner.

The contractual relationship of landlord and tenant is a binding agreement between the two parties detailing the lease terms and conditions during a specified period of time. The lease imposes duties and obligations on each party by statute and the lease terms. Primary among these duties and obligations is the obligation of the landlord  to maintain the rental premises in a safe and habitable manner during the term of the lease and the obligation of the tenant to pay rent during his tenancy as agreed.

Fixed-term Lease Agreement

A fixed-term lease agreement may be  the most common rental agreement between landlord and tenant. A fixed-term lease obligates landlord and tenant to a set period of time for tenancy, i.e., has a designated start date and end date. The fixed-term lease automatically terminates at the specified end date unless the lease agreement provides other options.

During a fixed-term lease, a landlord cannot raise the rent or change other rules, terms, and conditions of the lease unless the lease provides for such future changes and the tenant agrees to the lease modification in writing.

A landlord is not required to extend renewal terms to a tenant nearing the expiration date of his current lease nor is a tenant obligated to accept a renewal offer.

Periodic Rental Agreement

A periodic rental agreement, typically a month-to-month agreement, provides lease terms and conditions for a shorter period of time, and renews automatically at the end of that specified  period unless landlord or tenant give the proper amount of written notice to terminate as required by statute or the rental agreement. With proper notice to the tenant,  a landlord can change the rent or other terms and conditions of tenancy.

Due Diligence

The landlord must conduct due diligence for state and local regulations for lease termination including  notices, notice periods, and other requirements per statute and  ordinance. The lease agreement must be compliant with all statutory requirements.

End of Lease Term

Generally neither landlord nor tenant may end a fixed-term lease unless there is cause, such as a  violation of lease terms by one of the parties. The fixed-term lease simply ends of its own accord on the expiration date set by the lease. At that time the tenant is expected to move out, sign a renewal lease, or convert to a month-to-month tenancy with the landlord’s approval.

As noted above, the periodic agreement continues until proper termination notice is given by either landlord or tenant.

Lease Terminations

Lease Default

For a fixed-term lease, a landlord cannot remove tenants from the rental premises or terminate the lease before the set expiration date unless there is tenant violation of the lease terms. As examples, lease default by a tenant could be:

  • Material rent default – habitual missed rent, late rent, partial payments,
  • Property damage – intentional damage, negligent use,
  • Unauthorized occupants in rental unit,
  • Repeated violations of rental rules, terms, conditions – e.g., violation of no pets policy, noise and disturbance issues, violation of guest policy,
  • False or misleading information provided to the landlord for tenancy,
  • Violation of health and safety standards for sanitary conditions at rental unit, or
  • Illegal use of property, criminal activity, danger posed to others.

To terminate a lease, the landlord must follow the statute requirements of the state where the rental property is located. While each state may vary in requirements for lease termination, commonly, statutes require landlords to notify tenants of the intent to terminate a tenancy. Some states allow tenants the opportunity to cure a lease violation before the landlord can take further action for lease termination; while other states allow a landlord to terminate a tenancy without giving the tenant a second chance to cure the violation.

Notices commonly used for notification of intent to terminate a lease are

  • Pay or quit notice – applicable to rent defaults. The notice gives the tenant a specified number of days, usually 3–5 days, to pay the rent or quit the premises (move out).
  • Cure or quit notice applicable to default of lease conditions. The notice gives the tenant a specified number of days to comply with lease terms by curing the default or quit the premises (move out).
  • Unconditional quit notices – This notice requires the tenant to quit (vacate) the premises immediately without opportunity to cure the lease default.

If the tenant ignores a notice to pay, cure or quit a lease default, the landlord can begin legal action for eviction. If the landlord proves the default, a legal order will be issued to remove tenants from the rental premises.

Breaking the Lease

Early termination of the lease agreement breaks the contract terms and conditions of the lease and could be requested by landlord or tenant as a business or personal necessity.

The lease agreement may contain language that specifically allows the landlord to terminate a lease before the contracted end date. Reasons that a landlord may want to terminate a lease early include:

  • Sale of the rental property,
  • Landlord intends to move into the rental as his personal residence, or
  • Rental unit requires extensive repair or renovations that require the unit to be vacant for an extended period of time.

There could be other circumstances whereby landlord and tenant reach mutual agreement to end the tenancy without further responsibility by either party.

The landlord cannot terminate a tenant’s lease for discriminatory or retaliatory reasons nor lock the tenant out of the rental unit.

State statutes provide protection for tenants who have legitimate reason to request early termination of their lease. In some states landlord-tenant statutes allow a tenant to terminate a tenancy before the end of term without landlord permission for reasons such as:

  • Military Duty – A tenant who is a member of the armed forces, or that tenant’s spouse or dependent, who delivers copies of reassignment or deployment orders to the landlord within the required number of days of receipt of orders.
  • Domestic Violence – A tenant who is a victim of domestic violence, sexual assault, unlawful harassment, or stalking, and who has a legal protection order or has reported the incident to the authorities.
  • Harassment – A landlord or landlord’s agent violates the tenant’s right to privacy and quiet enjoyment of the property by stalking, sexual assault or unlawful harassment of the tenant.
  • Habitability Issues – As a remedy to the landlord’s failure to maintain fit and habitable housing resulting in constructive eviction of the tenant.
  • Withholding of essential services to the tenant excluding or  limiting access to rental premises
  • Property Damage – The rental property is significantly damaged or destroyed by natural disaster or other reasons beyond the tenant’s control.
  • Violation of Privacy Rights to Quiet Enjoyment of the Premises – Intrusiveness of the landlord that violates tenant privacy, such as landlord entry to unit without tenant notification.

In a few states landlord-tenant statutes allow for early termination of tenancy for reasons such as tenant health problems, or tenant need to move to assisted living facilities.

The death of a tenant during an active lease requires due diligence by the landlord to determine how state statutes address the issue. Lease termination may be allowed at a certain period of time after the landlord has been notified of the tenant’s death. In some states the death of a tenant does not  automatically terminate the tenant’s lease agreement unless the landlord’s lease agreement specifically contains language to the contrary. The tenant’s lease agreement remains active to the lease expiration date. What happens to a lease agreement following the tenant’s death depends on whether the tenant was in a month-to-month rental agreement or a fixed term lease agreement. A landlord will need to review applicable state laws and terms of the lease agreement to determine how to proceed.

