Landlords can be sued for discrimination despite their best efforts in fair housing compliance policies and practices. Discrimination lawsuits have increased over the past few years causing landlords to spend significant time and money to defend themselves against claims of discrimination. While some lawsuits may prove to have no merit, (e.g., a nuisance lawsuit) nevertheless the landlord must still defend against them in court or agree to a settlement outside of court at some cost to the landlord.

Tenant Discrimination Insurance coverage is a way to transfer the risk of discrimination lawsuits to a third party, an insurance carrier. Tenant Discrimination Insurance is a claims-made insurance that can protect a landlord in the event of a discrimination, harassment, or wrongful eviction lawsuit. Coverage will include actual or alleged acts of discrimination or harassment against tenants and third parties. A landlord’s standard general liability insurance policy does not provide this type of coverage.

The insurance covers the damage amount the landlord is legally obligated to pay as well as expenses and costs of defending the lawsuit. .As long as the claim is made within the policy period or within the specified time period as stated in the policy, the insurance will provide coverage up to the policy limits. Tenant Discrimination Insurance does not cover property damage, bodily injury, personal injury (unless the injury was a result of wrongful discrimination), or criminal or malicious acts.

An insurance product that helps compensate a landlord for loss of income in the event that a rental property become uninhabitable due to a covered loss – e.g., storm damage or fire damage – is available from many business insurance companies. This type of coverage may also be called a Loss of Income Policy, Rent Loss Policy, Fair Rental Protection Insurance, Business Interruption Coverage, Business Income Insurance or another designated product name by the insurer.

A landlord’s standard property insurance policy pays for property damage that occurred as a result of a covered event. A standard policy does not compensate a landlord for the financial damage caused by tenants being relieved of their obligation to pay rent when their rental unit is damaged and becomes uninhabitable. A landlord in this situation suffers loss of business income. A loss of rents coverage would compensate the landlord for the revenue the landlord would have earned had the covered event not occurred.

You should check with your current insurance carrier to determine if loss of rents coverage is included in your landlord package or whether it is available as an add-on to your basic policy. You need to know if the loss of rents coverage is based upon the fair rental value of the rental property (as determined by the insurance carrier) or is based upon the tenant’s actual rent amount at the time of the event. In a situation where the tenant is paying above market rent, you will likely be out the difference between the actual rent and market rent.

You may also want to determine if there is language in the loss of rents policy (whether included in your landlord package or as the separate add-on policy) that may cover your continuing operating expenses on the rental unit until such time it can be returned to the tenant for occupancy. Some mortgage lenders require a landlord to carry rent loss insurance in addition to the requirements for property and liability insurance. This is another reason to confirm your current coverages with your insurance agent.

Rent loss coverage does not cover lost rents due to vacancies, evictions, or ordinary tenant turnovers. Damage to rental property due to owner negligence will not be covered.

Late and missed rents are often cited by landlords as being the biggest problems with new tenants. To evaluate an applicant’s potential financial risk to the landlord, i.e., rent defaults, landlords conduct tenant background screenings. Based upon a greater perceived business risk, a landlord may offer conditional acceptance to an applicant by requiring the applicant to provide a cosigner.

Approval of the applicant as the new tenant is contingent upon the cosigner being financially qualified and fully screened to the landlord’s rental standards.  If the potential cosigner cannot meet or exceed required standards, the offer of acceptance can be withdrawn since the contingency was not met.

The applicant has the responsibility to provide a qualified cosigner. The decision to accept the cosigner is the landlord’s business decision per his stated rental terms and conditions. There is no law that requires or prohibits the use of cosigners for residential lease agreements with one major exception. Under federal fair housing law landlords must consider cosigners when an otherwise suitable disabled applicant having insufficient income to qualify on his/her own requests the use of a cosigner who is willing to pay the rent if needed. If the proposed cosigner is solvent and stable, federal law requires landlords to accept the applicant regardless of the landlord’s policy regarding cosigner qualifications.

