Capital Street

3 Lease Clauses to Protect Landlords

In this post I’m going to show you 3 key lease clauses that should be in every NJ Residential Lease to protect Landlords. We’re going to cover the purpose of each lease clause and how you can enforce them yourself, even if you’re a new landlord and just getting started.

As a rental property owner or landlord, I want you to fully understand how important your lease agreement is. Whether you need it to enforce an agreed upon fee or to stand up in front of a judge. Once signed by both parties your lease becomes law. Again, in this post I’m going to outline 3 clauses. So buckle your seatbelt because this in this post I’m going to show you how you can better minimize your risk to protect the profits from your property.

But first, if we’re just meeting my name is  Albert Myers, I’m the owner and Property Manager of CSM, a PM servicing EC,UC, and surrounding areas here in NJ. One of the many bright spots of being a rental property owner that first excited me was having properties that cashflowed, basically rents covering the mortgage and then still being able to put money in the owners pocket each month. But what I soon realized was that there are risks that come along with being a rental property owner that could wipe out that cashflow entirely. And spending several years working within a larger management company, that managed well over 10,000 doors in apartment communities, I got a chance to see first hand how they handled these risks for the owners of those communities. So, enough of my story, let’s dive straight into this content. Here are the 3 key lease clauses that can protect your Cashflow, risk against liability, and the overall quality of your rental property.

#1. In simple terms, a Lease Break clause:

This clause is for when a tenant needs to move before their lease is up. Now you might think, what’s the issue? If they need to move they need to move what’s the harm in that? That may be true but that shouldn’t mean that they should be able to up and leave you hanging. What will that do to your Cashflow? You have a tenant 1 month and the next they’re gone. This clause was one of the most asked about and enforced clauses that I’ve witnessed working at larger apartment communities. Many times tenants would move to the area for contract work and after their contract was up, they’d need to move on to another city. The only problem was that most of the lease terms were for 12 months.

So how did those larger communities handle this issue? With a lease break/liquidated damages clause! And it went like this: In the event the Tenant breaches the lease agreement or terminates the lease agreement before the expiration of the lease term, the tenant shall be liable for the rent due for the next 2-Months Rent in full.

Now you might be thinking 2-months rent is a lot of money to enforce and I can understand that perspective. But even if you’re not comfortable enforcing 2-Month’s rent there should be some type of fee for this. When signing the lease tenants are agreeing to pay you a total amount in 12 monthly installments. Try turning back over a car lease before the term is completed because you didn’t need the vehicle anymore. 9 out of 10 times they’ll still be a balance owed. This Lease break clause actually leads right into the second clause which is:

#2 No subletting or Air BNB

Why this clause? Looking back at clause 1, Just know that if there’s a fee there’s a tenant who’ll try to find a way around that fee. Instead of paying the lease break clause tenants might try to bring in a friend to take over their lease without telling you or in some cases they may even try making some money on the side by listing a room on services like AirBNB.

Before I worked at that larger management company, one of my close friends lived in JC NJ, in the Heights section. It was a house that was definitely a CashCow for the owner. It was a 2-family with a bonus basement apartment. Instead of renting it out by the apartment, each room was rented to an individual. 3 on the second floor, 3 on the first floor and 1 in the basement, all 7 tenants roughly paying around $1k each. Everything was great, all of the tenants were millennials and either worked locally or right across the water in NY. There was a lot of comradery between the tenants and probably even more cashflow for the owner. Everyone was happy for the most part until they weren’t. One of the roommates, my friend, was in between jobs for a brief stint and looking for ways to cover his expenses he decided to list his room on AirBNB. Within a few days of the idea he added a hot plate to his room, cleared his mini fridge and he was in business. This worked well for a few weeks, he was able to cover his rent for the upcoming month but when his roommates realized what was happening they raised complaints and he eventually had to shut his operation down.

As a rental property owner, this owner was lucky that he had other tenants on site who alerted him but as a rental property owner yourself, how do you protect against something like this? Well for 1) you explicitly list in your lease that Subletting and Air BNB is prohibited and 2) just like how clause 2 helped enforce clause 1. You also list this third clause in your lease agreement and that is:

#3: The right to Routinely inspect the apartment.

You want to make sure that you list out that as the property owner you have the right to inspect the apartment routinely with proper notice given, whether that’s annually or if you want to be more thorough, semi-annually or even quarterly. By doing this you can see exactly what’s going on at your property. Does it look like an air BNB set up, are there signs of pets not on the lease, or are there severe damages that haven’t been reported? These are things that you want to know as the landlord of the property.

With this clause you may get some push back when tenants read the lease before signing and that’s okay. How you justify this to your tenants is by letting them know that the purpose of the inspection clause is to make sure that they get their full security deposit back after vacating the property. By keeping up with regular inspections, you’ll easily be able to spot things that need to be taken care of before they get out of hand. If they object completely and you have no other qualified prospective tenants, you could maybe give them an option to opt out, for a Fee. You could draw up a written agreement that explicitly states that by opting out they are fully aware that any and all damages over normal wear and tear will be charged from their security deposit.

In all, these are just a few of the ways that you can protect your rental properties cashlfow and risk against liability as a rental property owner. As the owner and Property Manager at Capital Street Management I’d highly recommend that you consider having these clauses added to your leases to protect yourself in a worst case scenario.

To download a PDF with the actual clauses that we use in our Lease here at Capital Street Management, click the link below. Again, let me mention that I’m not an attorney. Just a Property Manager. Ideally you’d like to have these clauses reviewed by your attorney and added in by them. If you’re a rental property owner in Essex County, Union County, or surrounding areas and you’d like to have these lease clauses enforced on your behalf, give us a call at the number here to schedule a free consultation call. We’ll review your needs as a rental property owner and figure out if we’re a good fit to work together.

Overall I hope that this video helped you add a few more tools to your tool belt as a rental property owner to be able to better protect yourself. I’m Albert with Capital Street Management. Thanks for reading this post.

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