You have recently purchased a rental property and have a tenant or two lined up. All seems to be going well, and you can't help but think that all of this fuss over Lease Agreements is unnecessary.
It's not. We promise.
We manage over 1,038 properties and see all sorts of problems with leases. More often than not, these problems stem from the lease agreement itself – specifically from landlords who either do not understand what a lease can and cannot contain, or worse, think that a lease is simply a formal agreement between two parties before the "real" relationship with a tenant can begin. A landlord's lease is his only contract in the event that something goes wrong with a tenant. Whether a tenant stops paying rent, leaves early to take another home, or makes unauthorized changes to a property, the terms of the lease are the terms that will define how a situation is resolved.
Most rental property owners self-manage their rental properties. This guide to the Lease Agreement that is used to rent out a rental property is written for the rental property owner that is looking for the information that he or she needs in order to understand what a solid lease looks like and how a bad lease can cause problems for a landlord. The guide will also help the rental property owner to make sure that the landlord's lease is complete and that it will hold up when things go wrong with a rental property.
Your Lease Is a Legal Contract, Not Just a Formality
Far too many landlords have the mentality that they can get through the formalities of signing up a new tenant and then can start to work with the new renter. Lease agreements are written to be formal contracts between two parties to a contract, a landlord and a tenant, and these two parties need to abide by the terms in the signed agreement in the case of a problem occurring at the rental property.
Your lease is the ONLY document that outlines what to do in case something goes wrong. If a tenant stops paying rent; If a pet damages the rental property; If a tenant wants to break their lease after only 4 months; If an unauthorized person (roommate) moves into the rental property; Then what?! These situations and many more will be governed by your lease. In all of these situations, your rights as well as your options will be outlined in the lease.
As previously mentioned, the terms of a Texas residential lease are governed by Chapter 92 of the Texas Property Code. The sections listed below outline the obligations of the landlord with respect to repair of certain items, lock changes, and rules regarding landlord actions that are defined as retaliation. Important to note is that should a provision of the lease conflict with any of the listed sections below, not only will the conflicting provisions of the lease be deemed unenforceable, they could actually cause liability to the landlord in circumstances where the tenant claims that the landlord's actions constitute retaliation and are in violation of Chapter 92. In these types of cases, the landlord would not be able to argue that their actions were lawful as set forth in the lease, and the tenant could be granted early termination of the lease or be permitted to withhold rent, amongst other relief.
The Generic Template Problem
We have been asked several times about why we charge to review a lease. Most owners think they can download a "standard" lease from the internet and everything will be fine. But what they usually download is a poorly written generic lease that was written for a different state or even country. It takes a lot of work to modify a lease to fit the needs of a specific property and a specific local market. And in Texas, the consequences of not having the proper lease can be severe.
Another landlord of single family residence got burned recently in a Spring Branch court case. The tenant, who had been renting the property for 7 months, vacated the premises and the landlord attempted to withhold the deposit for the cost of replacing the carpet. The problem was that the lease had no Itemized Move-in Condition Report attached to it, therefore the landlord was unable to support his claim for damage. The court agreed with the tenant and the landlord was forced to return the entire $2,000 deposit plus court costs. The worst part was that the landlord was still stuck with the cost of replacing the carpet.
In Texas, the landlord is required to return a tenant's security deposit within thirty (30) days after the end of the lease. Should the landlord fail to return the security deposit or provide an improper itemized list of damages, the tenant could be awarded three times the amount of the deposit plus attorneys' fees pursuant to Texas Property Code Section 92.109. Thus, if a security deposit for a $2,000 average monthly rental property is $2,000, a landlord who fails to properly return a security deposit could be on the hook for $4,000 to $6,000 plus attorneys' fees.
A generic lease template typically will not have adequate language to address many common circumstances that can arise during the course of a tenancy.
Missing Lease Clauses - Why They Are Important and How to Address Them
Even seemingly routine aspects of a lease—such as provisions that detail what happens with pets—receive far too much consideration as afterthoughts to be handled as afterthoughts, with owners relying upon generic templates available for free online. Most notably, the provisions below get left out of far too many leases, perhaps in part because they have been afterthoughts throughout much of the rest of the rental real estate industry as well.
