While oral lease agreements may be possible in theory, they're enormously difficult to enforce or interpret. With written agreements everyone knows what the game is and how it's played.

Leases should be seen as a list of understandings which outline both rights and obligations. Leases can include - or exclude - just about everything, but from the investor's perspective there are certain issues which should be addressed.

Acceptance

Within the lease we need a statement showing that the tenant has examined the property and agreed that it's in satisfactory condition. Unless the owner is notified to the contrary within a brief period, say five business days after the lease begins, it will be assumed that the property's condition is acceptable to the tenant.

Alternations

Residential properties are designed to meet standardized building codes and safety requirements. The tenant who decides to build a fireplace in the rec room can seriously damage the property's structural integrity, violate local building codes, and negate insurance overage. For these reasons, a lease must prohibit alterations without the owner's express permission.

Abandoned Property

Because goods are sometimes left behind after a tenant moves out, an abandoned-property clause allows the owner to keep or dispose of all tenant items after a given time, say three days after the lease expires, without liability to the renter.

Default

If you've got to sue or evict a tenant, at least make him or her pay some of the cost. A lease should require the tenant to pay a basic legal fee, say $200, for each legal action required. Although $200 won't cover a serious legal tiff, it's a pro-owner clause that gives the landlord additional leverage.

Extension

When the lease term ends after a year or two, some agreements provide for an automatic month-to-month extension. But lease extensions on a monthly basis may create a problem with lenders, folks who often require leases of at least a year when calculating owner income.

Because investors can be expected to be in the market for financing on a regular basis, the best strategy from the owner's perspective is to raise rents and continue leases on a yearly basis. Annual extensions are not only valuable when dealing with lenders, but also provide a level of continuity for the tenant.

Forfeiture of Deposit

If the lease is breached - say the tenant doesn't mow the lawn all summer - the owner should have a unilateral right to take funds from the security deposit to correct the problem. Note that security deposits are often subject to special regulations, so speak with a local attorney or knowledgeable broker before touching money held in trust.

Hold Harmless

This type of lease clause states that the owner cannot be held responsible for injuries, accidents, or damages on the property when the property is under the tenant's control. Speak to an attorney for details and information about this type of clause.

Inspection

Landlords must have a right to enter the property, and an inspection clause will allow you in the unit for good cause, such as making repairs or showing the property to prospective renters or buyers. As a matter of goodwill and to assure tenant privacy, always make appointments before visiting the property, except in emergencies.

Insurance

A tenant's insurance obligations can be seen from two perspectives.

First, tenants should do nothing to violate the fire, theft, and liability policy carried by the owner. Operating a commercial auto repair business from a residence, for example, is likely to violate insurance requirements.

Second, tenants should be required by the lease to carry a policy that provides both public liability coverage and personal property coverage. This policy must be in force during the entire lease term and should include public liability coverage of not less than $100,000 and personal property insurance worth at least $15,000. Such policies protect both the tenant and the owner. If the house is robbed, for instance, insurance will over much of the damage, thereby reducing any claims a tenant might have against an owner.

Late Charges

What happens if rent is not paid on time? The tenant has breached the lease, but owners want the option of a less drastic penalty than eviction. A provision allowing late charges, say 5 percent of the total monthly rent, is common in real estate. It should be made very clear to the tenant that rents are due on a specific date and that rental payments "in the mail" or otherwise unavailable to the owner cannot be viewed as timely. 

One way to resolve the "lost in the mail" problem and other obscure delays is to establish an account with a savings and loan association or commercial bank near the property. The tenant then has the option of mailing rent to this account or making a deposit directly at the institution. The latter choice is particularly convenient when the institution has extended hours and drive-in windows.

If, however, payment is delayed, landlords should vigorously enforce late-payment clauses. Failing one time to use such clauses when rents are late may eliminate the option of charging a penalty in the future. If you don't charge a late fee, at least send the tenant a letter stating that in this particular case you're waiving your right to the fee, something you may not do in the future. As to how large a penalty, while 5 percent may be common, local rules can limit fees. Check with a local attorney to assure that only permissible fees are being assessed.

Maintenance

Regular and normal maintenance is the renter's responsibility, and the lease should say so. Changing light bulbs, mowing lawns, removing ice and snow, and taking out the trash are jobs for the tenant.

