Question

I’m wondering how long I must keep documentation related to operation of my rental home?

Answer

Landlords need to keep records related to every vacancy for at least the length of time when they might be relevant to defending against an alleged fair housing violation or against a lawsuit from regarding any other issue related to a current or former tenant.

The required retention period varies because the time allowed for filing of fair housing claims or of a lawsuit varies among states as well as between federal and state agencies. It can depend on a specific state statute or by the general statute of limitations laws applicable to the potential cause of action. The length of time typically varies from 2 to 5 years among the states and may vary with the issues involved. Accordingly, it is best to keep records longer than the maximum period required by any statute of limitations regarding any potential issue or by the regulations of any relevant government agency.

Records retained must include all records related to all applicants, current tenants, and past tenants. This includes advertising copy, sign-in books for open houses, phone logs of inquiries, returned applications, all types of screening reports, lease agreements, rent payment records, maintenance records, and letters and notices to and from applicants and tenants. Retaining the documentation will help ensure that the landlord is best able to defend against a lawsuit for any complaint charging housing discrimination or for any other disputed issue.

For property managers, who are regulated by a state licensing agency, the records which must retained and the period of time for which various records must be retained are defined by state statutes and/or regulatory agency regulations and the required periods may be different than for unlicensed landlords managing their own properties.

Question

I have three unrelated tenants in one of my rental homes, all having signed the lease when they moved in at the same time following a vacancy. One tenant has left and the other two remain. The tenant who left is seeking her security deposit back. Who is responsible for paying back the deposit; the landlord or the tenants who have remained behind?

Answer

The answer primarily depends on what it says in the lease agreement that the three co-tenants signed and perhaps secondarily how issues regarding these tenants have been handled in the past. I am not aware of any state having a specific law regarding the issue. Adding or subtracting co-tenants is not an unusual event, so a lease agreement should always contain adequately explicit information regarding the shared deposits and rent – specifically what happens in the beginning, when co-tenants are added or subtracted, and when all co-tenant depart at the same time.

Since I have no idea what’s in your lease agreement or what your policies have previously been regarding co-tenant issues, I’ll start with a short discussion of a number of issues regarding co-tenants.

All occupants of legal age should be required to sign the lease. Although many states make co-tenants jointly and severally liable by statute, the lease agreement should still contain such a clause because the tenants then cannot get away with claiming to be unaware of their liabilities.

Security deposits and rents should each always be considered a single total amount rather allocated among co-tenants. The landlord should only accept one full security deposit (in cash or bank check) and the FULL rent each month (by cash or bank check for the initial first month’s rent) from one person. The residents can fight it out among themselves for the “privilege,” but if anybody offers to pay their “his or her share” of the deposit or rent, the landlord should refuse to accept a partial rent amount, referring them to the lease agreement which should have so stated. Accepting multiple separate checks can result in additional problems if one or more, but not all, are returned as NSF. Furthermore, such acceptance may also indicate waiver of the “joint and several” words of the lease mentioned above.

Unless prohibited by law, the lease agreement should require written consent of the landlord to a tenant’s request to sublet or assign the rental unit or to replace one co-tenant with another without written consent of the landlord. New co-tenants should be qualified to the same standard as those being replaced were unless the landlord is changing qualifying requirements for business reasons – e.g., a slow rental market requires lowering standards.

The agreement should include clauses regarding the security deposit and rent payment issues discussed.

If a co-tenant leaves and the residents find a replacement resident who is accepted by the landlord, then the landlord can agree to the replacement subject to the applicant meeting the landlord’s qualifying criteria.

The proposed replacement or additional co-tenant should be required to submit a rental application, pay any usual application and screening fees, and consent to the landlord’s standard tenant screening process.

Upon acceptance of the new co-tenant by the landlord, a new lease agreement or an amendment to the existing agreement should be executed by all occupants of the rental unit. This is important in order to make it clear that all remaining co-tenants were willing to accept joint and several liability regarding the new co-tenant.

As a general rule the more individuals liable for the lease the better for the landlord. Accordingly, if a co-tenant departs during the term of a lease, there is seldom a reason why the landlord should release that person from responsibility during the remaining original lease term even when another person replaces him as co-tenant.

In the case where a departing occupant will not be replaced, landlords may also want to consider financially re-qualifying the remaining occupants regarding their joint ability to pay the rent. However, one must be careful to consider familial status issues under fair housing laws.

Allocation of security deposit shares among old, new, and remaining co-tenants should usually be left as a matter between those parties. Absent some lease clause stating otherwise, the landlord is not legally required to release any of the security deposit until all lease terms are met and all the tenants have vacated the rental property. A replacement co-tenant usually should not pay a security deposit to the landlord. The landlord should personally return the security deposit only to the last person on the rental agreement to leave the apartment.

For protection of new, departing, and remaining occupants, it is a good idea that a walk-through inspection be performed and a checklist be completed whenever any co-tenant is replaced. It is recommended that the landlord collect reimbursement for damages to that date so that the continuing occupants can properly settle up with the departing co-tenant and start out with a clean slate and minimize damage claims later, a benefit to all parties.

Since I don’t know how your lease agreement deals with the above mentioned issues or whether it deals with any of them, it is difficult to provide specific advice regarding your present dilemma. Assuming that the agreement is significantly deficient regarding the mentioned recommended clauses, I think that your best option is to act as if the agreement DOES adequately deal with the issues or that the issues are covered under statutes or case law.

In other words, you require that the remaining tenants provide the departing tenant with a refund, with you creating documentation that memorializes that fact – perhaps even a new lease agreement for the period remaining of the original term. The walk-through inspection mentioned above should be performed to determine damages that have occurred to date so that the remaining tenant can collect (or deduct from the departing tenant’s refund) the departing tenant’s share, with the remaining tenants becoming liable for all damages evident at the end of the remaining tenants’ occupancy. If the departure date of the departing tenant does not coincide with the date rent is next due or if there is past due rent, this must be dealt with in a similar way as the security deposit.

If and when a new co-tenant is found by the remaining tenant and is accepted by you, similar procedures must be followed.

Additional discussions regarding co-tenant issues are found in our “9 Roommate Issues” Mini Training Guide.

Question 1

The water heater in my rental property went out yesterday. How do we compensate the tenant until a plumber can replace it?

Answer 1

How you compensate the tenant depends entirely upon what the two of you can agree on. Factors that might be relevant to any compensation amount might be (1) the number of persons occupying the unit, (2) the ages of the occupants, or (3) whether any occupant is ill or disabled.

However, I will mention that failure to provide a tenant with hot water within a “reasonable” time after failure of the water heater could be a legal issue of habitability. If you can’t quickly come to an agreement with the tenant regarding compensation, you should consider getting a plumber on the problem ASAP, even if doing so is more costly than waiting until your usual maintenance vendor can get to it.

If the tenant decided to file a complaint with your local housing agency, “reasonable” would depend upon the agency’s definition of “reasonable.” The agency could consider that replacement within a few days is acceptable or the agency might consider your cost of the replacement irrelevant and that it should be replaced the day of failure even if the cost is double the usual. So, it’s best to either compensate the tenant for any delay or pay the extra cost of immediate replacement. You could find that the extra cost of emergency replacement service might be less than the tenant’s expectation of compensation.

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Question 2

I want to put my rental properties into an LLC. How do I do this?

Answer 2

Although I’ll briefly discuss the subject of your question here, I urge you to see my “Lesson 15 – Forming & Operating LLCs” in our eCourse titled “Buying and Selling Income Properties” for fairly detailed discussions concerning a variety of issues regarding LLCs. You may first want to see the preceding “Lesson 14 – Vesting” in the same eCourse, as Lesson 14 provides discussions regarding the variety of ways in which title to a property can be held, including some of the legal, tax, and management advantages and disadvantages of each.