There might be other reasons that a tenant could have cause to break his lease such as  the rental unit did not meet required building codes, licensing requirements, or compliance with federal and state regulations regarding environmental issues, such as lead-based paint regulations. Not as likely, a lease could be terminated because the lease was made void and unenforceable because the lease agreement contained illegal clauses that require the tenant to:

  • waive landlord liability for landlord negligence,
  • accept an as-is clause for habitability,
  • accept responsibility for repairs to the property,
  • waive their right to privacy and quiet enjoyment, or
  • waive their right to take legal action against the landlord.

However, the most common tenant reasons for requesting early termination of the lease are personal matters such job transfer/relocation, job loss, divorce, serious illness, buying a home, moving in with a family member, partner/roommate, other life events or changes in in lifestyle. In most states these reasons are not considered legitimate reasons for early termination of a lease. The landlord’s lease agreement may contain clauses that address the issue of early termination by the tenant and options that could be pursued for release from the lease contract.

The Process of Tenant Screening

March, 2022

The process of tenant screening is a series of steps taken in accordance with regulatory requirements and business practices to qualify applicants for tenant selection.

The selection of a new tenant is considered the most important business decision a landlord will make for his property operations. Therefore, developing the process of compliant screening policies and practices that support business necessity is a core management function.

There are discrete steps in a tenant screening process, that, while could be conducted as an individual screening in specific situations, if used collectively, complete the process to protect the business investment and the rental community. Conducting tenant screening as a standardized process helps to place priority and focus on those qualifications that contribute to a quality tenant. The purpose of a standardized practice is to qualify applicants in a non-discriminatory manner in the same proscribed manner removing potential subjectivity and bias from the process.

A compliant tenant screening process that protects business interests requires much detail in order to screen for potential risk for issues that may arise during a landlord-tenant relationship.

Rental Criteria

Setting tenant screening criteria customized for business protections requires time and effort to research business requirements, legal compliances, and market conditions. As business circumstances, legislative actions, and rental markets change, so should tenant screening criteria. A landlord must keep legally compliant and stay relevant to local markets in order to protect his business interests.

In creating tenant screening criteria, many landlords take into consideration the commonly accepted definition of a quality tenant as the tenant who (1) pays full and timely rent; (2) complies with lease terms and conditions; and (3) maintains the rental unit to good condition.

Based on these criteria a landlord would require an applicant to furnish proof of identity and consent to tenant screenings for a credit report, background check, public records search and verifications of current employment, income, rental housing history, and landlord references.

Fair Housing

The federal Fair Housing Act prohibits discrimination based on protected classes of race, color, national origin, religion, sex, disability, and familial status in the sale or rental of a dwelling and in other housing-related transactions. Fair housing laws of states, cities, and counties may provide more stringent protections against housing discrimination than does the federal Fair Housing Act.

Other Regulatory Requirements

Tenant screening is subject to numerous federal, state, and municipal laws. Due diligence is required to ensure compliance with the current regulations, prohibitions, and restrictions that are applicable to the location of the rental property.

Rental Listing

The rental listing helps to create interest in the vacancy by highlighting property features and amenities in the listing. Providing essential property information for property address, asking rents, qualifying criteria, and lease terms allows prospects to assess their interest in the property and to pre-qualify themselves to these disclosures.

Those prospects reaching out to the landlord for more information provide equal opportunity for the landlord to preliminarily qualify prospects to rental standards.

Showing the Unit

Most prospective renters will want to physically tour the available unit or at least take a virtual tour of the unit. Having quality photos of the property, its amenities, and unit features on the landlord’s website, an open house, or a private showing are other options for the prospect to see the unit and further qualify himself to interest and application.

Application

A rental application is the most efficient means to collect preliminary information about a prospective tenant to begin the process of qualification to rental standards.

Information requested on the application form should be relevant to business necessity. With permissible purpose and under legal compliances, a landlord can request any information that would objectively point to qualification requirements such as the applicant’s ability to pay timely rent and comply with lease terms and conditions.

An application requests personal information about the applicant, such as legal name, current and previous addresses, contact information, Social Security number and state driver’s license information. Other information that may be requested includes other occupants’ information, rental history over the past 3-5 years with landlord references and contact information; employment information; proof of income; and other financial information.

FCRA Compliances

When landlords use consumer reports to aid in tenant decisions such as applicant screenings, the federal Fair Credit Reporting Act (FCRA) obligates the landlord to certain regulated practices to ensure FCRA compliance for the protection, privacy, and accuracy of consumer personal information. This may include a separate notice and disclosure requirement for applicant authorization and consent per FCRA requirements.

Applicant Interviews

As the landlord conducts a review of application information, he may need to ask the applicant for additional information or to clarify information supplied on his application form.

Identity Verification

Verification of the applicant’s identity should be done during the initial contact with a prospective renter. Proof of identity can be verified with various types of identity documents.

Employment and Income Verifications

A landlord screens an applicant to determine if the potential tenant would be able to meet a tenant’s required rent obligations. Accordingly, one of the first tenant screenings to conduct is verification of the applicant’s employment and income. Note that source of income is a protected class by some state, city, or county statute/ordinance. A landlord cannot reject a rental applicant on the basis of the applicant’s source of income as long as the income is from a lawful source. In many of these states and localities, source of income protection includes rental assistance through participation in the Section 8 Housing Choice Voucher program.

References

Most experienced landlords recommend asking the applicant to provide rental history for the past three years. Usually that timeframe will provide one or two prior landlord references in addition to the most recent landlord reference.

A landlord may request the applicant to furnish personal references. This may be helpful in screening a first-time renter who has not yet established rental history.

Screenings

Consumer Credit Report

A credit report provides the landlord with an applicant’s credit history as reported to a credit reporting bureau as of a certain date. The credit history shows the applicant’s credit usage and credit management. By analyzing the data, the landlord evaluates whether the applicant could be a potential financial risk if selected as a tenant.