While the terms cosigner and guarantor are often used interchangeably, they can be significantly different, depending on state law and/or on the clauses contained within the lease agreement or a separate cosigner agreement.

In some states, a cosigner for a lease agreement is the same as a signer of the lease agreement. Accordingly, absent adequate language in the lease specifying otherwise, the cosigner may have all the same rights as a tenant who resides in the subject rental unit. That is, the cosigner can legally become a cotenant even though not living in the unit. Thus, if not specified otherwise in the executed agreements, it is important that cosigners for a lease agreement be served with all notices or other legal documents (e.g., eviction complaint) that are served on those signers who are occupying the unit.

A guarantor is often differentiated from a cosigner as someone who assumes certain financial liabilities for a lease, but does not actually sign the lease agreement itself and, accordingly, has no rights to the premises.

However, no matter what the person is called, it is best to adequately define all rights and responsibilities in written documentation executed by the one guaranteeing the lease agreement on behalf of the prospective tenant.

While landlord and applicant may agree that a cosigner will be used to secure the tenancy, the proposed cosigner must be qualified and willing and able to serve as the financial guarantor for the prospective tenant. Most importantly a cosigner must have a thorough understanding of the legal responsibilities that are required of a cosigner before signing the cosigner agreement.

The proposed cosigner should carefully consider and thoroughly evaluate certain issues before agreeing to act as a cosigner for the prospective tenant.  A cosigner is usually a family member or friend with a close personal relationship to the applicant who is willing to help the applicant get established. The personal relationship of trust between cosigner and applicant can be a motivator for the applicant to act responsibly during his tenancy (meeting rent obligations and lease terms and conditions) in order not to take advantage of the cosigner. The applicant and the potential cosigner should discuss this issue in detail before committing to the agreement. Both parties must understand the legal commitment of acting as a cosigner. While parents often cosign for their college age children, asking a friend to cosign a lease agreement is more than asking for just a casual favor. Default by the applicant once he is installed as a tenant has serious consequences for the tenant and his cosigner.  Once the lease agreement is signed by the new tenant, the cosigner is likewise committed to fulfill his cosigner obligations for the length of the lease term. A cosigner is not released from his financial obligation until the tenant’s lease terms ends per the lease agreement and all lease terms and conditions have been met.

If things go as planned, it is possible the cosigner will never have to fulfill his financial commitment. If however the tenant defaults, e.g., pays rent late, fails to pay rent, or breaks the lease, the landlord will go directly to the cosigner to collect what is due according to terms of the lease agreement. If both tenant and cosigner default on their obligations, the landlord will be able to file a lawsuit against both parties to collect unpaid rents and damages.

Having a formal, written cosigner agreement emphasizes the legal obligations of both cosigner and tenant and what the consequences will be if the tenant defaults. A cosigner should be sure to read and understand the lease agreement and the cosigner agreement before signing the documents. A signed copy of both agreements should be retained for the cosigner files.  Language in the cosigner agreement should make it clear that:

• The cosigner is only providing a financial guarantee and has no rights to tenancy or other type of occupancy.
• The cosigner agrees to the landlord’s standard rental lease terms and conditions. In addition the cosigner agrees to submit a rental application, submit to the same tenant screening procedure, and meet or exceed the same qualifying criteria as any tenant applicant. The same application and processing fees required for applicants are also required for a cosigner.
• The cosigner is jointly and severally responsible with the tenant for any and all financial obligations of the tenant under the lease agreement including but not limited to rent, deposits, fees, or other charges as a result of damage to the unit.
• The cosigner acknowledges that the landlord has no obligation to give notice to the cosigner if tenant defaults.
• The cosigner agrees to appoint the tenant as the cosigner’s agent for service of process in the event of any lawsuit that might arise from the agreement, releasing the landlord from any obligation to separately serve the cosigner directly.
• The cosigner acknowledges the landlord may demand that the cosigner perform per the cosigner agreement in the event of tenant default without first using any of tenant’s security or other deposits.
• The cosigner shall remain liable for the performance of any assignee or sub-lessee of the tenant unless expressly relieved by written termination of this condition by the landlord.
• The prevailing party of any legal action brought by either party to enforce any part of the agreement will recover reasonable attorney fees, court costs, and other expenses associated with collection of a judgment.