As you are probably aware, an LLC is considered to be the best way to hold title to rental properties for most investors because of the legal protection, income tax ramifications, and the ease of formation and operation compared to other entity forms of vesting.

Laws, registration procedures, and costs vary among states, so you must become familiar with those of your state.

A LLC is legally formed by filing LLC Articles of Organization with the filing office of the state or states in which you intend to do business. The filing office in many states is that of the Secretary of State, but LLCs are covered under various other state offices in some states. Although most states have similar procedures and forms, one must be sure to follow the procedures and use the proper forms for each state. Fortunately, obtaining the relevant information and proper forms is easy these days since it’s available on each State’s Web site.

Before filing the Articles, one must choose a name that is not already used for a LLC in that state. All states provide a means of checking availability of a name either by phone or on its Web site. Most states provide for reserving an available name for a certain period of time upon payment of a nominal fee.

It is relatively simple to form an LLC. Although a registered LLC is not legally required to have written agreements and can operate on the basis of oral understandings, it would be a very big mistake to do so, particularly for a multi-member LLC but even for a single-member one. A LLC should always have a detailed written operating agreement that defines the rights and responsibilities of LLC members and managers. Many states provide a generic legally acceptable form for the Articles of Organization on the state Website, but it is not necessarily adequate for every situation.

One disadvantage to not having a written operating agreement is that your state’s LLC statute will control basic issues and this might not reflect what the members want. For example, by statute, profits would be allocated equally among the members rather than in the same percentages as capital contributions or according to some other way the members agreed was equitable.

If it is to be a multi-member LLC, the documents that define and control the group should be very carefully drawn up and include enough details to cover every possible issue. Always write the documents as if the group is going to break up sometime in the future. Better yet, although it may seem like a pessimistic approach, write the documents as if partners are going to become enemies in the future. Accordingly, a number of issues should be considered in the LLC documentation.

The agreement should cover all possible contingencies including the insolvency, bankruptcy, death, incapacity, serious illness, divorce, or resignation of any parties, sale of interests, and other events that might impact the operation and success of the venture. Each of the issues in the previous sentence can result in unimaginable problems for you and failure of the venture if not adequately covered by documentation. For example, members would usually want to require that a sale of a member’s interest be to another member, with value based on a formal appraisal, rather than allow sale to just anyone.

There are many books available that deal with the subjects of forming and operating LLCs in considerable detail and after reading my eCourse Lessons referenced above you might consider browsing some of those books in your local bookstores. However, if you are not adept at generating legal documentation I recommend that you use an attorney for help with the documentation, at least for your first LLC, as once you have a good set of documentation on your computer, it is easy to create sets for subsequently purchased rental properties – it is important to understand and remember that each separate rental property should be vested in a separate LLC.

The attorney should be one who is experienced in forming LLCs rather than just any general practice attorney. If possible, use an attorney who has experience with the specific type of project involved – e.g., rental property ownership vs. a coffee shop business. If not using an attorney to draft documents for you, you can consider at least having your documents reviewed by an attorney.

However, first become as knowledgeable as possible about LLCs. Your expertise is important for several reasons. First, the attorney will likely never understand your needs as well as you and your fellow members, if any. Second, the attorney’s bill should be significantly lower if he is used primarily to check the adequacy of what you have put together and add a little necessary legalese. Third, you’ll be involved with the LLC long after the attorney has spent his fee, so you want to be sure things are done right.

Some folks think that after they’ve vested their properties in LLCs they no longer need to worry about them. However, it is important that you don’t continue operating in the same way as when you were personally the titled owner. In spite of the low cost and simplicity of forming and operating your LLC can, you can’t ignore the fact that your LLC owns the property.

If there is a lawsuit related to a property owned by your LLC (legal protection being the main reason you formed it), you will almost certainly be personally named as a defendant in addition to the LLC. In the complaint, you may hear words such as “unity of interest” and “alter ego.” There are many issues that can reduce the protection potentially afforded by LLCs. If you didn’t properly form and operate your LLC, it might result in a judgment against you personally, just as if you’d never vested your property in the LLC. It is very important that one operate individual LLCs as separate independent entities, separate from one another and separate from the owner.

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Question 3

I am a landlord in the process of evicting tenants for non-payment of rent. When I rented the apt to them the tenants asked if they could pay the security deposit the following week after they moved in and I said yes, thinking they were honest. When I went to ask for the money after they were in, the male gentlemen said he didn’t have the money, that he wouldn’t be paying it, and that I couldn’t do anything about it because we didn’t have anything in writing. So, I gave them a 3-day notice to pay or quit. The unit is in Los Angeles and under rent control and they went to the housing department and said I was trying to raise their rent. I got a notice from housing that stated I needed to cancel the notice because ‘I didn’t have anything in writing about charging the deposit, so doing so would be considered a rent increase. I complied with housing and cancelled the notice. I waited for the beginning of this month when rent was due and went to ask for the rent. The female tenant said they were told by the housing department that they didn’t need to pay rent and if I evicted them they could live rent free during the process. The following day I served them with 3-day notice to pay or quit. When they didn’t answer I filed an unlawful detainer. I had someone serve them the summons and complaint and they answered they had even hired a lawyer. In that answer they are claiming false allegations about me retaliating because they went to housing and that I tried verbally increasing their rent which is not the case. I also called housing and was advised that I could remove the stove and refrigerator since I was the legal owner of the property. They then went to housing again and put a complaint against me. Housing called me and said I needed to either return the items or decrease their rent. I’m very confused with this renting system because it seems like tenants have all the rights and they can get away with not paying rent and having all the comforts as someone decent paying their rent. Is there anything you can suggest I can do?

Answer 3

You have broken a number of basic rules related to managing rental property.

First, never assume an applicant is “good people.” Adequate screening and proper selection are essential for minimizing problems with new tenants. Selection must be based on credit reports, eviction reports, criminal history checks, prior landlord checks, and verifiable income. Furthermore, to avoid claims of discrimination, all applicants must satisfy the same qualifying criteria.

Second, every material issue related to a rental should be in writing and written with sufficient detail to eliminate ambiguity. Any change to the original written lease agreement and/or to normal custom, such as not collecting both the deposit and first month’s rent prior to giving possession should always be in writing. Furthermore, all occupants who signed the original lease agreement should sign any amendment thereto. In your case, the lease or an amendment thereto should have clearly defined the agreement regarding payment of the funds.

Furthermore, when not requiring payment of all deposits and fees and the first month’s rent prior to giving possession, it is almost always best to apply the amount received first against the security deposit, with any surplus applied next to any other deposits and fees allowed by law, with any surplus applied next against the rent. This is because failure to pay rent is usually the easiest eviction to obtain, whereas, obtaining the unpaid security deposit may require a separate lawsuit and a judge may not grant eviction for an unpaid deposit, almost certainly when not adequately written into the lease agreement. It is important that all initial funds required for possession be in cash, money order, or bank check. Remember that once the tenant has possession, a bad personal check will require an eviction to remove the tenants, something that can take at least weeks, even a couple of months if the tenants or their attorney know how to play the system.

