How to make a lease agreement
A landlord-tenant relationship can be a pretty serious thing. On the one hand, tenants are trusting landlords to deliver them a safe, hospitable unit that they can call home for the coming months or years. On the other hand, landlords are trusting that the tenants they bring into their hard-earned property won’t destroy it or fail to pay rent.
While everyone loves a good old-fashioned handshake and a verbal agreement, when it comes to your investment properties, it’s always best to get things in writing. That’s where lease agreements come into play.
Here’s a quick overview of what your rental process might look like leading up to asking for signatures:
- You’ve marketed your rental property online, taken some applications, and found a few that look promising
- You’ve conducted viewings and answered prospective tenants’ questions—or you’ve found a program like Flcrm’s Lease Assist to handle it for you
- You’ve run your background and credit checks on approved applicants
- You’ve drafted your lease agreement as explained below, including names and contact info, terms of the lease, rent, security deposit details, house rules, penalties, and so on.
- The big finale—your new tenants sign the lease, and you start collecting rent.
The lease agreement is one of the most important parts of ensuring that the new landlord-tenant relationship proceeds smoothly. If you’re wondering how to make a lease agreement that checks all of the boxes, this guide would be a good place to start (though it’s no substitute for the eyes of a licensed attorney or property manager).
What is a lease agreement?
A lease agreement, otherwise known as a lease or a rental agreement, is a contract between you and your tenants. Lease agreements are important because they establish clear expectations between landlord and tenant and can help protect you if any disputes arise in the future. In a word, leasing agreements are your written proof that everyone was on the same page about the terms of the rental whenever your tenants originally signed.
If you want to understand just how helpful making a lease can be, picture this: a few months after renting a unit and agreeing that lawn care will be the tenants’ responsibility, you drive by to see the yard in a state of utter despair that will be expensive to fix. The tenant claims they didn’t know lawn care was their responsibility and thus they aren’t liable for the damages. In cases like this, having a signed lease agreement listing all of your terms and conditions can help assign responsibility and squash disputes before they escalate.
Creating your lease agreement
Your lease agreement is your place to lay the ground rules about how you’d like your relationship with your tenants (and their relationship with the unit) to work, so you should invest some quality time and research into laying out your stipulations. Just like everything housing-related, there are laws surrounding what you can and can’t put in a lease, so be sure to familiarize yourself with local, state, and federal laws before asking for anyone’s John Hancock on your rental contract.
That said, there are some common features to your average lease. Read on to learn what they are, but be sure to consult with a legal expert before finalizing your lease agreement.
Names and contact information
This entry may seem obvious, but lawyers and judges who get involved in the case of a dispute won’t automatically know who the tenants are or who the agreement is between without it being spelled out in writing. Like with any good contract, in order to know who’s agreeing to what, first you have to establish who’s agreeing, period.
A good leasing agreement might list the landlord’s contact information, all owners and co-owners of the unit, any property managers, the lessees, and any other residents such as children or the elderly.
Description of the property
Next up, you may want to include the type of unit (for example, is it a multifamily home like an apartment building, or is a single-family home like a house?) and the exact address. If you have appliances or furniture included as part of the unit, it may be smart to mention these as well.
Define the lease terms
The last thing anyone wants is for new tenants to arrive with a U-Haul’s worth of belongings before the unit is move-in ready. Laying out a pre-agreed-upon move-in date can help avoid any misunderstanding and give you as the property owner a solid idea of when you need to have all necessary cleaning and repairs completed by.
Other crucial lease terms include whether the lease is fixed-term or month-to-month, how long the lease term is if fixed-term, and the procedures tenants should take depending on whether they want to renew or leave at the end of their lease term.
Define rent payment details
Getting your rental rate in writing is a good way to avoid any disputes and have a solid case for eviction if your tenants fail to pay. It may also be wise to include the monthly due date for rent, any grace periods, any late fees or penalties, and how you would like to collect rent. Convenient methods like online payment portals are popular among tenants and landlords alike.
You should also be aware that different states have different laws about grace periods and late fees, so be sure to consult an attorney or your local laws before finalizing your lease terms.
Assign a security deposit amount
The security deposit is a deposit of the tenant’s money that the landlord collects as proof of a tenant’s intent to live there and in case the tenants damage the unit or break the lease. Security deposits are usually equal to one month’s rent, but landlords may be able to charge more or less depending on preference and local law.
This part of the lease agreement might also include details about how the security deposit will be returned to the tenant or in what cases the landlord keeps the deposit, such as to repair damages or as a forfeiture for early termination of the lease.
House rules
You’ve heard the saying—communication is key. Even if you have a great conversation with your prospective tenants in person or on the phone, it’s always wise to get your expectations and house rules down in writing to be safe.
For instance, if you don’t feel great about the idea of dogs in the house, but only verbally tell your tenants about this rule, you may not have an opportunity to collect a deposit or pet rent if you find out they have a tail-wagging bundle of joy later in the lease term. Lease terms can be long, and sometimes people forget about verbal agreements. That’s why it’s important to put your rules on paper.