Utilizing a cosigner agreement as additional financial security against a tenant rent/damage default does not guarantee a perfect tenancy. Thorough tenant screenings are necessity to determine if there are issues of concern in the tenant’s background that should be evaluated further.

What does your lease agreement say? Once the lease agreement is signed, you and the tenants have a binding legal contract. If the lease agreement did include a contingency regarding the sale of their house, your options would be limited to the terms of that contingency. If not, your lease agreement terms and conditions govern tenant obligations and defaults.

You should require for your records that the tenants notify you in writing that they intend to break their lease agreement by not moving in. By terms of the lease agreement the tenants are legally liable for rent for the entire term of the lease agreement (whether they would occupy the rental property or not). By breaking their lease, the tenants are liable for any other actual expenses such as additional advertising or marketing costs in a landlord’s efforts to find a replacement tenant.

In most states, however, you as the landlord have the duty to mitigate damages and take reasonable effort to re-rent the property as soon as possible.

You could consider negotiating a written cancellation of the lease whereby you let them out of the lease for some consideration, as example, a month’s rent. If you have already collected a security deposit, you could apply the security deposit toward rent owed until the property is re-rented. Any unused portion of the security deposit would be refunded to the tenant. If the rent amount due exceeds the security deposit amount, the tenant will be liable for the difference and all future rents until a replacement tenant is installed. Applying the security deposit to rents may be a problem for a landlord if the tenant refuses to cooperate once the security deposit is used up. You could instead require the tenant to pay rent each month until the property is re-rented. The full amount of the security deposit would then be refunded to the tenant in the manner and timeframe as required by state landlord-tenant statutes.

Landlords should not make rental decisions based on gut feelings. Decisions should be made based on the results of a number of objective screening procedures as applicable per federal, state, or local laws. Typical tenant screenings include identity verification, employment history, income verification, previous rental housing history, references, and background screenings for credit, criminal, and eviction history.

A lease agreement is a binding legal contract between landlord and tenant. The contract takes effect on the day the contract is signed regardless of the date when the tenant moves in.

To my knowledge no jurisdiction in the country has a law that allows either a landlord or a tenant to change his mind after he signs a lease. A possible exception may be if it could be shown that one or the other parties committed fraud.

Consumer protection laws allowing a consumer a “right to rescind; i.e., to cancel a consumer contract in certain circumstances within 3 days, do not apply to residential leases.

If a month-to-month lease was signed, you could immediately give a termination notice (many states require only a 30 day notice) and you would likely find that the tenant would prefer to end the lease rather than again move in a month. If the lease term was a fixed term lease, you might be able to negotiate a settlement with the tenant for early termination. However, there could be potentially serious issues regarding landlord default or discrimination claims. You may need to consult with legal counsel should you want to pursue the matter of cancellation.

There are several issues here that require clarification before determining how to handle your situation. A primary issue is that, although you call the person a tenant, you do not explicitly state that the lease has been fully executed. If you and the person executed a written lease agreement, you can hold her to the terms of the lease. However, if she chooses to break the lease, you can only hold her responsible for the rent until a new tenant begins paying rent and you must exert reasonable effort toward finding a new tenant. You can probably also hold her responsible for paying extra expenses related to again having to market the property, including advertising and leasing commissions.

If it is an oral lease and there is no written lease agreement, it would be your word against hers as to the exact terms of said agreement unless there were witnesses on one or both sides.