Third, whether under rent control or not, a landlord should never remove anything from a rental unit without permission of the tenant. The owner of a rental unit has absolutely no right to remove anything from the premises or reduce any services related to the unit without agreement by the tenants. While the landlord usually has a fee simple interest in the property, the tenant has a leasehold interest which gives the tenant a number of rights. When there is any chance of disagreement regarding what is being removed, as was your case since you were already having a problem collecting the deposit, such removal should have advance written agreement. Contrary to what you understood when you called “housing” you should not have entered the premises (except in case of emergency – e.g., fire or flood) without proper advance notice required by the state of CA or any greater period required by the rent control ordinance. Doing so puts you at risk for (1) violation of the specific law related to entry, (2) violation of the lease agreement, as the unit was rented to include the items you removed, (3) claims related to invasion of privacy and peaceful enjoyment, and (4) charges of theft of whatever personal property the tenants wish to claim is missing.

Fourth, one should not manage rental property without adequate knowledge of all laws including (1) state landlord-tenant law, (2) federal and state fair housing laws, (3) federal and state environmental laws (e.g., lead paint laws), (4) county or municipal ordinances related to the aforementioned issues, and (5) for those few jurisdictions under some type of rent control, a full understanding of the rent control ordinance.

Tenants do have a number of rights. However, so do landlords, but it is extremely important that landlords fully understand the rights of both parties and that they do all things in accordance with the laws and utilize good procedures in management of their rental properties.

With the number of potential dangerous issues involved, you are strongly advised to consult a competent landlord-tenant law attorney as soon as possible, preferably one with significant experience in the particular court of jurisdiction for your property. Whenever a tenant is being represented by an attorney, it is usually particularly important that the landlord also be represented by an attorney. If you do not know how to find such an attorney, I suggest you contact a local landlord association to see if they can recommend one.

Termination and Eviction Overview – Part 2

Eviction is the legal process to remove a person from occupation of real property. However, before an eviction lawsuit can be filed, a landlord must first serve the tenant with a legal notice of intent to terminate the tenancy.

A previous article on Termination and Eviction provided discussion of termination notices, common reasons for eviction, and an overview of courts of jurisdiction that handle eviction lawsuits.

State statutes are specific in their procedures and a landlord should be thoroughly familiar with applicable state statues, case law, and local court of jurisdiction procedures. Failure to follow proper procedures can result in a dismissal or even the loss of the eviction lawsuit.

The Pleadings

The Complaint

The Complaint is a legal notice wherein the landlord gives further notice of the cause of action for the eviction, that is, the facts that justify an eviction. It is a formal request for a judgment for possession of the rental premises and a money judgment for unpaid rent, damages, court costs, and attorney fees.

The Complaint should answer the following questions:

• What happened?
• Where did it happen?
• When did it happen?
• How was the landlord damaged?
• What relief is requested by the landlord?

Each state has court rules under which their respective judicial systems operate. The court rules are intended to standardize and simplify the written documents for the court’s use. In most states in filing eviction lawsuits, the landlord can use a standardized pre-printed form as provided by the court of jurisdiction. Most forms can be completed by a combination of fill-in the blanks and checking appropriate boxes.

If a landlord is preparing the form himself, there may be a requirement to note on the Complaint that the landlord is appearing “pro se”, or in some states, “pro per”, legal terms meaning that the landlord is proceeding without the assistance of an attorney.

After the Complaint has been prepared, the landlord must arrange to have a copy of the Summons and Complaint served upon the tenant(s). If there is more than one tenant, each tenant should be served. Proof of service including the date and manner of service must be provided to the court.

The Summons

The Summons is a legal notice to the tenant from the court of jurisdiction that the landlord has filed a Complaint against the tenant. The Summons commands the tenant to appear at court for a trial. In many states when a Complaint is filed, a court date is assigned at that time. The tenant must file a written response to the Complaint within a specified number of days and appear in court. If the tenant fails to respond the court may award a default judgment in favor of the landlord.

The court of jurisdiction may require copies of notices and written leases be attached to the Summons and Complaint. This requirement would include any expired leases and all written modifications, amendments, and addendums that were executed relative to the tenancy at issue.

Service of Process

Many states have specific procedures for service of court papers. It is the landlord’s responsibility to follow proper notice requirements. Failure to comply with service requirements can result in dismissal of the eviction lawsuit.

In general, service can be made by any person of legal age who is not a party to the Complaint. The landlord cannot personally serve the Complaint and Summons. The landlord should make arrangements with law enforcement officials or a process server to serve the court papers.

Personal service of court papers, that is, handing the papers directly to the named tenant or leaving the notice with the tenant if he refuses to take it, is most often the preferred choice of service to prove delivery to the tenant.

In many states, substituted service may be used if repeated attempts to locate and personally serve the tenant have been unsuccessful. The process server may leave the Complaint and Summons at the rental premises with a competent member of the household who is at least 18 years old. Additionally, a second copy of the Complaint and Summons must be mailed first class to the tenant at the rental address. Service is not complete until both steps have been completed.

If the server is making the service on a domestic corporation, partnership, or other entity, the server should deliver a copy of the Summons and Complaint and any attachments to an officer, managing agent or any other general agent authorized by appointment or by law, to receive service.

It is recommended that each adult occupant of the premises be served with the court papers. If the lease agreement was signed by co-tenants, service on only one of the tenants would be sufficient but serving all tenants is a better policy. A co-tenant, if not served, may try to use a defense later on that he had no knowledge of the situation since he was not served.

Whatever method of service is used, proof of service will be required before the lawsuit can proceed.

The Answer

The tenant files a response, called an Answer, to the landlord’s Complaint on or before the date shown on the Summons. The time allowed for the tenant’s response is limited, usually five days. In the Answer, the tenant will state his written defense to the Complaint.

After the tenant’s Answer has been filed, the clerk of the court will notify the landlord and tenant of the date and time of the hearing

If the Answer is not filed with the court within the specified time, or the tenant does not file a response (does nothing), the tenant loses all defenses. The court will enter a default judgment against the tenant in favor of the landlord. The default judgment allows the landlord to obtain a Writ of Possession to recover possession of the rental property and may also award unpaid rent, damages, and court costs to be paid to the landlord.

The tenant’s Answer may be either a denial of the allegations, or a claim of affirmative defense. As example, in a denial of allegations of the landlord’s Complaint, the tenant, if being evicted for non-payment of rent, may deny that the rent is unpaid, claiming he paid the rent to the property manager.

An affirmative defense is a valid legal reason that provides an explanation for the tenant’s actions and invalidates the eviction action.

Tenant Affirmative Defenses

Retaliation

A tenant cannot be evicted in retaliation for the exercise of his legal rights. If the tenant can establish that he has exercised certain rights for which the landlord might attempt to retaliate by eviction, he has raised a valid defense. As example, if the tenant filed a complaint against the landlord with the local government authorities about housing conditions before the eviction procedure was initiated, the tenant is entitled to a legal “presumption” that the eviction is truly in retaliation for that complaint. The law usually specifies a time period within which an action could be related to the presumption of retaliation.

Warranty of Habitability

The laws of most states makes the payment of rent an obligation of the tenant that is dependent upon the landlord’s obligation to provide a fit place for the tenant to live. In eviction lawsuits based on nonpayment of rent, the breach of the warranty of habitability asserts the tenant is relieved of his rental obligations if the landlord failed to keep the property in good repair.

Constructive Eviction

Constructive eviction occurs when a rental property becomes untenable, or a landlord substantially interferes with a tenant’s ability to use the property for its intended purpose. Accordingly, although constructive eviction can relate to warranty of habitability, there are also other actions that constitute constructive eviction, such as landlord threats, harassment, false claims, utility shutoffs, lockouts or other actions that interfere with the tenant’s quiet enjoyment of the premises.

Repair and Deduct

A tenant may use a repair and deduct right as an affirmative defense against an eviction lawsuit for nonpayment of rent. In many states under certain conditions a tenant may exercise his right to make needed repairs for property defects or damage that are the landlord’s responsibility and for which the landlord, after being given reasonable notice, has failed to remedy. The tenant deducts the costs of the repairs from rent.