A lot of owners are leaving out important clauses in their leases, like the pet clause. For the Houston rental market, it's typical for a pet deposit to be $300 to $600 per pet with monthly pet rent of $25 to $75. However, there is a very important point of clarification regarding the wording of this clause. If an owner were to label the pet fee as "non-refundable" this does not necessarily mean that the tenant cannot contest it. One owner had previously used another property management company to place a tenant at one of his properties. Unbeknownst to the owner, the previous company had placed the tenant without an addendum to the lease for pets. Two large dogs had destroyed the hardwood floors of the property by the time the tenant had moved out. The cost of repair for the floors was $4,800. There was no pet deposit on file for either of the dogs and the owner had no contractual basis to try to recoup the damages.
Another common item that many leases lack is the entry notice. In Texas, a landlord has to give a tenant 24 hours written notice of entry for non-emergency repairs. If there is no language in the lease regarding the entry notice, the landlord is relying on the tenant to comply with the terms of the entry notice in good faith. However, without specific language in the lease governing entry, a landlord may not have sufficient protection should a dispute arise regarding entry into the leased premises.
Another very common lease provision to be lacking from generic lease templates is the early termination clause. Owners should want to require 60 days written notice prior to the lease end date and a buyout amount of one to two months' rent. A provision such as this would allow an owner to market their property quickly to obtain higher rent from a new tenant and avoid carrying a property with a subpar tenant for extended periods of time. In the absence of such a clause, a tenant could provide 30 days written notice and the owner would be required to allow the tenant to vacate the property in a matter of weeks, potentially losing valuable time and being forced to reduce the rent to attract a new high quality tenant.
Houston's Market Creates Specific Lease Needs
A lease that works great for a long term lease in a Sugarland area property would leave you exposed in the Energy Corridor area due to all the corporate relocations that only stay for short amounts of time.
The energy sector dominates Houston's market for single-family rental properties and for corporate relocation tenants. They move frequently, such as when they receive a transfer in another location, and need a flexible lease with an early termination penalty which can be set and advertised. This same flexibility in a well-written lease with defined terms and written requirements for military deployment allows the property owner to protect his or her earnings while remaining competitive in the lease marketing process.
Next are issues that arise in the Houston markets due to certain characteristics to this city. For the majority of flood disclosed properties in Houston, a generic template would fail to incorporate critical information in the Lease and Addendums regarding the Flood. This often results in landlords and tenants arguing after a major rainfall about who is responsible for the repairs to damaged materials and systems. This damage can occur rapidly and for that reason alone it is extremely important to have such disclosures in writing and identify who pays for what for flood related issues.
Houston has no rent control laws because of Texas state law. Therefore, a landlord's only means of control of rent increases at time of lease renewal is in the language of the lease and in the terms of the lease renewal. It is common for owners to experience large increases in rental rates at time of lease renewal when lease renewal language is not clear.
Renewal Terms and the Month-to-Month Trap
In Texas lease agreements can automatically expire at the end of the fixed term and return to a month-to-month agreement if a written renewal agreement for a new fixed term has not been signed by all tenants and the owner prior to the end of the fixed term. This can cause problems, for example in selling a property with a tenant. The owner cannot require the tenant to vacate the property on short notice, and as a result the sale of the property could be delayed for up to two months in order to allow the lease to expire.
This same owner did not realize that his lease auto-renewed. When he tried to sell the property several months later, he found out that the tenancy was month-to-month and could not give a clean end of lease date to prospective buyers. The delay in listing the property and ultimately the closing of the sale created nearly two and a half extra months of carrying costs for the seller – a big financial impact that could have been avoided with proper documentation of a new lease.
Having properties on month to month leases can create problems when obtaining financing on additional properties and getting insurance on the property.
The Lease is Your Last Line of Defense
It's rare that a landlord thinks about the potential damages that can be caused by a poorly screened tenant in a lease that spans for years. A long-term lease can be as damaging as a vacant property. While losing a month or two of rent can be painful, the total loss of $3,000 to $7,000 in rent, plus additional costs of legal and eviction procedures can do significantly more damage in the long run. Screening is the first line of defense to leasing out a property and protecting your revenue. A well-drafted lease is the last line of defense, and the key is to make sure that you have the best screening in place to ensure that the tenant that you sign to a lease will be the best for your property.