Background Checks

Landlords must comply with federal, state, and local laws that regulate or prohibit the use of criminal history background for tenant screenings. A landlord’s blanket policy that excludes any person who has been convicted of any offense is discriminatory and violates provisions of the Fair Housing Act. A landlord will need to conduct his own research to determine applicable compliances for the jurisdiction governing his rental property.

Public Records Search

Public records search for an applicant’s bankruptcy, liens, judgments, and eviction records may be conducted to determine potential financial risk to the landlord’s business.

Notification of Decisioning

It is the landlord’s business decision based upon assessment of risk and the analysis of the applicant’s qualifications to accept or reject an applicant. Qualified applicants can be advanced to an offer of tenancy. Applicants that do not qualify to standards should be notified in a timely manner that their application has been declined.

Adverse Action Notice

An adverse action is any action by a landlord that is unfavorable to the interests of a rental applicant. It includes a landlord’s denial of a rental application as well as an action by the landlord that imposes a burden on the applicant that is not required of all tenants, such as requiring a co-signer or a larger security deposit.

When a landlord takes an adverse action that is based solely or in part on information contained in a consumer report, the Fair Credit Reporting Act requires the landlord to give the applicant a notice of that fact orally, in writing, or electronically. The adverse action notice is required even if the information in the consumer report was not the primary reason for the decision. Even if the information in the report played only a small part in the overall decision, the applicant or tenant must be notified.

Additional Information

Security Deposit Alternatives

March, 2022

Security deposit restrictions by statutes and ordinances regulate the landlord’s policy and practice for the maximum amount of security deposit that can be collected, the time period for deposit accounting and return of available deposit funds, security deposit accounting disclosure requirements, and mandates for deposit installment plans.

Recent legislative changes in many jurisdictions requiring lower deposit amounts and utilization of installment payments for security deposits have been implemented as means to address housing affordability. With higher rents and, accordingly, higher rent-based security deposits, renters may struggle to afford the move-in expenses of screening and application fees, first month rent, last month rent, and security deposit. A large dollar amount due at lease signing can reduce the size of the applicant pool and potentially extend vacancy down-time. With changing regulatory requirements and market conditions, a landlord will need to consider many factors in setting his rental policies for rents and deposits.

There is movement by some jurisdictions to require security deposit alternatives and security deposit replacement options to expand choices for renters to manage their financial obligations for security deposits. A landlord will need to conduct due diligence to determine the applicable legal compliances for security deposit options for the location of his rental property to ensure understanding of those requirements. Due diligence is also required to research deposit models to make an informed business decision on the best deposit alternative/replacement option for the landlord’s property operations. A landlord should have good knowledge of the particulars of his selected deposit option in order to educate the renter on how the option works and what the renter can expect if choosing that option.

Renters Choice legislation

In 2020 Cincinnati was the first city to require landlords to accept alternatives to a traditional security deposit. Cincinnati’s Renters’ Choice law applies to all landlords with 25 units or more and offers three security deposit options:

  • an insurance premium, in which the tenant pays a small monthly, nonrefundable fee instead of an upfront deposit;
  • an installment plan to spread the deposit equally over six months (or more if the landlord and tenant agree); or
  • a reduced security deposit, paid upfront, of no more than one-half the monthly rent.

Columbus has passed a Renter’s Choice ordinance that if a security deposit is required, prior to entering a rental agreement, a tenant required to pay a security deposit, shall either pay the required security deposit in full or select and subsequently fulfill one of the following rental security deposit payment alternatives:

  • payment of the security deposit over a series of no fewer than 3 monthly installment payments, which installments shall be due on the same day as the monthly rent payment and which may be paid together with the monthly rent payment in a single transaction,
  • payment of the security deposit over a series of no fewer than 6 monthly installment payments, which installments shall be due on the same day as the monthly rent payment and which may be paid together with the monthly rent payment in a single transaction.

The ordinance does not apply to any landlord with fewer than 5 rental units.

 

 

 

The city of Atlanta passed a renters choice ordinance whereby renters can request rental security insurance or monthly installment payments for their security deposit obligations .The ordinance applies to landlords with more than 10 rental units who require a security deposit that is more than 60% of the monthly rent amount. The ordinance allows renters the choice of paying their security deposit in three monthly installments or through third-party rental security insurance. Renters still have the option to pay the traditional cash security deposit collected at lease signing.

State legislation examples

The Texas Property Code allows landlords to give their tenants the option to pay a monthly fee with their rent instead of paying a security deposit. Under this law, the landlord can choose to purchase insurance to protect the rental with the monthly fee. If the landlord chooses to do so, the fee cannot be “more than the reasonable cost of obtaining and administering the insurance” purchased under this law. If the landlord files a claim under the insurance purchased with this fee, they cannot make the tenant pay them for the same damages.

In the state of Washington, upon written request from a tenant a landlord must generally permit the tenant to pay any deposits, nonrefundable fees, and last month’s rent in installments. In all cases where premises are rented for a specified time that is three months or longer, the tenant may elect to pay in three consecutive and equal monthly installments, beginning at the inception of the tenancy.

Other states that have passed legislation addressing security deposit alternatives and deposit replacements include Delaware, Florida, and Nevada. Other states have pledged support or have proposed legislation for options to traditional security deposits.

Deposit Alternatives

Alternatives to traditional cash security deposits may include deposit options such as surety bonds, deposit installment programs, guarantor programs, and billing authorization services.

Surety Bonds

The surety bond model of deposit alternatives may be the most familiar product to landlords. While specifics of surety bond programs may vary among a number of service providers, in general a surety bond program is a contractual agreement between three parties, the landlord, the renter, and the surety bond provider. The renter purchases a bond equal in the amount to the security deposit required by the landlord. The bond is held by the provider in the event that a landlord needs to make a claim against the renter for a lease default. The renter pays a non-refundable premium, typically a small monthly fee, or a one-time premium that is usually a small percentage of the total insured amount as specified by the landlord. The premium is in addition to the stated monthly rent. The premium is the renter’s promise to comply with lease terms and conditions; i.e., to pay full rent and not damage the rental property. Coverage provided by the bond is the same as would be covered by the cash deposit, e.g., property damage, lost rent, but not normal wear and tear.