Unexpired Lease

The current existence of a valid unexpired lease is no defense against the majority of specific grounds for eviction. If, however, the situation does not permit application of one of the specific lease agreement terms and conditions, then it is necessary that the lease be terminated to allow an eviction to take place. The lease agreement should contain a strong termination clause allowing both termination and eviction in the event of any breach of its various provisions. In the event that no special grounds exist and the tenant has fully and properly observed the lease, no eviction is possible.

Other Affirmative Defenses

Other affirmative defenses may include a landlord’s violation of rent control ordinances, landlord discrimination against the tenant, landlord acceptance of rent beyond the termination date, or landlord actions that constitute a waiver of rights to certain lease agreement conditions.

Default Judgment for Possession

If the tenant does not contest the eviction lawsuit by filing a written Answer to the Complaint, the tenant is said to be in default and the landlord may obtain a default judgment from the court for possession of the rental premises. The default judgment for possession requires satisfaction that the:

• The tenancy was properly terminated
• The Summons and Complaint were properly served on all tenants
• The state statute required notice period has elapsed from the date the tenant was personally served with the Summons and Complaint
• The tenant has not filed a written response to the Complaint by the time the landlord seeks a default judgment

A Default Judgment for Possession provides the legal basis for issuance of the Writ of Possession, a document that authorizes law enforcement officials to evict the tenant. The issuance and enforcement of the Writ is a separate action from the Default Judgment and requires additional action upon the part of the landlord.

In a final article we continue the discussion of Judgments and Writ of Possession, and preparation for Trial.

Property Inspections

Regular property inspections help protect your business, property, and tenants. For many reasons and in most states, property inspections may be a statutory requirement for rental housing compliances. As examples, warranty of habitability, landlord-tenant statutes, local jurisdictional requirement for business operations, local building, fire, safety, and health codes, Section 8 Housing Choice Voucher Program inspections, business insurance coverage, or rental lease agreement terms and conditions can require property inspections. The longer the interval between inspections, the greater potential for loss and liability.

Warranty of Habitability

In almost all states, a landlord is required to provide housing that meets basic structural, health, and safety standards. Under the legal doctrine of implied warranty of habitability, landlords are responsible to maintain and repair the rental property throughout the tenancy term. The basis for the implied warranty comes from either local building codes which specify minimum requirements for essential services or from widely held common-law beliefs of what constitutes decent housing. The source of the warranty determines the landlord’s responsibilities and the legal remedies available to the tenant. Since some states have more stringent requirements than others, 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.

Landlord-Tenant Statutes for Tenant Move-In/Move-Out

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

The move-in inspection should be done before the tenant moves in any boxes or furnishings or is given a key. This can be important because any such action that indicates having given the tenant possession can make him/her legally a tenant even if all documentation has not been completed and/or all initial funds owed by the applicant have not been received by the landlord. This can result in a dispute between tenant and landlord, potentially requiring a time-consuming eviction and significant financial loss for the landlord if the two parties cannot come to agreement regarding the checklist and other matters. The checklist is important for minimizing disagreements between landlord and tenant at a future time regarding the unit’s initial general appearance and maintenance at the time of move-in. Even though both parties think they will remember important items and think they have an understanding, such is not always the case.

The original signed checklist should be retained by the landlord in the tenant’s file and a copy given to the tenant. That same checklist should be utilized when the landlord conducts periodic inspections and will be used to inspect the rental unit upon the tenant’s move-out. The move-in and move-out inspections serve as evidence for why deductions were taken from the security deposit and for a lawsuit for damages in excess of the deposit.

The condition of the rental unit is documented on the move-out checklist and action taken accordingly if damage has occurred. After cleaning and repair/renovation the rental unit is again offered to tenants. The move-in checklist with the new tenant serves to document the “rent ready” condition of the unit and with the tenant’s signature acknowledges the tenant’s satisfaction with the general condition of the unit. Any items still needing repair or replacement are noted, with agreement to a projected resolution date. Any items noted “as is” serve as acknowledgment to both landlord and tenant that the condition existed prior to the new tenant’s possession of the rental unit. However, “as is” cannot be used for items related to habitability or covered by building codes or other governmental regulation.

The move-in checklist when properly completed is a valuable document that serves as the baseline for the condition of the rental unit throughout the rental term. It is helpful to have the move-in checklist available during the annual inspection of the rental unit. It provides a quick reference as to whether the rental unit remains in satisfactory condition.

Landlord Entry

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. If you know what is required by law and give proper notification, most tenants will cooperate to schedule a mutually agreeable time for inspection. A frank discussion of the benefits of safety and maintenance inspections should allay the tenant’s concern for loss of privacy and quiet enjoyment.

Landlord/Rental Property Inspection and Registration

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 are required to verify their properties meet quality of housing standards before they can register their properties with the municipality.

Local Codes

Safety and maintenance inspections of each rental property/rental unit should be conducted at least annually, preferably more often, in order to preserve and protect the rental property investment and as required by applicable landlord-tenant statutes or municipal codes.

Section 8 Inspection

If you have elected to participate in the Section 8 program, your rental property will be required to meet Housing Quality Standards (HQS) in order to receive the rental subsidy payments. These standards were developed to insure that rental units provide safe, decent, and sanitary housing under the Section 8 program. HQS standards are minimum habitability standards and there may be additional habitability requirements under state or local statutes.

Regular inspection of the rental premises by the landlord helps to insure that there are no health or safety issues that could adversely affect the Section 8 participant and to assist the landlord in identifying issues that pose a risk to the tenant and potentially create a liability for the landlord. As explained in the guidelines for participation in the Section 8 program, if routine maintenance is deferred, housing conditions could deteriorate resulting in substantial repair costs or threat of serious injury. Property and common areas must be maintained in good condition to meet program requirements. If the HQS inspection should find maintenance violations, re-inspection will be scheduled at a later date to allow the landlord time to repair or replace noted violations. Landlords can help reduce potential problems by conducting regular property inspections, preventative maintenance, and repairing and replacing broken or worn out items as needed.

Business Insurance Coverages

Property inspections may be conducted by insurance companies to evaluate property conditions, identify potential risks, analyze current business coverage, and offer recommendations for risk management. Terms and conditions of business policies may require scheduled inspections.

Lease Agreement Terms and Conditions

Landlords should conduct periodic inspections during the period of residency of each tenant. A lease agreement clause or section should cover these periodic inspections. These inspections should be done at least once annually, but even more often may be justified due to the age of the property or other reasons. It is best to have an inspection about midway through each year of the lease term. Reasons for such inspections include checking for unreported maintenance needs (e.g., leaking plumbing that could cause costly collateral damages), lease violations (e.g., unauthorized occupants or animals), safety hazards (e.g., smoke and CO detectors whose dead batteries have not been replaced as required by the lease agreement), and other possible issues of potential concern to the landlord and/or the tenant.

The importance of regularly scheduled inspections can be emphasized by clear language in the lease agreement and rental rules regarding types of inspections, timeframes, and notifications necessary for tenant health and safety issues and property maintenance and repair.

Maintenance Inspections

Regular maintenance of rental property can increase its marketability and extend its economic life. The pride of ownership as reflected in the property’s appearance can translate into fewer vacancies and better tenants. For those landlords looking to trade up or dispose of a property, resale value can be directly affected by how well the property was maintained.