In addition to rules about pets such as bans, species restrictions, breed restrictions, pet deposits, and pet rent, you might also include whether smoking in the unit is allowed, what the penalty if tenants smoke indoors, what tenants should do in cases of maintenance emergencies or pests, and so on. If you have an expectation for your tenants that you don’t want them to forget about, it’s smart to include it in your lease.
If you want your tenants to have renters’ insurance, this section of the lease would be a good place to include that as well.
Lastly, it may be a good idea to include any general rules about living on the property like who pays for what bills, how garbage is handled, who takes care of lawn care and snow removal, how long guests can stay without approval, whether subletting is allowed, and what parking is available, if any. If everyone is on the same page about who’s responsible for what, it’s less likely you’ll have to deal with a lawn-turned-jungle or tenants’ vehicles being towed by mistake.
Penalties
It would definitely be convenient if everyone agreed on the rental terms and no one ever infringed on them, but sadly, real life is more complicated than signed rules on a piece of paper (or e-signatures in a portal). As part of the rental contract, it’s smart to include penalties for different things like damaging the property or breaking the lease. For example, some landlords might stipulate that tenants forfeit their security deposit if they break their lease before the end of the lease term.
This would also be the section to include which scenarios warrant an eviction, such as nonpayment of rent, violating a no-pet clause, or causing damage to the property.
As with anything else, consult an attorney to ensure everything is above board before you present your new contracts to prospective tenants.
Understanding local laws and rental agreements
As a landlord, you have legal obligations to the people who rent from you. There are laws surrounding virtually every piece of the rental process, from screening applicants to collecting the security deposit to returning the deposit after tenants move out, and many of these laws vary by state. Creating a leasing agreement is meant to protect both you and your tenants, so be sure to have a legal professional review your rental contracts to ensure everything is airtight.
Lease Agreement Glossary
Lease
The agreement by which a property owner gives another person or persons the right to stay at a property for a certain length of time at a certain monthly rate.
Lease agreement
The formal agreement defining the relationship between landlord and tenant.
Lease term
The agreed-upon length of time that a fixed-term lease will last (i.e., six months, a year, eighteen months, etc). Leases may also operate on a month-to-month basis.
Security deposit
Money given to a landlord by tenants at the beginning of the lease term to indicate intent to lease the unit as well as to pay for damages incurred during the lease term or in case tenants break their lease early.
Renters’ insurance
Insurance landlords may require tenants to have protecting belongings within the rental property in case of theft or disaster.
Termination
The process by which the landlord or tenant ends the lease agreement and the tenant vacates the property.
Eviction
A legal suit that a landlord undergoes to remove a tenant from their property for violating the lease, causing property damage, nonpayment of rent, etc.
Renewal
The process by which tenants on a month-to-month or fixed-term lease take to continuing living in the unit beyond the end of the lease term, i.e. “renewing” the lease means agreeing to continue renting the property for another lease term.
Frequently Asked Questions
Does the rental agreement need to be in writing?
Yes. While verbal contracts, such as agreements made over the phone or in-person, can be legally binding in certain situations, they can be difficult to prove in court if one or more parties later claims the conversation in question never happened. For your and your tenants’ protection, it’s better to get all contracted agreements in writing.
What questions should the lease agreement answer?
Your lease should answer questions about who intends to live at the property, who owns the property, who the rental contract is between, how rent is to be collected, the penalties for late rent, the house rules, and more. A good rule of thumb is to imagine yourself in the tenant’s shoes: what do you need to know about the place you’ll be legally renting? And what do you, as a landlord, want your tenants to know and agree to in writing?
What 5 things should be included in a lease?
Different localities will have different legal requirements for leasing, but most residential lease agreements should include landlord and tenants’ names, the property address, the term of the lease, the cost of rent and how often rent is to be paid, and any house rules the landlord has along with the penalty for breaking them or the lease agreement.
What cannot be included in a lease agreement?
There are some federal laws surrounding tenants’ rights and landlord obligations, but there are also local laws that can vary by state. When it comes to what you can and can’t put in your lease, common sense should tell you that you of course can’t include any clauses that circumvent your tenants’ rights, such as a clause that waives their right to prior notice before a landlord or property manager enters the unit.
You also can’t include clauses about seizing tenants’ personal property if they’re behind on rent, ask a tenant to sign away their right to a trial, require tenants to pay for “wear and tear” or other damages that weren’t their fault, or include any clause that waives some responsibility of yours as landlord. Most of the big no-nos in lease agreements are fairly common sense, but it’s still a best practice to consult with an experienced attorney while drafting your lease agreements.
What are my responsibilities as a landlord?
As a landlord, it’s your responsibility to keep your properties safe and hospitable for your tenants. You’re required to make repairs in a timely fashion, to keep the units free of hazards, offer fair housing free of discrimination, give notice before entering units, attempt to mitigate damages if a tenant breaks a lease, and safely manage your tenants’ security deposits. Part of being a landlord is knowing about tenants’ rights and the laws you have to follow, so do your research both federally and by state to find out your specific obligations.