The provider holds the bond that guarantees coverage of the landlord’s risk up to the value of the bond. The renter is able to move in without a large cash outlay, yet the landlord can still protect his business interest. If the landlord suffers a loss and files a claim, the provider uses the bond to cover and pay out the claim directly to the landlord. The provider will then seek repayment from the renter. Rather than the landlord deducting charges for tenant-caused repairs from a deposit already paid, the renter gets a bill directly from the carrier.

Security Deposit Replacement

A security deposit replacement option is lease insurance which gives the renter a deposit-free move-in. The renter avoids the expense of a security deposit payment at move-in and pays a small monthly deposit waiver fee in addition to his monthly rent. The property manager insures his property against rent loss and damage, generally at a higher coverage amount, while reducing administrative costs of traditional deposit collection and handling. Depending upon the service provider, lease insurance may be an option only offered at this time to large rental communities. Due diligence will be needed to research providers, program details, and service areas.

Security deposits are required by a landlord to protect his business from property damage and lost rents The model or methodology used to protect the business is dependent on business necessity and legal compliances.

While security deposit options legislation is being considered, pending, or has been recently enacted in some rental markets, it should be noted that security deposit option services offering alternatives for traditional deposit collection are not new to the rental market. Independent landlords with small to mid-size properties have for some years voluntarily contracted with deposit services providers to offer such options to their renters.

Tenant Screenings as a Risk Management Tool

March, 2022

Tenant screening is a housing provider’s best practice for risk reduction of financial loss caused by tenant default. Failure to adequately screen applicants creates potential liabilities for the housing provider’s business. With the complexities in today’s rental housing regulations and requirements, avoiding unnecessary business risk is a prudent, business necessity.

As discussed in many articles, managing investment property carries risks. Appropriate measures must be taken in business operations in order to reduce exposure to known business risks. Non-payment of rent, nuisance, disturbances, property damage, and direct threats to the safety and welfare of others are examples of high-risk tenant behaviors that have a negative impact on business. Tenant screening is the most important tool for risk assessment of an applicant before he becomes a high-risk tenant.

The tenant screening process provides a consistent, verifiable means to collect relevant information about an applicant to make an informed tenant selection decision A formalized process legally compliant and developed to good business standards helps the housing provider comply with fair housing equal opportunity for all prospective renters to qualify to tenant selection standards. By evaluating the same decisioning factors, such as consumer credit reports, and background checks, required of every applicant, the housing provider establishes a universal screening process that prevents potential bias among applicants. Having a standardized application process and screening policy and practice helps to ensure a non-discriminatory tenant selection decision.

Housing providers depend upon a stable, timely income stream to cover operating expenses and a return on their investment. Without adequate screening for an applicant’s financial ability to pay stated rents, the housing provider may be harmed by his own inability to meet his financial obligations. It could be particularly harmful for the independent housing provider who self-manages his properties and must depend upon a regular, full cash flow to continue operations. Appropriate screenings for the applicant to determine the applicant’s financial ability and his payment history of financial obligations provide a means to evaluate financial risk of the applicant to the rental business. Gaining an understanding of the applicant’s financial situation at the time of application may allow the provider to project future ability of the applicant to meet his obligations during tenancy.

Installing a qualified tenant can help reduce tenant turnover. Tenant turnover is expensive, time consuming, and resource intensive as it recreates the process of screening and selection. There is no reason to let a qualified, known tenant depart in order to chance a new unknown tenant to fill the vacancy.

Why should housing providers conduct tenant screenings? Housing providers have a legal duty of care to take reasonable measures necessary to protect the safety and security of their tenants and their property from unacceptable levels of risk.The housing provider’s duty of care to protect tenants from foreseeable harm extends to protect tenants from third party criminal acts and, correspondingly, to protect the neighborhood from criminal acts of his tenants.

There is good reason to conduct relevant screenings to determine the risk as presented by the applicant for consideration of tenancy. Tenant screenings can help identify risky behaviors of applicants such as illegal activities, threats or nuisance acts toward other tenants or neighbors or property damage during previous tenancies. A housing provider can be held responsible for negligence if his screening practices are inadequate and fail to detect a threat to others.

The tenant screening process is a matter of establishing a level of trust between housing provider and potential tenant through a process of verification and confirmation of relevant facts. By conducting tenant screenings, a housing provider verifies the truthfulness and completeness of applicant supplied information. To the best ability, the housing provider seeks assurance that the potential tenant could be counted on to become a responsible and compliant tenant who will not pose a known danger to other tenants, neighbors, or cause destruction of property.

The tenant screening process is composed of various verifications and consumer reports that identify, confirm, and report information relevant to qualifying the applicant to the housing provider’s rental criteria. Information collected from the application form, applicant interviews, housing provider’s verifications, and consumer reports obtained with permissible purpose and with authorization by the applicant are collectively evaluated and analyzed to give a financial overview and background check of an applicant.

Generally, a housing provider’s tenant screening process includes identity verification, verification of employment and income, a consumer credit report, a background check, a review of the applicant’s rental history, and a public records search. The housing provider will need to research applicable regulations and requirements for the jurisdiction of the rental property to determine permissible screenings by state statutes and municipal ordinances.