Property that is inadequately maintained cannot effectively compete for the attention of new, good tenants. Some landlords use discounted rents to counter the negative effects of poorly maintained property. However, deferred maintenance combined with discounted rents will only keep properties occupied for so long. The landlord may have to accept less qualified tenants to fill the next vacancy or may have problems in rent collection or other lease violations. An applicant or tenant may perceive that if the landlord is lax about taking care of the property, the landlord may likewise be lax about enforcing other rental policies. The new tenancy may be short-lived, lasting as long as it takes for eviction action.

Failing to take care of maintenance and repairs is a costly mistake. If the property is not kept in good repair, the tenant may have the right to withhold rent, sue for any injuries caused by defective conditions, or move out without notice.

In almost all states, a landlord is required to provide housing that meets basic structural, health, and safety standards. Under the legal doctrine of implied warranty of habitability, landlords are responsible to maintain and repair the rental property throughout the tenancy term. The basis for the implied warranty comes from either local building codes which specify minimum requirements for essential services or widely held common-law beliefs of what constitutes decent housing. The source of the warranty determines the landlord’s responsibilities and the legal remedies available to the tenant. Since some states have more stringent requirements than others, 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.

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 such as changing batteries in smoke detectors or changing furnace/AC filters.

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. Inspection items usually include plumbing (leaky under-sink turn-off valves in particular), furnace and air conditioning problems, cracks in window panes, roof or gutter repair and housekeeping items that need attention to maintain health and safety conditions, such as trash and garbage accumulating on the property.

It is a good idea to include clauses in the lease agreement regarding maintenance and inspections. The clause regarding maintenance should include a list of the tenant’s responsibilities, including the duty to report problems requiring landlord action. The clause regarding inspections should state that there will be periodic inspections by the landlord or by his/her agent, the approximate frequency of inspections, and the manner (method of communication and amount of advance notice) in which the landlord will schedule a proposed inspection date.

The importance of regularly scheduled inspections is emphasized by including such language in the lease agreement and statement of rental policies. This helps to reinforce the tenant’s responsibility to take good care of the rental premises and to promptly report any items needing service. An annual safety and maintenance inspection is generally considered an acceptable standard, but semi-annual inspections may have more value to help reduce risk and/or contain costs by identifying a problem early on.

The tenant should be made aware that certain annual inspections may be required for compliance with state landlord tenant statutes and/or municipal codes for fire, safety, health, environmental or other reasons and/or local landlord/rental properties registration and license.

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. Most tenants will cooperate to schedule a mutually agreeable time for inspection. The benefits of safety and maintenance inspections should ease any concerns by the tenant regarding a brief loss of privacy and quiet enjoyment.

Common sense should come into play when scheduling an inspection. If the landlord schedules an inspection toward the end of the tenant’s rental term, the tenant may already be planning to move out and may not have the same attention to detail or motivation for repair items. An inspection scheduled too soon after move-in may cause the tenant to feel his privacy is violated.

Property conditions can quickly change if landlords fail to routinely inspect units and some deferred maintenance needs can result in serious collateral damage when not attended to early on. While a simple drive-by of the property can quickly determine if there is visible exterior damage or evidence of lease violations such as unauthorized vehicles or parking on the lawn, a more thorough inspection will be needed to assess health or safety hazards and to discover damage or potential for damage to the interior of the rental unit.

When tenants move-out, the condition of the rental unit is documented on the move-out checklist and action taken accordingly if damage has occurred. After cleaning and repair/renovation the rental unit is again offered to tenants. The move-in checklist with the new tenant serves to document the “rent ready” condition of the unit and with the tenant’s signature acknowledges the tenant’s satisfaction with the general condition of the unit. Any items still needing repair or replacement are noted, with agreement to a projected resolution date. Any items noted “as is” serve as acknowledgment to both landlord and tenant that the condition existed prior to the new tenant’s possession of the rental unit. However, “as is” cannot be used for items related to habitability or covered by building codes or other governmental regulation.

The move-in checklist when properly completed is a valuable document that serves as the baseline for the condition of the rental unit throughout the rental term. It is helpful to have the move-in checklist available during the annual inspection. It provides a quick reference as to whether the rental unit remains in satisfactory condition.

Landlords can use the checklist 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 law.

Inspections can result in discovering other problems which might require a violation notice to the tenant, a business decision to not renew the tenant’s lease, or cause for an immediate eviction.

There are numerous ramifications related to inadequate maintenance. If the property is not kept in good repair and the problems are not repaired during a vacancy, 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. Damage to a door or wall found at move-out is obviously the fault of the tenant if the door and wall were in excellent condition at move-in.

Many types of maintenance items that are not taken care of when initially discovered, not only become worse as time passes, but can eventually be the cause of other problems that are substantially more costly to correct.

Without a maintenance plan in place, a landlord has less control over his expenses. Unplanned emergency repairs will almost always be more costly for the landlord and be more stressful for both the landlord and the tenant.

It is important to maintain a detailed up-to-date maintenance log which provides information about every tenant request for service, the results of each inspection in detail, and what was done to correct any issues discovered. Keeping a maintenance log is powerful evidence if a landlord ends up in court or before a housing agency in spite of always attempting to provide safe and sanitary housing

In summary, the positive benefits of good property maintenance can include better tenants, greater tenant satisfaction, longer tenancies for good tenants, improved landlord-tenant relations, higher rents, less likelihood of complaints to regulatory agencies, and reduced costs for vacancies.

Termination and Eviction Overview – Part 1

When a tenant fails to materially perform according to his lease agreement, a landlord must decide the appropriate course of action to protect his investment. For many landlords the better business decision sometimes is to terminate the tenancy and file an eviction lawsuit.

Eviction is the legal process to remove a person from occupation of real property. However, before an eviction lawsuit can be filed, a landlord must first serve the tenant with a legal notice of intent to terminate the tenancy.

State statutes are specific in their procedures to terminate tenancy and conduct an eviction. A landlord should be thoroughly familiar with applicable state statues, case law, and local court of jurisdiction procedures. Failure to follow proper procedures can result in a dismissal or even the loss of the eviction lawsuit, no matter how egregious the tenant’s violation.

Termination Notices

The type of termination notice and required notice period are determined by state statute and the type of default. Generally there are three types of termination notices.

Pay Rent or Quit

The most common reason for an eviction action is non-payment of rent. In most states, if the tenant is late with rent, the landlord must give the tenant a written notice of the time period (usually a number of days) in which the tenant has to pay rent or move out (quit). If the tenant does not pay rent or move-out, the landlord can file for eviction. In some states there is a legal late period before the landlord can serve the notice to pay or quit.

Cure or Quit

If the tenant violates a condition of his lease agreement, a landlord can notice the tenant with a specified amount of time to cure the lease violation, cease the lease violation, or move. In some states a landlord can file for eviction as soon as the cure period expires; in other states, the tenant may be allowed additional time to vacate. In many states, a landlord can terminate with an Unconditional Quit notice.

Unconditional Quit

Unconditional Quit notices allow landlords to terminate a tenancy immediately or within a short period of time for repeated violations of lease terms and conditions, acts of damage, nuisance, or illegal activity. The tenant is ordered to vacate the premises with no chance to cure or cease the violation.

Many states have all three of the above types of notices on the books. In many states the Unconditional Quit notices are the only notice statutes.

Termination of tenancy is the first step in the eviction process. However, when the noticed deadline expires, the tenant is not automatically evicted. In almost every state a landlord must file and win an eviction lawsuit before local law enforcement officers can physically evict a tenant who refuses to leave after receiving a termination notice.

