Everything You Wanted To Know About Leases – Part 1

The importance of having a good lease cannot be overstated.  A good lease solves and prevents countless problems.  The statement that an ounce of prevention is worth a pound of cure is particularly applicable to having a good lease.  A single sentence in a good lease can save you thousands of dollars, and a bad lease can cost you thousands.  Because we represent property managers, landlords, and owners, leases are our stock-in-trade.  We review leases.  We draft leases.  We interpret leases.  Based on our significant and ongoing lease related work, we want to share with all of our clients and readers the countless lease concepts and issues that we frequently discuss with clients.  These issues cover a wide range of topics from policy decisions, to drafting philosophies, to specific lease language.  Given the breadth of leasing related issues, we will continue to write on this topic in future newsletters, and then compile the entire series for our clients.

Lease discussions always involve the length of the lease.  Clients want an ironclad comprehensive lease, but they also want a short lease.  You can’t have both.  Comprehensive residential leases are in excess of ten thousand words, not counting addenda.  Depending on the font, this translates into six to eight legal size pages.  Leases can be shorter.  A shorter lease can be solid, but will never be as comprehensive as a longer lease.  Given the endless scenarios that come up in an apartment community, leases could be dozens of pages.  However, not every conceivable situation needs to be covered by a lease.  We always ask couple of questions when deciding to add something to our lease package, thus making it longer.  Does the issue come up often?  If the issue comes up, would it be a problem if the lease didn’t cover it?  Issues that don’t come up often or are not problems when they do don’t make the lease.  The more units you manage, the more likely an issue is to come up.  Companies that manage in excess of a thousand units need a comprehensive lease package.  Landlords that manage only a few units probably will be adequately covered by a much shorter lease product.

When it comes to lease length, sometimes more is less.  Two examples illustrate this point.  Many leases have a laundry list of reasons why the landlord can re-enter the premises.  For example, landlord can re-enter to make repairs or replacements; to estimate repair or refurbishing costs; to perform pest control; to do preventive maintenance; to change filters; to stop excessive noise; to remove health or safety hazards, to remove perishable foodstuffs, etc.   You get the idea.  This is only a fraction of the actual paragraph.  Instead of trying to cover every possible scenario, the lease should just allow the landlord to re-enter for any reasonable commercial or business reason, or in the event of emergency.  Similarly, many leases have long lease paragraphs addressing how the landlord can apply money paid by the tenant.  Money received will be first applied to late utilities, then to late fees, then to concession paybacks, then to unpaid pet rent, then to rent, etc.  The language can be significantly shortened and add almost unlimited flexibility by allowing the landlord to apply money received in landlord’s absolute discretion.

Lease related legal costs are driven by the amount of attorney time involved.  Lease work is not rocket science, but it is time-consuming and tedious work.  Sometimes clients forget the time-consuming nature of lease work.  This can cause unrealistic expectations about lease review and drafting.  For example, clients want a lease review, but don’t want us to spend more than an hour on it.  We cannot comprehensively review a five to ten thousand word document in an hour.  During a one-hour review, an attorney can only read the lease and highlight the most fatal or obvious flaws.  This brings us to a critical point about lease review work and related costs.  It is always less expensive to buy a well-developed lease product, then to try to fix a bad lease.  Reviewing, revising, and fixing most leases can easily exceed five hours of attorney time which is more than the base cost of our most expensive lease product. 
Similar to the other societal trends, the trend in lease language has been toward more tenant-friendly lease language.  What you need to know is that the use of dumbed down expressions doesn’t necessarily make a lease easier to understand, and can create other problems.  For example, more and more leases, in an attempt to be tenant-friendly, use the word “please”.  For example, please refrain from playing your stereo loudly after 9:00 p.m.   In our experience, if you want tenants to do or not do things, and have it be legally enforceable if they don’t, the words that need to be used are “shall” and “shall not”.  When lease language sounds like a request (please do this) rather than an obligation, it can lead to problems.  Lease language can be clear and understandable without going overboard and undermining the enforceability of lease obligations. 

The first and biggest decision to make about a lease is the measure of damages if the tenant breaks the lease.  The decision will determine how critical sections of the lease are drafted.  In Colorado, the two main options are future rent and lease break fee.  Upon default, a future rent clause makes the tenant liable for the rent into the future until such time the property is re-rented.  Under Colorado law, a landlord has a duty to mitigate damages by making reasonable efforts to re-rent the unit.  Upon default, a lease break fee clause makes the tenant liable for a fixed amount, properly referred to as liquidated damages.  Because a full discussion of the future rent versus lease break fee debate was set forth in the March 2009 issue of Landlord News, we will only highlight a few key concepts here.  One advantage of a lease break fee is that the accounting becomes final at move-out.  Future rent damages are not finalized until either the end of the lease term, or until the unit is re-rented.  Future rent’s biggest advantage is that it is legally tried and tested.  If tested in court, judges are going to enforce future rent clauses.  On the other hand, no Colorado appellate court has ever ruled on the enforceability of lease break fee clauses.  The enforceability of lease break fee clauses arises frequently in collection cases.  At least some judges, at the county court level, have not upheld lease break fee clauses.  However, the lack of clear legal precedent has not deterred landlords from using lease break fees since seventy to eighty percent of our clients use lease break fees.

Tenant’s false representations on applications have been and will continue to be a major issue.  Landlord’s rely upon and rent to tenants based on application statements.  Tenants most frequently lie about their criminal record, especially including lies about sex related crimes and sexual offender status.  When we get calls about tenant lies on applications, unfortunately too often not a lot can be done because the lease does not address the issue.  Your lease should address this issue, and a good lease will give a landlord the absolute right to terminate a lease if the tenant lied on their application.

As recently blasted out in an email alert, organized bands of thieves continue to rob onsite drop boxes.  As discussed previously in Landlord News, taking legal action to address these thefts is problematic.  The best solution is to eliminate drop boxes and thus eliminate the possibility of theft.  Several clients who have eliminated drop boxes report that it has not significantly impacted payments.  If you can’t or don’t want to eliminate the drop box at your community, then your lease needs to address the drop box issue.  Absent proper lease language, the theft of money orders from a drop box is the landlord’s problem.  Drop box lease language should state that the drop box is for convenience only, and that rent placed into the drop box is not delivered unless the payment is in the drop box when opened.  Finally, the language needs to shift the risk of loss to the tenant by stating that until any payment is delivered, the tenant bears the risk of loss, including by theft, of any payments put in the drop box. 

Under Colorado law, landlords can evict tenants for non-payment of rent.  Obviously, tenants fail to pay amounts other than base monthly rent.  Examples include, not paying a security deposit, or not paying for damages to replace a broken window.  When tenants fail to pay these amounts, the landlord typically serves a three-day Demand for Rent or Possession.  However, depending on the lease language, a landlord may or may not have the right to evict for non-payment of amounts other than rent.  The key is that the amount at issue has to be rent.  Problems can arise in eviction cases based on non-payment when the amounts demanded are not clearly rent.  This problem is easily remedied by simple lease language making all sums due rent, or additional rent.  A good lease should state that any and all rent, amounts, charges, sums, damages, or money owed by tenant under the lease shall be considered rent, and landlord shall have all remedies for non-payment of any amount, including eviction.

Look for a continuation of this discussion in future issues of Landlord News.

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