  • Identity verification – An important first screening is to conduct identity verification of the applicant to protect the housing provider against harm from tenant identity theft and fraudulent acts in renting.
  • Verification of employment and income – While source of income is a protected class in many localities, the applicant’s ability to meet rent and other living costs must be verified through appropriate documentation of income such as earnings statements. A housing provider must research applicable statutes and ordinances for the jurisdiction of his rental property to determine the requirements for income qualification. There could be low barrier screening requirements in place that must be followed. As an example, a traditional qualification criterion has been verification of monthly income that is three times the monthly rent. In some jurisdictions, the housing provider may be restricted to a qualification standard that is less than three times the monthly rent.
  • Background check. By requesting a tenant background screening for criminal history, the housing provider is protecting himself, his business, his tenants, and neighbors from harm from known risks of criminal acts. The provider must be familiar with jurisdictional requirements for individualized assessment of an applicant’s criminal history. The criteria for use of criminal history in making housing decisions must be developed with respect to what crimes pose a risk, why such crimes pose a risk, and what constitutes a reasonable time period when the applicant no longer poses an unacceptable risk. As required, an individualized assessment may be conducted to provide an opportunity for the applicant to submit supplemental evidence to explain, justify or negate the relevance of potentially negative information. Some of the factors that could be considered in the individualized assessment process include:
    • the nature and severity of the criminal offense
    • how recently the offense occurred
    • the nature of the sentence
    • the number of criminal convictions
    • the length of time passed since the most recent conviction
    • the age of the individual at the time the criminal offense occurred
    • the evidence of rehabilitation
    • the individual’s rental history before and after the criminal conviction
  • Review and analyze previous rental history. A housing provider can conduct an interview with the applicant’s previous housing provider to determine whether the applicant kept lease terms and conditions, paid rent timely, and took good care of the rental unit.
  • Public records search. A tenant screening of public records may disclose records of bankruptcy, liens, judgments, or evictions of the applicant of which some could be a concern for qualifying the applicant. A provider should have policy that addresses how such issues as disclosed will be handled.
  • Review credit history. A housing provider should conduct a review of the applicant’s credit history, including total debt obligations, payment history, missed and late payments, and accounts in collection. The applicant’s ability to meet debt obligations is a decisioning factor in offering tenancy. A housing provider wants to be sure that the applicant has the ability and demonstrates the willingness to pay a rent obligation.

The housing provider should be alert to issues that could indicate a potential problem. These red flag issues should be discussed with the applicant and appropriate measures taken as required for investigation and resolution.

While a well-developed tenant screening process, compliant to legal requirements, can take some time to conduct, there should be no doubt about the effectiveness of the process. To aid in the efficiency of the process, a housing provider should employ relevant technologies specific to his business operation to help streamline and simplify his screening practices. Having a formal screening policy and practices supported by the appropriate technologies will make screening operations more productive at lesser cost.

Cutting costs by cutting corners is a liability for the provider. Installing a tenant without the appropriate screenings and qualification to standards is risky business. Once installed, a tenant has legal rights that cannot be violated. A housing provider must follow legal requirements for notice and remedy for a tenant who has defaulted on his lease. The provider must use the court system to initiate legal proceeding to evict the tenant and re-gain possession of the rental unit. Legal costs and time spent on just this one tenant alone can be quite costly to business operations. Once the legal process has been completed, the housing provider must spend more money and time to prepare the unit for a new tenant. The rental process will start all over again with requisite costs of time, money, and resources.

Tenant screening done right, gives the housing provider confidence in a tenant selection decision. Quality tenants in a quality landlord-tenant relationship can readily turn into quality renewal tenants, providing cost savings by avoiding tenant turnover.

Defining Rental Relationships

January, 2022

The classification of individuals staying in a rental unit affects the business of property management. Classification of rental relationships determines the rights and responsibilities, and protections afforded those individuals by law. Failing to properly address trental relationships  can create liabilities for the landlord.

There are three different types of interactions that can occur between a landlord and an individual regarding rental housing. The landlord may interface with a tenant, an occupant, and a guest. The only legal rental relationship is between the landlord and a tenant.

Tenants

The landlord-tenant relationship is a contractual relationship with specified rights and responsibilities of landlord and tenant by law.

In general, a tenant is an individual who:

  • Enters into a binding contract, the lease agreement, with the landlord. The lease could be a written document, an oral agreement, or in certain circumstances a series of actions by the landlord and the individual that evidence acceptance of a landlord tenant relationship.
  • For the typical lease agreement, signs a written contract which gives the tenant the right to use the premises for his housing needs for a set period of time in exchange for tenant payment of rent and tenant agreement to lease terms and conditions. The landlord must provide habitable housing including repairs and maintenance, and respect the tenant’s rights by law. Tenant failure to comply with lease terms and conditions can result in legal action by the landlord to evict the tenant from the rental premises.
  • Pays rent (money) or delivers something of value to the landlord e.g., payment of other goods and services, which is mutually acceptable to landlord and tenant and is not of an illegal nature.
  • By signing the lease agreement, the tenant agrees to financial obligations for rent and responsibility for appropriate care of the rental unit. Tenant has responsibility for lease defaults including lost rent, property damage from misuse and neglect, and failure to comply with rental policies such as policies for guests, pets, nuisance, and property alterations.
  • Enjoys legal rights (in most states) of tenant’s right to quiet enjoyment of the premises, safe and sanitary housing according to habitability statutes and other rights conveyed by applicable statutes, laws, or ordinances.
  • Is held responsible if an occupant or guest in the rental unit violates the lease agreement’s terms and conditions, including  occupant’s or guest’s non-compliance with rental rules and regulations established by the landlord for the property.
  • Enjoys property amenities and services provided by the landlord as detailed in the landlord’s lease agreement.

Generally, a landlord should require all adults of legal age wishing to live in the rental unit to sign the lease agreement as tenants. This holds each adult jointly and severally responsible for the lease terms and conditions including financial responsibility for rents, property damage, and other lease defaults.

A rental relationship can exist in a special situation whereby the original tenant subleases the rental unit to another individual as a subtenant. The original tenant becomes the sublessor when he transfers some but not all of his rights to occupy, use, and enjoy the rental premises to a subtenant, the sublessee, on a short term or temporary basis. The original tenant retains the right to retake the premises at a future date.

The subtenant is renting from the original tenant who has now become the subtenant’s landlord. A legal relationship exists between the original tenant and the subtenant.

The subtenant pays rent to the original tenant at the mutually agreeable amount. The original tenant is responsible to landlord for the rent amount per the master lease agreement. The original tenant remains the landlord’s tenant and is responsible to the landlord for actions of the subtenant. In general, the landlord cannot directly deal with the subtenant and must enforce the lease through the original tenant.

Occupants

The interaction between landlord and occupant is according to permissions authorized by the landlord.