Common Reasons for Eviction

There are many reasons that a landlord may bring legal action to remove the tenant from the rental property. As noted above, the most common reason for eviction is non-payment of rent, followed by chronic late payment of rent, or repeated violation of lease terms. Lease violations could be a breach of the tenant’s statutory duties regarding waste or nuisance, health and safety, or a breach of a material condition of the lease agreement. If a tenant holds over once his lease agreement has expired (with no renewal or extension of the lease by the landlord) a landlord will need to give notice to the tenant to leave, and if the tenant does not comply, the landlord can file an eviction lawsuit.

Individual landlord lease agreement clauses may specify various terms and conditions which protect his rental investment and help prevent harm to others. Material violations of any of those lease clauses could also form the basis for an eviction lawsuit.

There can be circumstances when a landlord must take immediate legal action to evict a tenant. In the event the tenant poses a danger, such as drug dealing or engaging in other illegal acts, in most states the landlord must take immediate legal action to evict the tenant or risk substantial criminal penalties and/or possible confiscation of the rental property according to public nuisance abatement and forfeiture laws.

To legally re-gain possession of the rental premises, a landlord must use the court system to conduct an eviction. A landlord has the burden of proof to show that there is a material breach of the lease agreement or other circumstance that should be remedied by termination of the tenancy. He must show not only a breach that permits termination of the lease, but also that he complied with all statutory procedures, such as the Complaint and Summons and service of process.

The tenant has the right to due process and the court may extend a bias towards the tenant who presumably could be at the mercy of the landlord. The landlord’s prior conduct towards the tenant and his entire relationship with the tenant will also come into scrutiny if the tenant defends against the lawsuit. Even with fully documented proof, a landlord is not guaranteed to win an eviction lawsuit. A landlord should take nothing for granted.

Self-Help Evictions

In almost all states landlord self-help evictions are illegal. Any attempts using methods outside the legal system to force the tenant to move, such as utilities shut-off, tenant lock-out of the rental property, or seizure of the tenant’s personal property, can subject the landlord to substantial legal penalties for actual and/or punitive damages, court costs, attorneys’ fees, or other orders as determined by the court. Any activity that is or may be perceived as illegal, threatening, humiliating, abusive or invasive of a tenant’s rights or privacy could be used to file a lawsuit against the landlord.

Courts of Jurisdiction

The important determination before initiating any legal action is whether one party has suffered damage because of the other person’s action or lack of action. If there is no damage, there is no cause for legal action.

If there is cause for legal action, the action must be taken in the appropriate court of jurisdiction. Since landlord-tenant laws are state statutes, evictions are the business of state level courts.

Eviction lawsuits can be filed in a formal trial court, in a small claims court or, in a few states, in a special court such as Landlord-Tenant Court.

While some states give landlords a choice of courts in which to file an eviction lawsuit, other states specify the court that must be used. If the landlord has a choice of courts between formal trial courts and small claims courts, there are several important considerations.

An important determination is the dollar amount that the landlord is seeking. If the amount of unpaid rent exceeds the dollar limits set by the state’s small claims court, the landlord must use a higher court or accept a lesser amount that can be awarded in small claims court.

Another consideration in the landlord’s choice of courts is the issue of attorney fees. If the landlord’s lease agreement provides for payment by the tenant of “court costs and attorney fees in any action or legal proceeding to enforce the agreement,” the landlord may want to consider filing the eviction lawsuit in a higher trial court.

In this option the landlord will be relying on winning with a strong case, and a good chance of collecting all funds from the tenant. If the tenant is already in dire financial trouble, the chances of collecting the awarded fees might be slim to none, at least in the near future. In that instance, the landlord is probably better off filing his lawsuit in the small claims or equivalent court.

There are other important difference between a formal trial court and a small claims court.

The rules of small claims courts are not as formal as the municipal court rules. There is no discovery period. The landlord will present his case to a judge or magistrate by telling his story without worrying about legal language and strict procedural formality and the tenant will do likewise. After each side has presented its case, the judge will make his ruling. Even though the court operates somewhat informally, neither the landlord nor the tenant is allowed to ramble on or bring up issues that are not germane to the issues at hand. The landlord must, however, be prepared with his facts, backed by evidence, to prove his case.

In a formal court the landlord and the tenant may use pre-trial discovery to gather information to support their positions. During discovery, each side may question witnesses under oath (depositions), submit written questions for response (interrogatories) and pose requests for admissions that the other party, again under oath, is obliged to admit or deny. The information gained during the discovery process may be used during the trial.

Also, in a formal court a landlord will need to produce proof that the tenant’s breach of a term or condition of the lease agreement was a material breach, sufficient to warrant a termination of tenancy. In addition, before a landlord can present his case for termination, he will need to provide evidence that certain conditions existed before the breach. A landlord can call upon witnesses, submit letters or reports, use information gained from pre-trial discovery, and provide photographic evidence that can be substantiated through witnesses.

While many experienced landlords routinely conduct their own evictions in the courts, many others prefer to have an attorney specializing in landlord-tenant law handle their evictions. There are, however, some circumstances when a landlord should consult with an attorney before proceeding with the eviction action, such as when the tenant is already represented by an attorney, has filed for bankruptcy, or is contesting the eviction. There may be other factors such as rent control rules or the property location that could require obtaining legal counsel.

In a future article, the eviction legal procedures of Complaint, Summons, Service of Process, and Tenant Answer will be discussed in some detail.

Legal Possession of the Rental Unit

The landlord-tenant lease agreement is a legal contract that defines the rights and responsibilities of landlord and tenant. The landlord has the right to receive rent for the use of the property. The tenant receives the right to the possession and use of the rental property free from interference from the landlord.

At the expiration of the lease term the tenant has no legal right to occupy the rental property. In general a landlord knows when the tenant has surrendered the property and relinquished all rights. The tenant has: notified the landlord of the intent to move; removed personal belongings; completed the move-out inspection; and turned in the keys. The tenant’s actions signify voluntary relinquishment of the right to occupy the property.

The issue of legal possession can arise if the landlord erroneously assumes the tenant has returned possession of the property. If that was not the intent of the tenant, there can be potential problems. Legal remedies may be required to return possession of the rental property to the landlord.

Questions of possession may arise when the tenant appears to either be holding over after the expiration of a lease or to have abandoned the property in the midst of the lease term. What a landlord can do or must do depends on how the vacancy occurred and can vary significantly among states.

Holdover by Tenant                                                   

If the tenant stays on after the expiration of the lease, the tenant becomes a holdover tenant. Despite the expiration of the lease, in order to remove the holdover tenant from the property, the landlord in many states must serve the holdover tenant with a notice to vacate the property, stating the date upon which the tenancy ended. If the tenant does not vacate by the end of the notice period, the landlord can file an eviction lawsuit. There are some states that do not require a notice to a holdover tenant and allow the landlord to immediately file an eviction lawsuit upon expiration of the lease.

Abandonment of Rental Property

The issue of possession is especially a problem when a tenant appears to have abandoned the property without any notice, but has left some belongings behind. The problem is knowing whether the tenant has permanently left and intended to leave the belongings for disposal by the landlord. If the tenant instead plans to return at a later date to retrieve the belongings, or even to re-occupy the property because the tenant did not intend to give up possession of the property, there can be problems. If the landlord is in the process of filing what was assumed to be a vacancy, there is a greater problem.

Even if the tenant is past due with rent, the tenant still has the right of possession. The right of possession exists independently of paying rent unless a court ordered eviction has been completed.

A landlord should not take possession of the rental property until he is certain that the tenant intended to relinquish possession of the property. Before worrying about installing a new tenant, a landlord must be sure the old tenant does not have possession rights. While following proper procedures according to specific state laws could mean delays in filling a vacancy and collecting rent from a new tenant, failure to do so can expose the landlord to various potential liabilities including being sued by the old tenant.