You are not specific regarding whether the deposit was a security deposit under terms of the lease or was actually a separate holding deposit for which there should have some other written agreement. If the deposit was a holding deposit you must abide by the terms of the holding deposit agreement.

A holding deposit is associated with a potential tenant, the applicant, who has requested the landlord take the rental unit off the market until the applicant qualifies or otherwise fulfills the landlord’s terms and conditions for tenancy.

When the landlord holds the rental unit for an applicant, it should be considered off the market and unavailable to other qualified prospective tenants who may have to be turned away. If the applicant later changes her/his mind, the landlord may have suffered financial harm. In such a case, the landlord is justified in retaining all or part of the holding deposit within the limits allowed by state law and according to the signed, written holding deposit agreement (including what happens to the funds in the event of a tenant default). If there was no such written agreement, it could be difficult to prove the terms of the deal.

Deposits and fees are required by a landlord to protect his business against possible financial losses from tenant unpaid rents and property damages beyond normal wear and tear. The type, use, and amount of rental deposits and fees are customarily regulated by state landlord-tenant statutes. Additionally, local ordinances, area rental market conditions, property location and characteristics, and the landlord’s ability to absorb risk can affect the landlord’s deposit and fee requirements.

Most landlords utilize the security deposit as a primary risk management tool to protect their investment. The administration of security deposits for legal compliances requires the landlord’s due diligence on state statures for the collection, handling, and return of security deposit funds. In some markets local municipalities may also regulate the administration of tenant security deposits. For landlords with multiple properties, multi-family housing, and/or frequent tenant turnovers, administration of security deposit accounts can be time consuming.

As an alternative risk management measure, in some rental markets, primarily metropolitan areas, some landlords have utilized a policy of collecting a tenant move-in fee instead of a security deposit. A move-in fee is a non-refundable fee generally characterized as a fee collected from the tenant for turnover costs associated with preparing a rental unit for a new tenant. Unit preparation costs may include general cleaning and painting. Collecting a move-in fee may provide a benefit to the landlord in time savings for administrative costs of deposits while tenants may benefit from not having to come up with a large security deposit amount at lease signing.

While due diligence is required to determine whether a move-in fee is addressed by state statute and local ordinance as applicable to the rental property location, in general, a move-in fee is not regulated in many states. This is perhaps the most obvious difference between a security deposit and a move-in fee. Security deposits are regulated by state statutes and landlords are held accountable to specific duties and obligations. For the most part, move-in fees are not regulated by statutes and landlords are not held accountable for the use of move-in funds.

Security Deposits

All states allow a landlord to collect a security deposit when the tenant moves in and to hold the deposit until the tenant moves out. Security deposits are funds that legally belong to the tenant and remain a credit of the tenant during the tenancy. A landlord is legally accountable to the tenant for use of the security deposit funds.

State landlord-tenant statutes regulate security deposit limits, deadlines for itemization and return of security deposits, and disclosure requirements. The statutes provide clear protections to tenants for the use of their security deposit funds and the return of deposits upon tenant move-out.

Deposit disclosure requirements must usually be in writing. Common disclosures require the landlord to disclose the conditions under which part or all of the security deposit may be withheld and how the deposit is refundable. A landlord may be required to provide a written list of preexisting damage to the rental unit, a copy of inspection orders for the unit or a list of habitability defects before collecting a security deposit. In most states landlords that require a security deposit must utilize a move-in/move-out property inspection checklist to document the condition of the rental unit at time of tenant move in and upon tenant move out.

In states that require a separate account for holding a security deposit, a landlord is required to disclose the account number, amount on deposit, interest rate, and name and address of the financial institution.

The purpose of a security deposit is to protect the landlord from damage caused by a tenant. Specifically a landlord may only recover funds from a tenant’s security deposit if the tenant has defaulted on his obligation to pay rent (tenant owes past due rents) and/or the tenant has caused physical damage to the property that is beyond normal wear and tear allowed by statute.