In general, an occupant is an individual who:

  • Does not have a legal, contractual relationship with the landlord – there is no lease agreement between an occupant and the landlord.
  • Lives in the rental unit, either  temporarily or permanently, with evidence of personal possessions in the unit or other indications of intent to stay.
  • Does not pay rent to the landlord or provide compensation of other means to the landlord in lieu of
  • Does not have financial obligations to the landlord for rents, property damage or defaults of other terms and conditions of lease agreement.
  • Is not entitled to tenant rights and protections by applicable laws, statutes, and ordinances.
  • Is not obligated to give notice for move-out.
  • Is not authorized to requests repairs and maintenance for rental unit.
  • Is not authorized to make changes to the rental property.

Commonly, occupants are likely to be minor children in the family or a tenant’s dependents who are  authorized to live in the rental unit with the landlord’s permission. These authorized  occupants will often be listed in the lease agreement as a matter of record and for safety reasons to account for all persons in residence.

Why would a landlord be concerned with occupancy issues? There are valid concerns regarding the number of persons staying in a rental unit. Concerns include regulatory local, state, and federal laws; as well as limitations of property size and characteristics, building and systems  limitations,  wear and tear, noise, use of utilities if not paid by tenant, and health and safety issues related to overcrowding. While a landlord may, with consideration of all factors including fair housing laws, set occupancy limits, the landlord should have clear understanding of legal compliances and ensure the occupancy policy is defensible for legitimate non-discriminatory business reasons, health, and safety standards.

Unauthorized occupants present a different situation for landlords. The concern for many landlords regarding  occupancy issues are the potential problems that an unauthorized occupant can create in liability issues for the landlord. An unauthorized occupant is any adult living in the property without landlord permission. Unauthorized occupants do not have  legal rights to be live in the rental unit. An unauthorized occupant is not held legally responsible for lease terms and conditions, landlord rules and regulations, or accountable for property damage. The tenant will be held liable by the lease agreement for lease defaults and damages caused by occupants but it may take legal action by the landlord to recover his losses. Additionally, if the tenant moves out, by lease termination or abandonment, the unauthorized occupant could continue to stay in the unit creating risks and liability for the landlord. The landlord would need to take legal action to remove the occupant from the unit.

Guests

A guest is a person invited onto the rental property  by the tenant for occasional visits. The lease agreement should hold the tenant responsible for guest compliance with lease obligations and rental rules while on the rental premises.

Similar to unauthorized occupant issues are potential risk and liability Issues that arise from guests who violate the tenant’s lease terms and conditions. The tenant will be held responsible for the guest’s conduct while on the rental premise, but in actuality the tenant has little control over the guest’s actions. The landlord‘s only recourse for defaults and damages is recovery from the tenant.

Legal Action for Lease Defaults

Classification of individuals staying in the rental unit also determines how a landlord should proceed in taking legal actions to remedy lease defaults. A landlord will need to research appropriate landlord-tenant statutes and ordinances for guidance and compliance in removing an individual from the rental unit. In the case of lease default by a tenant, a landlord must follow legal procedures as established by the court of jurisdiction to re-gain possession of the rental unit and seek judgment for lost rents and damages. In some situations, it may be necessary for the landlord to consult with legal counsel to determine appropriate action.

To avoid problems, a landlord should ensure the lease agreement has clear, detailed language for rental policies and practices addressing the issues of occupancy, use of rental premises, guest policy, and requirements of landlord permission for special circumstances. to allow extended stays by guests. Research of applicable laws by the landlord will be required to make sure the lease and attendant policies and practices are legally compliant. The landlord’s new tenant move-in orientation should review the lease and important policies and make sure the tenant understands the rules and what his tenant obligations are during the tenancy.

Tenant Screening Interviews

January, 2022

Screening interviews are important to identify and qualify rental prospects for tenant selection in filling a vacancy. As relevant to the circumstances, a landlord could conduct more than one type of interview with prospects or tenants during the application process and tenancy. The following discussion is representative of screenings that could be conducted as part of a landlord’s best practices in property management.

Prescreening Interview

A prescreening interview is a separate interview from a tenant screening interview during the application process.

Prescreening rental prospects can identify potential tenants to fill a vacancy. Qualifying a rental prospect could begin as soon as the landlord is contacted regarding a posted vacancy listing.

Questions asked during a prescreening interview help the landlord prequalify the prospect to the landlord’s minimum screening requirements. Many prospects have questions to ask the landlord about rental policies and procedures for tenant qualification, selection, and residency. During the interview the prospect can determine if the unit meets his rental criteria and whether he will take the next step in the application process.

There are multiple ways a potential renter can learn of a unit vacancy. A prospect may contact the landlord in response to print/online media advertising, social media post, a referral from a satisfied tenant, “for rent” signage, an on-site visit, an open house showing, or other type of contact for information about a vacancy.

The questions that a landlord may ask during an interview with a prospect should be relevant to business purpose and compliant with applicable laws. A landlord should prepare a list of permissible screening questions to be ready for the first contact with a prospect. Using a set of standardized questions will help avoid claims of discrimination.

.Some common interview questions include:

  • Do you currently rent? How long have you lived there?
  • Why are you moving?
  • What is your planned move-in date?
  • Have you given notice to your landlord?
  • Will your landlord give you a good reference?
  • How many people will live in the unit?
  • What is your monthly income?
  • Will you be able to meet requirements for:
        • Security deposit, one month rent
        • Credit and background check
      • Will you comply with:
        • No smoking policy
        • Pet /animal policy

A landlord may want to document responses to his advertised vacancy by keeping a written record of inquiries received with brief but relevant information about the response to the vacancy listing. This aids the landlord in his marketing and advertising practices and can be an additional reference document if a prospect later decides to apply for tenancy.

Applicant Interview

Rental applications are the most efficient means to gather relevant background information about a prospective tenant to begin the rental qualification process. Customized to a landlord’s business requirements, the rental application form is a screening document that requests information about an applicant’s background, rental history, credit history, employment, and income.

A well-developed application form makes it easier for the applicant to furnish information in an organized manner. This in turn makes it simpler for a landlord to analyze and evaluate applicant information for potential business risk. A standardized format helps to ensure the screening process is conducted in a non-discriminatory manner. Every applicant should receive the same application form to be processed in the same manner according to rental practices.