A long lease does not equal a better screened tenant. A bad tenant on a long lease can be much worse than a 30 day void. The lease is your last line of defense, screening is your first line of defense.
The Verbal Agreement Disaster
We cannot overstate how often verbal agreements come back to bite owners.
An owner's verbal agreement with their tenant to allow another person to reside at the property can cause huge financial problems for an owner when that unauthorized person causes damage to the rental property. The owner may not be able to collect any part of the damage from the unauthorized person and in the worst case scenario could have to pay the damage out of their own pocket. In a past case, an owner in the Katy area (77494) allowed a roommate to move into the home of his tenant. There was never any written addendum to the lease agreement that had been signed by both the owner and the tenant prior to the roommate's move into the home and therefore the roommate was not a party to the lease agreement. When the roommate caused thousands of dollars in damage to the property the owner was unable to collect any of the damage from the roommate. He had to pay $4,000 of the $12,000 in damage out of his own pocket. He even took the roommate to small claims court and won but was only able to collect $1,200 of the damage in judgment.
How Professional Management Addresses This
Our clients describe the change as going from uninformed to informed. They tell us that they had no idea that they were exposed to certain risks, and that our knowledge of the neighborhoods, pricing, lease terms and expectations of tenants for each submarket of Houston has allowed them to confidently grow their portfolios.
So, if you feel that managing the lease agreements of your single-family rental properties is harder than it needs to be, please let us know by clicking the button to the right and setting up a time for an introductory consultation with one of our licensed Property Managers.
FAQ
What should every residential lease agreement include in Texas?
A Texas lease needs to cover the following items at a minimum to be valid: the amount of rent to be paid as well as the time in which it is due, the terms of the security deposit (amount as well as how it is to be returned), entry notice requirements, the terms for early termination of the lease, the terms for pets, the repair of the property, and the terms for renewal of the lease.
How long does a landlord have to return a security deposit in Texas?
If you are unable to return all of a tenant's deposit for lawful reasons (for example, because of damage to the premises), then you must provide the tenant with a written itemization of the basis for the return of only a portion of the deposit within thirty (30) days of the end of the lease. Texas Property Code Section 92.109(2) provides that if a landlord fails to return a security deposit or fail to provide a written itemization as required in this Section, the landlord is liable to the tenant for an amount equal to three times the amount of the security deposit plus all court costs and attorney's fees.
Can a landlord increase rent mid-lease in Houston?
Raising rent on a lease that is currently in effect is generally prohibited in Texas and cannot be controlled by any local ordinance. However, terms for raising rent can be agreed upon by landlord and tenant in writing within the terms of the lease. If there are no terms for raising rent in a lease, the rent generally cannot be increased until the end of the lease term. The lease will then typically roll over to a month to month lease and terms for raising rent can then be agreed upon by landlord and tenant in writing and implemented for future months.
What happens if a lease expires and no renewal is signed in Texas?
When a lease agreement expires and no new lease has been signed by both the landlord and tenant, the terms and conditions of the prior lease agreement automatically convert to a month-to-month tenancy. This means that the landlord and tenant are each other's landlords and tenants under the terms and conditions of the prior lease agreement. In effect, this gives the tenant greater flexibility and creates more difficulties for the landlord with respect to scheduling showings for prospective buyers or for conducting repairs in anticipation of a refinance. It is always best to enter into a new written lease agreement or a written lease agreement for a fixed term of time (referred to as a "renewal" of the prior lease agreement).
Is a verbal agreement with a tenant legally binding in Texas?
Verbal Agreements are difficult to prove in Court. As a general rule, until it is in writing and signed by both parties it does not exist. So, any change to a lease needs to be in writing and signed by all parties.
Can A Lease Clause Be Unenforceable?
Any lease clause that is in conflict with Texas Property Code Chapter 92 is unenforceable. In some instances, it could even potentially expose a landlord to liability. This would be the case if a lease had overly aggressive entry rights; contained inappropriate deposit language; or charged excessive fees that violated statutory caps. An effective lease is one that is BALANCED and PROTECTIVE of landlord's and tenant's rights.