Move-in Fees

A landlord may choose to collect a move-in fee for necessary services to prepare the rental unit for a new tenant. A move-in fee is a specified dollar amount that is not refundable to the tenant. The rental prospect/applicant/tenant should clearly understand that the move-in fee is non-refundable. A move-in fee is money that is paid directly to the landlord and is immediately available to the landlord to administer the funds as the landlord chooses.

When filling a vacancy, a landlord may collect an application fee and/or screening fee from the applicant. The applicant upon selection for tenancy will be required to pay the first month’s rent, possibly the last month’s rent, security deposit, and/or other fees or deposits, such as pet fees, parking, or use of other amenities. For many tenants, the total dollar amount of move in costs can be quite high. There is a potential risk that the new tenant will over-extend his financial abilities to pay or under-estimate his ongoing costs of living including rent and utilities. The tenant may be able to pay his deposits but fall short when the next rent payment is due. Adequate tenant screening by the landlord and clear communication of rent policies to the new tenant may help to minimize potential risks. A move-in fee in lieu of a security deposit can often provide some relief to the new tenant for his signing costs while allowing the landlord to collect a set fee upfront to potentially offset a future expense caused by a tenant default.

Move-in fees may be assessed as a flat fee, for example, based upon the size of the rental unit, or as a calculated percentage of the monthly rental amount. A landlord may take into consideration the costs of a typical tenant turnover and set a move-in fee based upon that cost (within reason). Move-in fees that are less than a customary security deposit amount are usually more attractive to rental prospects and more easily budgeted by incoming tenants. A range of 1/3 to 1/2 of the monthly rental amount may be less a burden to the tenant than a one to two months’ rent amount collected as a security deposit.

If agreed to by mutual consent of landlord and tenant in a written document and as allowed by statute, a landlord could collect a security deposit and a move-in fee from the tenant. An amount designated as the security deposit could be held for the tenant during his tenancy and refunded per the tenant meeting terms and conditions of his lease. The amount designated as a move-in fee would not be refundable, being immediately converted to landlord use. Care should be taken that total deposits and fee amounts comply with applicable statutes and ordinances.

Key Differences

The key differences between move-in fees and security deposits:

• Security deposits by statute are refundable to tenants. Move-in fees are non-refundable.
• Security deposits are typically an amount ranging from one to two months’ rent. Move-in fees are typically one-half the monthly rent amount.
• Security deposits are regulated by state statutes with specific landlord obligations and requirements. Move-in fees are generally not regulated.

Considerations

Whether a security deposit or another form of security should be used to protect a landlord’s business will depend upon several factors including legal compliances, prevailing rental market conditions, property location, property brand, and the rental policies and practices of the landlord.

As a landlord best practice a traditional rental policy of collecting a security deposit in the amount as allowed by statute may help protect the rental investment to a greater degree. The tenant has an obligation to take good care of the rental unit and pay rent as agreed in the lease contract. The tenant has a vested interest to uphold that obligation. The tenant is protected by statute in his right to a refund of that deposit upon his meeting the terms and condition of his lease. The landlord has the right to deduct his financial losses if the tenant defaults.

Formulation of rental policies and practices must be done with complete understanding of applicable business regulations, landlord-tenant statutes, local ordinances, and financial safeguards.

Many states require a move-in checklist to be completed when possession of the rental unit is given to the new tenant. The checklist is a written statement of the condition of the rental unit at the time of move-in. The completed checklist documents any existing damage to the unit and/or an inventory of landlord supplied appliances or furnishings and requires signatures by landlord and tenant to acknowledge move-in condition of the rental unit.

The original signed checklist should be retained by the landlord in the tenant’s file and a copy given to the tenant. The move-in checklist is an inspection report and should be referenced when future scheduled inspections are conducted to determine if the rental unit remains in satisfactory condition or repairs are needed. The move-in checklist and inspection reports will be utilized during the final inspection and walk-through of the rental unit when the tenant is moving out.

