By Carolyn Hackett
When you begin to enter the world of real estate investing, there is so much information available for you to access that, at times, it can feel like you are trying to take a drink from a fire hose.
That said, probably one of the most important pieces of the real estate investing puzzle is the residential lease. This legal document is the very basis of your relationship with your tenants and the courts should you have to unfortunately go down that road. Finding a good lease can be troublesome and timely. Most jurisdictions have some sort of landlord-tenant agency from which you will be able to purchase paperwork. A residential lease is one that you should definitely purchase, not to use, but to form the template of a lease that protects you and sees that your investment is protected.
As a broker for a property management company in Alberta, I have seen many scenarios with tenants. Every time we come across an issue that is either not covered by our lease or not covered well enough, we revise our lease so that the next time that issue comes up it is easily dealt with due to the wording and clauses in our lease.
Here are 5 important clauses that you should consider including in your lease. We recommend confirming the use and wording of each clause with the local landlord-tenant authorities as each Canadian province has different rules.
1.) Assignment of lease: This clause is typically in a base template lease but the wording may not be as clear as you might like it to be. The clause should state that you are renting to the tenant on the lease and no other and that the tenant is not allowed to sublet, assign, or otherwise transfer the lease to another person without the consent of the landlord. The last thing you would want to have happen is to rent your beautiful place that you just spent 6 months and $40,000 renovating to a great elderly couple who then turn around and rent it to couple of boys who turn it into a frat-house. Although it may make for a great movie, its not the best for an investment.
2) Term of Tenancy (Fixed vs Periodic): This part of a lease is one that either keeps the control with a landlord or gives it to a tenant. A fixed term lease is a lease that expires on a certain date with no automatic renewal and a periodic lease is one that automatically renews after a period of time, typically monthly.
In Alberta, at the end of a fixed term lease the landlord has the right to agree to re-lease it to the same tenant and put a new lease in place covering a new term, if they choose. On a periodic, the same lease continues to be the basis of the agreement, if the tenant chooses. There are situations that may arise that you want to have a vacant property, maybe to sell, or to renovate, or as place for a family member to stay. In Alberta, if a periodic lease tenant is paying their rent and not breaching any rules, there are only a few ways to have them leave in order to have a vacant property. Most require 12 months notice to be given to the tenant. This now limits your options when it comes to what you want to do with your property. With a fixed term, at the end of it, should you want a vacant unit, the tenant must move.
We feel that this gives you more options as the owner of the property, specifically in liquidity. In addition, on a fixed term you also have more control over when your unit is vacant as opposed to a tenant moving out with only 30 days notice in the middle of winter!
3.) Pets: Pets are a perceived sore spot for a lot of new investors. They may not be pet people themselves and have heard of horror stories from others about how pets have destroyed their properties. I propose to you that it was not the pets fault for the damage, but the pet owners, and the lack of due diligence done by the rental owner on the rental application. As a landlord you want to have property that appeals to the largest rental market you can. I would say that 7 out of 10 rental applications that come across my desk have pets associated with them. That means that should you choose to not allow pets in your property, you dismiss over half of potential renters before even looking at one. I further propose to you that instead of dismissing pets, you rather look at ways to include them. Most property management companies charge extra monthly rent for pets, which can be an additional source of revenue, while making sure you are not limiting your applications. Then just be sure that you have strong clauses in your lease that protect you from the potential hazards of pets. But, most importantly, screen diligently and find responsible pet owners and you should be able to listen to pet horror stories and not tell them.
4.) Incentives: This is a strategy that can be used in various different scenarios within a lease. In Alberta, should you take a tenant to the Residential Tenancy Dispute Resolution Service for non-payment, the adjudicator will not grant you late fees as part of your compensation, even if they are agreed by the tenant within the lease. However, create a lease with a base rent $100 higher than what you want the tenant to pay, and then give them an on-time incentive where the rent will be $100 lower as long as they pay their rent on-time. If they do not pay on-time, they could potentially lose the incentive and you are not assessing an additional fee, now the courts will approve it. This strategy can be used in various ways from late fees to seasonal discounts. It is only up to your creativeness on how best to use it.
5.) Re-rental fee: Peoples lives are unpredictable. You may find a great tenant, sign a one-year lease and everything is going great for 6 months. Then unfortunately, they lose their job, or have a death in the family, requiring them to move. The challenge is that they have a lease with you for another 6 months. As a landlord, once a tenant notifies you of their intent to break their lease, you must re-market the property and do your best to find a new tenant as quickly as possible. This may be unexpected and cost you time and money to advertise and screen for a new potential tenant. For this you should be compensated. By creating a re-rental fee clause in your lease, it gives you the opportunity to not only be compensated but also re-confirms with the tenant that they are responsible for rent until a new tenant is found or until the end of their lease, whichever comes first.
These are a few of the clauses that you should consider for your residential leases. I will stress to you that the best defense in protecting your investment is not your lease though . its your screening process. Just remember A vacancy is always better than placing a wrong tenant!
Reach her at Carolyn@libertasholdings.com