Breaking lease

The landlord may have some indications that a tenant may be intending to leave before the end of the lease term, i.e. breaking the lease. Routine monitoring of the rental property, information from neighbors, or changes in tenant behaviors may point to signs of a sudden move by the tenant and a potential unexpected vacancy for the landlord. Ignoring early warning signs may lead to greater potential landlord losses for rents, property damages, and possession.

It may be the best course of action to initiate communication with the tenant to remind the tenant of his obligations under contract. The tenant will suffer loss if the lease is broken and may damage his future ability to qualify for housing. The landlord may determine it is beneficial to negotiate mutually acceptable terms of lease termination. While there may still be loss, it can be minimized and the important issue of possession can be quickly resolved. The negotiated terms should be in documented in writing and signed by landlord and tenant to acknowledge termination of the tenancy.

Lease Agreement

The lease agreement can help to minimize questionable vacancy issues. A lease agreement should include a clause that requires written specific notice of intent to vacate. Notice should be given per the timeframe as required by state statute or if not specified, the number of days required by the landlord, usually a minimum of thirty days.

The lease should contain clauses regarding procedures to follow for vacating the property and what actions might be taken by the landlord if procedures are not followed, including any required by statute. The lease language should clearly detail what the tenant must do when vacating and what will happen if the tenant fails to act as agreed.

As an example, in order to provide definitive knowledge of when possession has transferred, a lease clause could state that all tenant belongings must be removed and keys must be returned when the tenant has fully vacated and that failure to do both will result in (1) continued accrual of rent and any relevant late charges, (2) charges for the costs of storing and or disposing of the abandoned belongings, and (3) a locksmith charge.

Some states have statutes that define how a landlord may proceed to recover possession when the tenant appears to have abandoned the rental property. When the state statute defines such procedures, the lease agreement should include the procedures as defined by statute.

Absent any statute prohibiting it, the lease agreement should contain a clause that specifies the length of time that the tenant may leave the property without prior notice to the landlord (e.g., 10 days) and provides that the property may be considered abandoned if such notice was not provided to the landlord.

There could be many reasons why a tenant would fail to give a required notice of extended absence. The landlord should make reasonable effort to locate the tenant or obtain information regarding the tenant’s absence. Information supplied by the tenant on his application form, such as emergency contact information or personal references, may provide a contact name and phone number.

Statutory Possession

When a landlord is considering whether or not he has gained legal possession of a rental property, he must be aware of any specific state requirements regarding possession. Such possible requirements can vary significantly among those states which have them.

For example, a state may specify that the landlord does not have possession absent a specific action such as the keys being turned in. Absent such an action, state law may require that the landlord perform “abandonment” procedures or commence a forcible detainer action (eviction).

An abandonment procedure typically requires that the landlord has not seen the tenant for some period (e.g., 7 days) and rent has not been paid for at least some period (e.g., 10 days). The landlord can then (and only then) post an abandonment notice on the door stating that he will be taking possession of the unit at a future date (e.g., 5 days later). All periods must be as specified by the statute of the particular state. Although such a statute could significantly delay readying the property for a new tenant, failure to follow the statute puts a landlord at risk.

Question
A tenant in my 4-plex is a painting contractor and we are discussing trading two month’s rent on his unit for some painting on the property and for some painting on my personal residence. How do I handle this income tax-wise?

Answer
You actually need to be concerned about four different legal issues. One is the income tax ramifications that you ask about and this is by far the easiest one to fully address. A second relates to state and federal employment laws. A third, for some states, relates to contractor licensing laws. A fourth issue is insurance coverages. The other three issues would each require a lot of discussion to cover adequately, but I’ll mention a few things about each.

If you receive property or services, instead of money, as rent, include the fair market value of the property or services in your rental income. If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary. If the services are related to operation of a rental property, the amount may be deducted or depreciated, depending on the nature of the services provided.

Include in your rental income the amount the tenant would have paid for 2 months’ rent. You can deduct the portion of that amount that was for work on the rental property as a rental expense for painting your rental property. The portion of the amount that was for work on your personal residence, although included in the 2 months’ rent, cannot be deducted as a rental expense for your rental property.

If instead your tenant was a carpenter who offers to construct a storage shed on your rental property for 2 months’ rent, you must include in your rental income the amount the tenant would have paid for 2 months’ rent. You can depreciate that same amount in accordance with the appropriate depreciation schedule.

If the shed is constructed on your personal residence property in exchange for 2 months’ rent, you would include the 2 months’ rent as rental income for the rental property. If this shed can be considered a capital improvement to your personal residence property, you can add the amount to the basis of your personal residence property, meaning that the amount will not be subject to capital gain tax when the residence is sold in the future.

Regarding employment laws, workers are classified by state and federal statutes as either employees or independent contractors. If employees, issues such as income tax withholding, social security taxes, unemployment insurance, and workers’ compensation insurance must be considered – and there are other possible issues. These issues are not directly a concern when a worker is legally an independent contractor (IC). However, a worker cannot be classified as an IC because he says he is one or because the person paying him wants to avoid the burdens of his classification as an employee. There are criteria that determine whether a worker is an employee or an IC and further discussion is beyond scope of this answer, but the criteria is most basically related to the control each party has regarding the tasks being performed. For your case, if the tenant is truly a licensed painting contractor and he performs work for multiple customers, you might want to assume he can be treated as an IC, but such is not guaranteed and safety comes only from satisfying the state and federal government rules.

Regarding the licensing issue, many states limit the type of work and/or the cost of a project that can be legally performed by non-licensed contractors and there can be serious consequences related to breaking licensing laws. Type of work is often related to the risk of injury or damages related to work that is improperly done – e.g., many states prohibit electrical or plumbing work by unlicensed workers. The types of work allowed by workers not licensed for the particular trade varies among the states. The maximum cost for which a license is not required, so long as not otherwise required to be performed by a licensee varies among state. For some states, the maximum cost can be as low as $500.

Regarding the insurance issue, you need to make sure that your insurance policy will cover you for liability that might result from injury or damage to property caused by workers, whether licensed or not. If the contractor is licensed, the state will require him to carry liability insurance and, if he has employees, workers’ compensation insurance. You should require proof of the required insurance coverage, but you still need know that your insurance policy provides secondary protection. Unlicensed contractors seldom carry the necessary insurance.

Of the three issues other than income tax, the insurance issue can have the largest financial loss due to possible litigation related to injury (to workers themselves, to other of your tenants, or the public) or related to damages to the property of tenants or the public. These issues are discussed more fully in our Mini Training Guide titled “9 Steps to Avoiding Problems When Hiring a Contractor.”

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Question
Many of the tenants in my apartment complex have more than 2 vehicles even though there two parking spaces available per unit. This occasionally causes problems when a tenant is using more than his 2 spaces. Can I legally limit the number of vehicles a tenant can park on my rental property?

Answer
Landlord-tenant laws of most states do not specifically address this issue. Accordingly, a landlord may control parking in a reasonable and equitable manner. What might be considered reasonable may depend on the type of property and the available parking space.

A landlord should control parking space assignments to tenants rather than the number of vehicles a tenant may have. A landlord would not have a right to restrict parking on public property – for example, on the street in front of the property – except as restricted by the city or a home owner association. Furthermore, although likely not an issue for your property, it may not be reasonable to limit a tenant of a SFR to one or two vehicles when there is ample parking space for six vehicles. Of course, lawns, flower beds, or patios would not be included within such parking space. Any governmental restrictions or HOA rules can be enforced by the landlord just as well as can the lease agreement clauses, however, as with most rental issues, in order to avoid misunderstandings it is best to have parking rules well defined in the lease agreement.