The application form does not replace an applicant interview. The applicant interview is used to request additional information or clarify information as needed to evaluate the applicant’s rental qualifications.

Interview questions are developed to help the landlord determine if the potential tenant has the ability to meet rent obligations and would be likely to comply with rental rules and regulations. A rental application should be completed by every adult who intends to live in the rental unit.

A landlord must be knowledgeable of fair housing laws to understand what questions are permissible and what questions are not permissible during an interview.  Federal Fair Housing laws prohibit discrimination against the protected classes of race, religion, national origin, sex, color, familial status, or disability. Many state and local fair housing laws have additional protected classes that are more stringent than federal fair housing law.

The interview is a time to confirm the applicant’s responses to the questions regarding the completed application form. By confirming the applicant responses, a landlord prepares for the verification process at the source document or source entity. While a landlord may want to get to know the applicant, it should be remembered that the landlord-tenant relationship is a business relationship, contractual to specific duties and obligations. Questions asked must be relevant to business purpose and not stray into personal or non-essential topics. A professional working relationship between landlord and tenant will be a best practice for both landlord and tenant. A landlord should be clear in expectations for tenant duties and behavior and follow legal compliances for disclosures and notification to tenants per regulations and guidances.

Landlord Interviews

Conducting interviews with the previous landlord and past landlords is a tenant screening tool that provides direct information about a former tenant’s rental behaviors with landlords and neighboring tenants past rental history as documented by the landlords for timely rents, lease compliance, and maintaining the property in good condition provide a larger view of the tenant’s behaviors in a community setting.

Being organized with the rental application and a written list of questions will allow the landlord to conduct the interview in a professional business-like manner.

A customized rental references worksheet might ask questions such as:

  • When did the tenant’s lease begin and end?
  • What was the amount of monthly rent? What was the security deposit?
  • Did the tenant consistently pay the rent on time?
  • Did the tenant have roommates that contributed to the monthly rent?
  • Did the tenant take good care of the property? Did the tenant leave it clean at move-out?
  • Did the tenant cause disturbances or generate complaints from other tenants or property owners?
  • Were any legal notices for evictions served?
  • Was notice given per the lease agreement?
  • Was the full security deposit refunded?
  • Would the landlord rent to this tenant again?

Other Screening Interviews

A landlord may want to conduct interviews with personal references as provided by the applicant to gather additional information related to qualifying the applicant for selection to tenancy.

The landlord may require the applicant provide a co-signer to qualify for tenancy. The landlord will need to conduct his standard tenant screenings on the co-signer including the application interview.

Contacting employment references is usually verification of current employment. This type of contact/interview is to confirm employment history, wages/salary information, and expectations for continued employment.

Lease Renewal

Many fixed term lease agreements are for a term of one year. A tenant who qualified under the landlord’s rental standards a year ago may have had a change in regard to one or more of the landlord’s qualification criteria. If the landlord is considering offering an existing tenant a lease renewal, the landlord may conduct a screening interview to re-qualify the tenant to current rental standards.

Tenant Exit Interview

Some landlords have found that conducting a tenant exit interview at time of move-out can provide valuable feedback on property operations and rental practices. While information gained from the exit interview may be too late to retain that particular tenant, the information can be used to prevent a future tenant from experiencing the same or similar problem.

In developing questions for a tenant exit interview, a landlord is expanding on the standard question “why are you leaving?” Questions may include:

  • What is your primary reason for moving?
  • Are you moving to another rental community in the area?
  • How did you find your new place?
  • What did you like about living here?
  • Do you consider the rent a fair rent for this unit/area?
  • What could have been done to keep you as a tenant?

Managing Difficult Tenants

December, 2021

Dealing with difficult tenants is costly for a landlord; draining landlord energy and diverting business resources of time and money away from general property operations. However, a landlord cannot afford to dismiss or ignore demands from a difficult tenant. Experienced landlords recognize that property management is also tenant management.

A difficult tenant creates stress on the landlord’s business which can potentially create liabilities for the business if issues are not addressed in a timely manner. Difficult tenants can be disruptive to other tenants, potentially interfering with other tenants’ rights of quiet enjoyment of the premises, privacy, security, and safety. This can result in absence of renewals by other tenants or other tenants also becoming difficult.

The challenge in managing difficult tenants is to be prepared with a plan of action that details what steps should be taken to acknowledge and address tenant concerns and take appropriate action for resolution while protecting the business from potential harm.

Each landlord could define a difficult tenant in a different way from his fellow landlords. As a generalization, a difficult tenant is a demanding tenant, usually with repeated requests for services and comments, concerns, and complaints voiced frequently to the landlord and his staff. Issues could be major or minor ones yet treated equally in importance by the tenant.

Difficult situations could also produce a difficult tenant. A landlord would do well to first listen to tenant concerns and comments before deciding his tenant is a difficult tenant. A landlord should always remember that a difficult tenant is first of all a tenant entitled to fair and equitable housing, rental services and amenities and tenant rights and protections by law. In exchange, the tenant has responsibilities and obligations by statutory requirements and his lease agreement. Demanding or not, pleasant, or unpleasant, the tenant must be treated in a professional manner, as respectful and courteous as all other tenants are treated.

There are legitimate business reasons that a tenant could become a difficult, demanding tenant, such as a landlord‘s failure to maintain habitability or a landlord’s practice of deferring maintenance and repairs. If a tenant has repeatedly expressed concern or requested services for repairs and maintenance but his communications have been ignored or dismissed, there may be legitimate reason for the tenant to be more demanding for a response and resolution. Landlord failure to maintain the rental premise to good condition is a statutory contract default on the landlord’s obligation to provide habitable housing. Deferred repairs and maintenance which negatively impact tenant health and safety are recognized by courts as legitimate reasons for tenants to withhold rent. If the tenant proves that he has received different treatment than other tenants, he has claim for discrimination and unfair practices. A difficult tenant can quickly become an angry tenant who could potentially pose a threat to others by his disruptive behavior or can result in a complaint to government housing authorities or filing of lawsuit.