The move-in and move-out inspections document why deductions were taken from the tenant’s security deposit for property damage and as proof for damages in excess of the deposit when a lawsuit is filed for damages recovery.

It may prove helpful to provide another copy of the move-in checklist along with a copy of the annual inspection checklist to the tenant before the actual inspection date for move-out to allow the tenant advance notification of the items/conditions to be inspected. Minor items that should have been taken care of by the tenant can be dealt with before the inspection date and the actual inspection should go much smoother since the tenant will know what to expect.

Landlords can use the checklist/inspection document to better manage properties by knowing when repairs were done and when to schedule future routine maintenance. Checklists are another source of documentation to help refute claims of neglect or unsafe conditions in a rental unit. As with all property records, inspection documents should be retained in a permanent file for the appropriate time period as specified by specific legal requirements or by statute of limitation laws.

If the property is not kept in good repair and the problems are not corrected during a vacancy, the new tenants will start out with a bad experience. The fewer defects for a property when a tenant moves in, the less argument the tenant can have when the tenant moves out.

The importance of regularly scheduled inspections can be emphasized by clear language in the terms and conditions of the lease agreement. The lease agreement should specify the types of inspections, schedules, and notifications that are required for tenant health and safety issues and property maintenance and repair. Separate sections in the lease agreement for maintenance responsibilities and inspection schedules will help reinforce the tenant’s duty and responsibility to report problems regarding maintenance and repair.

If there are other types of inspections that must conducted during the tenancy (other than scheduled landlord inspections) the lease agreement should provide specifics on the type of inspection, the regulating agency, and the notification and inspection process required. These types of inspections might include Section 8 Housing Choice Voucher Program, business insurance coverage requirements, municipal rental housing inspection and registration programs, and local health, safety, fire protection, or building/occupancy code requirements.

An annual safety and maintenance inspection is generally considered an acceptable standard. Semi-annual inspections may have more value to help reduce risk and contain costs by identifying a problem early on. The longer interval between inspections creates greater potential for property damage and loss, including increased exposure to claims of liability.

Depending upon the type and age of the property, the condition of the property at the time of the last tenant move-in, the landlord may want to schedule periodic, detailed inspections of the property. Some landlords schedule these inspections to coincide with seasonal maintenance tasks.

Periodic inspections will allow the landlord to inspect the property for a variety of maintenance issues, including those that may not be reported by the tenant but would be costly for the landlord if not taken care of. Some landlords rely upon the tenant to notify the landlord of any maintenance or repair issue. However if the tenant ignores issues that should be corrected before they become an emergency repair or cause collateral damage, a landlord could incur liability for habitability issues or claims for damages to tenant health and safety.

In most states, property inspections may be a statutory requirement for rental housing compliances. It is important for a landlord to know the specific standards under his state’s law and to use those standards as a minimum standard for his properties in order to fulfill his legal responsibilities and protect his financial interests.

Some municipalities have implemented rental housing inspection and registration programs to help ensure rental units meet basic housing code standards. These programs require properties to be inspected by qualified rental housing inspectors to help identify and correct habitability issues of health, safety, and security. Landlords may be required to certify their properties meet quality of housing standards before they can register their properties with the municipality.

Landlord-tenant statutes of most states require specific advance notification to the tenant before a landlord can enter the rental unit to conduct an inspection. There may be different requirements regarding landlord entry in the event of an emergency or other need to access the rental unit. By giving the proper legal notification, a landlord will usually receive the tenant’s cooperation in scheduling a mutually agreeable time for inspection.

Regular maintenance inspections can extend the useful line of the property’s structures, systems, and equipment helping to reduce long-term expense of property maintenance.

Be aware though that “too frequent” property inspections by a landlord may be considered a violation of the tenant’s right to quiet enjoyment of the rental premises.