Luigi Rosabianca is principal attorney for Rosabianca & Associates
Whether or not to use a lease agreement when you rent is a subject that ignites a good deal of debate. There are many landlords that will tell you that they have been renting for years without having the tenant sign a lease, and it has worked out just fine.
However, for every story with a happy ending, there is another that will make every landlord's hair stand on end. Here’s one such example from Steve Replin, a CPA and practicing attorney in Colorado:
“I used to own a 17,500 square foot shopping center in Denver, and two fellows rented a space to open a deli that offered specialty foods from other countries. They began their own rennovations, drilling holes in the concrete, putting in cooling cases and putting in wiring, which they left exposed. A building inspector, who was there to inspect another store, happened to walk into the deli and asked to see the building permit. One of the men started cursing at him and saying, ‘We don’t need no stinking building permit.’ Even though the tenants committed lease violations (by not doing that work properly) there was no lease yet. So they couldn’t be held accountable. I started eviction proceedings against the tenants, but without a lease they put up a powerful fight not to leave.”
It’s cases like these that should make every landlord understand the need for a lease agreement, because without one, you are subject to risk exposure from tenant actions that could make you liable. Formalizing the agreement through a written lease makes certain that all the Ts are crossed and the Is dotted, says Luigi Rosabianca, principal attorney and founder of real estate law firm Rosabianca & Associates. It allows you to decrease your level of risk.
Luigi emphasized that anyone who plans on owning real estate should have a basic understanding of the real estate laws of their state. That’s because these laws become the default provisions of the agreement between the tenant and the landlord if there is no lease. What that means is that if there is no formal document that spells out the rights and responsibilities of the landlord and the tenant, then state law determines what those rights and responsibilities are.
Many states do provide protections for both sides, Luigi added, but if you want to deviate from those guidelines in any way, you need a formal lease agreement. For example, most states don’t require a tenant to carry renter’s insurance. However, a landlord may decide they want their tenants to have renter’s insurance in the event the tenant causes damage. The landlord can also stipulate in the lease agreement that they be named as an additional insured on the tenant’s policy so they receive the same coverage protection as the tenant.
Another important function of the lease agreement, according to Luigi, is that it “draws a very clear dividing point between the rights of both sides as opposed to the gray area that would exist if a disagreement should arise.” That’s because a lease spells out what each side can expect from the other in terms of issues like who is responsible for paying the utilities, or whose job it is to maintain the property.
The third, and probably the most frequently overlooked reason to have a lease is that it serves as a proof of income. It’s no secret that since the real estate bubble burst, lending institutions have become a lot more cautious when it comes to financing. If you are trying to refinance a mortgage, presenting a lease agreement can serve as proof of the monthly income you receive from the rental property. Luigi noted that it carries more weight than cancelled checks. And, needless to say, if your tenant pays you in cash, it is the only proof of the income you receive from your property.
Luigi was in agreement that there are “tens of thousands of rental arrangements that are not formalized, and they never get litigated.” But, rather than leaving it to chance that your informal arrangement will work. Luigi recommended having your tenants sign a lease. As he says, “It will help you sleep better at night.”