Tenant screenings can help identify red flag issues during the application process that could indicate potential problems during tenancy. A landlord can address red flag issues with additional screenings and evaluate the applicant’s qualifications according. While most applicants are on their best behavior during the interview and property showing, it is not unusual for a landlord to discover that the selected tenant becomes a difficult tenant once in residence.

The lease signing and tenant orientation meeting is a good opportunity for the landlord to hold an open discussion with the incoming tenant regarding tenant responsibilities and setting landlord expectations of appropriate tenant behavior.

A landlord’s lease agreement is a powerful property management tool. The lease agreement is the legal contract between landlord and tenant with specific duties, obligations, terms, and conditions of tenancy. The lease agreement is the governing document to enforce rules for tenant behaviors and remedies for tenant breach of contract. Therefore, the lease agreement must be strong enough in language and terms and conditions to protect tenants’ rights but, when necessary, to evict a tenant who commits repeated violations of the lease or a material condition of the lease.

During tenant move-in orientation, the landlord should review all material lease clauses with the new tenant, emphasizing the rental rules and regulations including rents, deposits, occupancy and use of premises, guest policies, noise restrictions, quiet hours, and the consequences of violation of the rules. The landlord should emphasize to the tenant that by the tenant’s signature on the lease the tenant acknowledges his understanding and consent to terms and conditions. A tenant should also understand that he is responsible for his guests’ conduct and adherence to rules and regulations while the guests are on the rental property.

The rules for community living must be clear to serve as a guide for resident behaviors and to act as a deterrent for unacceptable behaviors. Landlords should incorporate as much detail in their lease agreements as needed to protect the property and the residents. Caution is advised that arbitrary or excessive rules and regulations can serve as a deterrent for business. Tenants do not want to be regulated or restricted unnecessarily, unfairly, or illegally. Lease clauses must comply with applicable federal, state, and local laws for fair housing, consumer protections, and landlord-tenant statutes. Any policy, procedure, practice, rule, or regulation cannot discriminate against a protected class or characteristic nor deny rights afforded by law.

Certain landlord-tenant interactions make it more challenging for a landlord to work with a difficult tenant to achieve resolution of issues.

Rents

The most common situation for difficulty in landlord-tenant interactions is tenant failure to pay rent. The applicant may have qualified during screening as being financially able to meet rents but circumstances frequently change after a tenant has been installed and the tenant is unable or unwilling to make timely payment of the full rent owed.

In a situation where the tenant has defaulted on his rent obligations, such as late payments, missed payments, partial payments, or skipping out on the rent, a landlord must remain calm and professional in his dealing with the tenant. The tenant may be emotional, embarrassed, belligerent, or unable to deal with the situation as a result of cash flow problems, or unemployment. Communication is important in this situation to understand the true nature of the problem and how to resolve it.

It is a best practice to have good lease clauses that include all policies and practices related to rents – how much the rent is, when it is due, the grace period as applicable by statute or lease and application of late fees. The lease should address the issues of rent defaults and the remedies that may be taken to resolve the issue, including legal eviction.

Frequent Tenant Demands

A landlord may have to deal with a difficult tenant who constantly makes demands on landlord time and services or complains about the property, the neighbors, the policies, and the rules for the community. It takes effort to remain calm with tenants who are angry, rude, or irritating but a landlord must listen first before responding professionally to the tenant. Tenant safety, security, and health issues must be prioritized when issues arise to protect the tenant and the landlord.

A best practice to help with demanding tenants is to ensure that (1) there is a strong lease agreement, (2) the lease is enforced consistently, (3) the lease is enforced uniformly with all residents, and (4) new tenant orientation is conducted to provide education and training regarding rental rules, lease terms and conditions.

Disruptive Behaviors/Nuisance Complaints

A tenant’s noisy behaviors can be disruptive to his neighboring tenants which in turn can cause problems for the landlord. Noise complaints from tenants should not be ignored by landlords. Any complaint should be taken seriously and investigated accordingly.

A best practice is to have a strong lease agreement. A lease should always include a clause that prohibits tenants and their guests from creating a nuisance by disturbing or interfering with the quiet enjoyment and peace and quiet of the rental property by other tenants or nearby residents. If the tenant violates the lease by creating a nuisance with loud or excessive noise, the landlord’s actions should be in accordance with the remedies set out in the lease or by law.

Property Damage

Property damage caused by a tenant can be an expensive problem for a landlord. Accordingly, a landlord collects a security deposit to protect his property against damage caused by a tenant. In general, tenants are held responsible for property damages as a result of tenant negligence, carelessness, or intentional destruction. Tenants are not responsible for normal wear and tear during their tenancy.

A best practice is once again a strong lease agreement that details tenant responsibilities for maintenance and housekeeping to maintain the unit in good condition as received at move-in. Landlords should conduct regular routine property inspections for damage and maintenance concerns and take corrective actions as required.

Property Damage Caused by Pets

Property damage can be caused by a tenant’s pet’s destructive behavior or by pets being left unattended by their owner/tenant. The landlord ‘s pet policy should detail pet owner responsibilities for control of their pet and responsibility for damages to the property caused by their pet The owner/tenant acknowledges his acceptance of the pet policy at lease signing. Some landlords require pet deposits at lease signing to help prevent loss from pet damages.

Occupancy, Guests, Subletting

Difficult tenants may ignore a landlord’s policies for occupancy standards, guests, or subletting. A landlord may discover during a property inspection that others are living in the rental unit that are unknown to him. Those additional occupants have not been tenant screened and have not signed to the lease. This can result in creating potential liabilities for the business.

The landlord should have definitive lease clauses regarding occupancy, guests, and prohibitions against subletting the rental property. Remedies for tenant default should be clearly detailed in the lease and strictly enforced during the tenancy.

Illegal Activities

A landlord cannot ignore tenants conducting or being involved in criminal activities on the rental premises. A landlord should monitor tenant activity on the premises and report criminal activities to law enforcement agencies. Tenants engaging in criminal acts have materially violated the lease agreement and legal action should be pursued for lease termination and eviction.