Similarly, depending on the location, it may be reasonable and enforceable to prohibit vehicles being partially dismantled or up on blocks. There could be other issues that might concern other tenants of your property, the government, and/or neighboring property owners.

Furthermore, the number of available parking spaces should be disclosed during the marketing of the vacant unit, certainly prior to lease signing, in order to avoid last minute problems. As with many other issues, in order to avoid claims of fair housing laws, rules should be applied in the same manner to all applicants and to all tenants.

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Qustion
The lease term for one of my rental units is nearing completion, the first time it is occurring since I bought my triplex. Do I need to serve the tenant with a notice to quit the lease?

Answer
What you need to do to terminate the lease depends on the clauses in your lease agreement and, in a few states, the law. It can be of benefit that the lease agreement explicitly discusses end-of-lease issues in some detail. For example, the agreement may state that the tenant is expected to vacate the unit by the end of the lease term if an extension or renewal agreement has not been executed by the parties at least some number of days (typically 30) before the ending of the existing lease term. As another example, the agreement may state that the lease becomes a month-to-month lease if no action has been taken regarding an extension or renewal, the landlord has not given notice of termination, and the tenant holds over beyond the term end – often with an increased rent amount. This latter clause should always be included in a lease agreement.

It never hurts to provide a termination notice prior to term end no matter what the lease requires when the landlord desires to have the tenant depart rather than renew or extend the lease. The tenant can be notified that you do not wish to extend his tenancy beyond the term of his existing lease by providing a written notice that clearly states that fact. No reason need be given and it is best to not give a reason that can in any way be considered a violation of fair housing laws. Such a notice can be given at any time prior to term end unless otherwise required by the lease agreement or law, but it should be long enough in advance for the tenant to find new housing.

Advertising Your Vacancy

The local rental market has a direct relationship to filling vacancies. How quickly and how successfully you find your next tenant depends on the size and constraints of the current rental market and on your policies and standards.

Supply and demand for rental properties may fluctuate in response to economic pressures and demographic changes. The size of the market, the composition of the market and the demands of the market govern to some extent your potential applicant pools. Within a generalized large applicant pool there are usually several different smaller sized pools of potential applicants with varying characteristics and housing needs. What pool you draw from can be related to the timing of the vacancy, how you market your vacancy, and your rental selection standards.

Before rushing to fill your next vacancy you should review the local rental market conditions and target market populations to see if you can determine the size and composition of the current rental pool. Can you identify market trends and consumer desires?

If you’re not getting any interest in your property, you need to first ask yourself whether or not potential renters even know you have a vacancy. Are you missing out on rental income because your advertising doesn’t reach your target market? Tenant selection is a moot point when there are no applicants to screen. You want to attract as many rental prospects as possible, qualify them to rental standards, and select the next tenant from that qualified pool.

Market ready properties with comparable rents and amenities will be more attractive to various applicant pools which should create additional prospect opportunities. If you have trouble converting prospects to applicants, or have trouble qualifying applicants, you may need to revisit your business model and adjust your rental policies. Your rental policies may be unnecessarily limiting the size of the pool you typically draw from.

However, before you adjust your standards, you should determine the cause and effect of such a decision. Adjusting your standards is not the same as deviating from your standards. Don’t risk a fair housing complaint by treating applicants differently.

Advertising

Vacancies don’t usually fill themselves. Help meet your occupancy goals by getting the word out.

Advertising, in its simplest form, is getting the word out to as many people in as many possible ways as you can think of. Advertise where your market is and where you think it could be. Don’t be limited in your thinking about where to find tenants. There are many different approaches to market and advertise rental properties. Be creative using a variety of media to reach out to potential tenants, but be sure to comply with applicable laws including fair housing laws.

Truth in Advertising

When advertising a rental property you should take care not to exaggerate property features. While it might seem like a good idea to create interest in the property by “puffing up” its amenities, particularly in a competitive market, the choice of words (oral or written) or even the manner in which the words are spoken can potentially increase landlord liabilities by claims of misrepresentation or false promises.

Of particular importance to landlords in their advertising is complying with federal Fair Housing law requirements.

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

Advertising Methods

What works best often depends on the type of property, location, competition, local market conditions, and even the time of year. It may take a combination of advertising methods to produce an adequate pool of qualified applicants.

Identification of target markets is allowed, but marketing in such a way as to discriminate against protected classes is illegal under fair housing laws.

There is no one best approach to advertising your vacancy. While almost any type of advertising may eventually get the job done, if you can custom fit your advertising to your particular property, without violating discrimination laws, you can effectively reduce your vacancy time and costs.

However, in the real world it usually requires a combination of advertising methods to produce a pool of qualified applicants. The two most traditional advertising approaches are “For Rent” signs on the property and the classified ads of the local newspaper. For Rent signs are fairly inexpensive and can be very effective, particularly for those prospects that have already narrowed their choice of location to your property’s neighborhood. Newspaper advertising has a broad reach and is commonly the first method used by prospective tenants to search the available rental market.

Another common advertising method is word-of-mouth advertising from existing tenants, family, friends, or co-workers. Satisfied tenants like to refer prospects who share similar values and characteristics. Your family, co-workers, and friends form an informal information network that can serve as a trusted source of referrals. A nominal financial reward, of an amount not above any state law regarding size for payment of compensation to unlicensed individuals, can provide incentive.

Networking with fellow landlords, property managers, and real estate professionals could also serve as an informal source of prospective applicants. Being open to sharing information about your business and future vacancies could bring you additional business.

Direct mail, flyers, and brochures can be an effective marketing tool in some markets. Flyers and brochures can provide much more detail about your property, and its amenities than a classified ad. An advantage of flyers is that they can be posted on community bulletin boards such as those found in grocery stores, discount stores, variety stores, laundromats and other public access places.

Rental housing vacancies can be posted online in searchable vacancy listing databases on various web sites, landlord-tenant web sites, or advertised on a landlord’s own web site.

Sometimes overlooked is the ready-made advertising opportunity of a desirable property location. Certain neighborhoods carry the cachet of fine living. If you are lucky enough to have property location, location, location, you should certainly market to this advantage.

Don’t forget curb appeal. The exterior of your property gives a pretty good indication of the condition of the interior. As prospects drive by and picture themselves living there, they are also being conditioned to the standard that is expected to maintain the property. If your property is clean, well-kept, with appropriate landscaping, cash in on the value of that first impression.

Holding an Open House is another approach to reaching a potentially large market segment. The open house provides the opportunity to host multiple showings, a time saver in itself. An open house can be attractive to prospective tenants because of its non-threatening atmosphere and a chance to thoroughly inspect the property. Carry that favorable first impression from the curb into the interior with appropriately staged areas designed to showcase the best features that turn the house into a home.

As important as it is to attract and find tenants, it is equally important that they find you. A prospect, potential applicant, or your tenant needs to be able to reach you to ask questions, to provide information or to request a service. Filling a vacancy is a time sensitive process. If you are unavailable the prospect will move on to the next property on his list. Failure to respond timely to a tenant’s request for a service may delay a needed repair or create another type of liability.

Evaluation

You should evaluate your advertising effectiveness in order to determine what works and what doesn’t. Keep written documentation of your advertising efforts, including a print copy of each ad placed, the number of responses received from each type of advertising, the number of qualified applicants obtained from each source, and the cost, including time, of each type of advertising. You can then determine what advertising method(s) is most effective for your property under various market conditions.

Document Retention

All advertising copy and information regarding responses should be kept for the period of time that complies with applicable document retention policies regarding the subject matter. By documenting your advertising efforts you can help provide a defense against claims of discriminatory advertising policies.