Owners can approach the problem of general maintenance in three ways. Once tack is to provide a basic "deductible" threshold for repairs - say $75 per item per incident. Thus, if the toilet is clogged and the bill is $90, the tenant is responsible for the first $75. The problem here is that routine maintenance items may be ignored. Note also that "general maintenance" can be defined so that tenants are not responsible for capital repairs such as a leaky roof or rotted decking.

A second tack is to seek higher rentals and include anticipated repair expenses within the rental budget.

A third strategy is to make the tenant responsible for specific repairs, say the first $100 for any work required on the dishwasher or furnace. This approach allows owners to customize repair agreements to match the needs of each property.

Monthly Rent

A lease represents an exchange - money for space. How much rent is a mater of negotiation but once established, it should be clearly stated in the lease.

A lease should show the tenant's total obligation over the agreement's entire span, not just a single month's rent. For example, if a tenant leases property at $500 a month for two years, then the contractual obligation should be for $12,000 ($500 x 24). If a tenant stays only 18 months, an owner may be able to collect the remaining rent, assuming the owner makes a good-faith effort to find another tenant.

Owners who want a two- or three- year lease should build rent increases into the original agreement to save yearly negotiating hassles. Long leases with built-in rent increases are a good way to reduce vacancies while maintaining high rents.

Notice of Termination

Although a tenancy may continue for many years, at some point all tenancies must end. Leases should require both tenants and owners to give the other party adequate notice when they wish to discontinue a lease, say 30 to 60 days.

Occupancy

In properties of a given size, owners may have the right to limit the number of occupants to avoid excess wear and tear. Owners must take care that if they establish numeric limits, they do so on the basis of warm bodies and not on the basis of age. If you say that occupancy by two adults and two children is okay but four adults is impermissible, the issue of age discrimination could arise.

Readers should be aware the subject of rentals and occupancy numbers can be contentious. There have been instances where the use of occupancy limitations have led to claims of bias (because large tenant groupings may not have an equal opportunity to rent, as an example). Owners are advised to check with legal counsel for the latest standards regarding numbers.

Group rentals are another approach to occupancy. This is a strategy that can maximize property income in college and urban neighborhoods; however, for group homes to be successful, each tenant must be fully responsible for the entire lease. For instance, if rent is $1,000 and four people share the property, each must be liable for the entire rent, not just $250.

Group-house leases must also provide that new residents will be permitted only with the landlord's approval. Such approval, in turn, should require new residents to sigh the lease and be bound by its terms. The approval of new tenants should not be unreasonably withheld.

There may be situations where a prospective renter is below the legal age to make a contract, and in this situation owners lease at their peril. Because minors cannot be forced to honor a contract, always have a parent or guardian co-sigh the lease.

Pets

A lease should clearly state whether or not pets are permitted and, if allowed, the number and type of animals you'll authorize. No venomous animals should be allowed, nor unlicensed animals or those not inoculated as required by local public-health policies.

Tenants should be fully responsible for rug cleaning, fumigating, detecting, and the repair of all pet-induced damage during the lease term. Check to see if local rules allow larger deposits or a cleaning fee paid in advance when pets are permitted on the property.

Some landlords permit pets, but insist on highly subjective and largely unenforceable rules. Fro instance, pets "which can be carried" may be permitted, but not larger animals. The real standard here is not the size of the animal, but rather the carrying capacity of the tenant.

Security Deposits

Security deposits must be part of every deal, but owners should see if local regulations limit deposit amounts. For example, owners may not be permitted in some areas to charge a security deposit in excess of one month's rent or perhaps two months' rent.

As owners we want the largest possible security deposit. Tenants, however, may not have such funds available. One way around this problem is to charge the tenant monthly rent plus an additional fee that is credited to a security deposit. For instance, if Hobbs is paying a $700 security fee but can only afford $300, it might be reasonable to take the $300 and then charge rent plus $50 a month until the $700 is in hand.

Local regulations may require that tenants receive deposit interest. To resolve the problem of excess bookkeeping, security deposits can be placed in separate accounts controlled by the owner but using the tenant's name and social security number. In this way all interest payments are credited directly to the tenant, and the landlord is not responsible for paying the taxes. When the tenant moves, the deposit and all accrued interest are his or hers, less any compensation due to the owner for lease violations. Since interest on the escrow account is added each year, and since the interest will go to the tenant unless you have a claim against the escrow money, it follows that the interest is taxable if collected by the tenant or by you.

The catch is that most people operate on a "cash" basis. They do not pay taxes on money they have not yet received, thus it is probable that neither the tenant nor the owner can pay a tax on dollars which are not yet paid out. In a similar manner, there is likely to be no "income" to report until it is actually given to the tenant or taken from the account as part of a claim. For details and specifics check with a tax professional regarding escrow interest reporting requirements.

An alternative approach to security-deposit interest is to credit the tenant with required interest and keep any excess monies. If the money is in a 5 percent account and deposits must earn 4 percent according to local regulations, landlords may be able to pocket the difference. Check with local attorneys for specific rules.

In addition to collecting the highest possible deposits, owners may also seek rent in advance, perhaps the first month's rent and the last month's rent. Collecting vast sums of rent money up front sounds enticing, but there are three practical problems. First, not every tenant has enough money to cover two months of rent plus a security deposit at one time. Second, your property will be less attractive when compared to other properties that have similar rents but lower tenant costs up front. Third, some jurisdictions may limit tenant pre-payments.

"Rent" money is very different from "deposit" funds. Because deposit money is held in trust, an owner cannot use or "commingle" the tenant's funds with his own. But rent money belongs to the owner and can be used any way he or she likes. Again, however, owners need to check with an attorney to determine if there's a local prohibition to limit the collection of extra rent at the beginning of the lease term.

Smoke Detectors

Smoke detectors are increasingly required in jurisdictions throughout the county, but whether or not local regulations make them necessary, owners are foolish to ignore the obvious benefits such devices provide. Both electric and battery-operated detectors are available, but electric devices are the better buy. They're more expensive to install, but they don't require tenants or owners to change batteries. Also electrified detectors represent a capital improvement, something that raises property values.

Sublets and Assignments

Under no condition should the property be sublet or the lease assigned without the landlord's written authority. If there's a sublet or assignment to which the owner agrees, the lease should give owners a processing fee for their work qualifying the new tenant. The amount of this fee should be specifically established in the lease.

Note that in some jurisdictions there's a movement by courts to allow sublets even when banned in a lease. The theory is that sublets should not be unreasonably prohibited when qualified tenants are available.

Surrender

When the lease period ends, the tenant must give up the premises. Landlords, however, don't want the property back with 30 tons of debris, so a surrender clause requires tenants to leave the place broom clean, to remove all trash and garbage, and to leave all mechanical equipment in good operating condition. If these steps are not taken, the security deposit can be used to clean up the property and repair damage.

Tax Increases

There's no reason why leases cannot contain clear pro-owner clauses, and a good one concerns tax increases. If taxes are raised after the first year of the lease, the increase can be passed through to the tenant on a monthly basis.

Term

All leases must show a given term, not merely "one or tow years", but from a given date to a specific, final date. This way the precise period covered by the leae is clearly understood.

Use

If may seem obvious that  a property with tow bedrooms, one bath, and a kitchen will be used only for residential purposes. Some tenants, however, may look at the same property and see everything from an industrial facility to a warehouse. Lease should clearly stipulate that the property's sold function is for residential purposes alone, and that commercial and professional use is prohibited unless otherwise agreed.

Utilities

In properties with separate meters, the tenant must be responsible for all utilities, including deposits. Be certain all water, gas, and electric meters are read at both the beginning and end of the lease term.

Vehicles

No campers, buses, motorcycles, or unlicensed or non-operating vehicles should be permitted on teh property without the owner's approval. All vehicles must be kept on driveways or in garages so that lawns and gardens are not ruined.

Miscellaneous Items

Every lease is ultimately a customized agreement between owner and tenant, and you may want to add special language for a variety of reasons. For instance, owners licensed as real estate brokers or agents should say in the lease that they're licensed. Any portion of the property not warranted, perhaps the washer and dryer, should be described in full. If the owner objects to water beds, they can be banned in the lease.

In may jurisdictions, the content of a lease is controlled or regulated by local governments. Owners, for instance, are usually required to hold security deposits in escrow or trust accounts. There may be certain rules regarding maintenance, pets, or cars on the property. Whatever the regulations, recognize that you're not the first person in the community to rent property and that standardized leases undoubtedly exit. You're likely to need help, however, updating, modifying, and customizing such form documents, changes best made with the advice of a knowledgeable attorney and local broker.