The runaway success of Airbnb and Homeaway leads many landlords and property managers to reasonable suspicion that their tenants are making extra cash by listing their properties as short-term rentals (STRs).
While many lease agreements and local ordinances restrict STRs, investing the time necessary to identify violations is unrealistic for most property managers, and the options for penalizing them are limited.
STRs can pose considerable risks to landlords—from increased wear and tear on units up to significant penalties and fines if STRs are in violation of the city’s zoning laws.
However, there may be a solution. Some savvy property managers are working out alternatives that both sidestep conflict with tenants and ensure increased profits, like this anonymous Chicago tenant:
– ANONYMOUS TENANT
Unfortunately, this sort of “everybody-wins” scenario can’t work across the board, as some cities and states have stricter laws than others.
Of course, be sure to contact a local lawyer before making any changes to your lease agreements. But to give you a head start, we consulted with three real estate lawyers to create the following six amendments to consider including in your leases.
1. Tenant bears liability for any fines or violations incurred
This amendment helps protect against the most common issue with STRs—if they’re prohibited in the city you live in, you can get slapped with a hefty fine. If your tenant’s STRs are in fact deemed illegal by the local authorities, this amendment may provide landlords with some protection.
But as Jack Levey, an attorney at Plunkett Cooney, warns, “that issue will only be binding between the landlord and the tenant. It will not be binding between the landlord and the city.”
In other words, if the city wants to prosecute you for the violation, the lease agreement won’t stop them. But, Barry Katz, partner at Arnstein & Lehr, LLP, says “just because it’s hard to enforce is not a reason not to include it.” This ensures you will have more power to hold the tenant responsible for any fines you’re required to pay.
The tenant shall comply with all applicable laws and governmental regulations, including those prohibiting discrimination, in connection with any short-term subletting or other subletting.
If the tenant’s subleasing results in the imposition of any fines, penalties, damages, or legal or administrative proceedings are levied against the landlord or the property, the tenant shall reimburse the landlord for the full amount required to resolve the matter, including the payment of any fines, penalties or damages, and all costs of investigation, settlement and defense.
2. Landlord will receive a set percentage of profits gained
Of all the suggested amendments on the list, this addresses the most basic concern: getting paid when other people reside on your property. You can use wording that makes a clear case for why it’s a reasonable expectation.
To determine the percentage of profits you receive, you first must decide whether you want this figure to be high enough to deter the tenant from arranging regular rentals, or if you want to encourage rentals to ensure you receive a steady stream of profits.
Alternately, in a case like the example mentioned earlier—where you know rentals will be common—you can negotiate a monthly rent increase, which eliminates some of the administrative concerns of the percentage model.
“Net proceeds” means all compensation received by the tenant, minus the cost of the landlord’s background check and any listing fees or commissions actually paid by the tenant.
3. Tenant is required to provide written advance notice
This should be a standard addition to any agreement regarding STRs. If you want to make a percentage of the profits for each rental, you first have to know when they’re going to occur.
Additionally, it’s wise to have an interest in knowing when someone new will be in your building, how many people are expected and how frequently rentals are occurring so you can plan accordingly. You should specify your preferences in three ways:
- How far in advance you need to receive the notice
- The format it should be in
- How much information you require
If you approve of the tenant renting out the property regularly to earn greater profits, you may wish to keep these requirements more relaxed to speed up turnover rate than if you prefer plenty of time to screen potential renters for approval.
In addition to complying with the requirements of Section __ [insert the section number for the provision governing subletting and assignments of lease], the tenant shall notify the landlord in writing or by email, at least __ days before the first day of any short-term sublease, of (1) the contact information and full legal name of each individual who will be occupying the property during short-term sublease, including a valid home or office telephone number, mobile telephone number, home address and email address; and (2) the first and last days that the individual will be occupying the property.
4. Tenant agrees to purchase extra liability insurance
The tenant should also have insurance to cover any serious property damage caused by a short-term renter.
“You’re going to want to make sure that there is adequate insurance in place for the benefit of the landlord, [and] you would want the landlord to be specifically named as an additional insured third party on any policy procured by tenant,” says Katz.
How comprehensive this additional insurance is should be contingent upon how frequently the property will be used as an STR, as a greater amount of renter traffic will increase the likelihood that significant damage will occur.
At least 30 days before the first day of any short term sublease, the tenant shall furnish the landlord with evidence from the insurance company that the coverage is in force, including an undertaking by the insurance company to mail notice to the landlord at least 30 days before any cancellation.
5. Tenant must pay an additional security deposit
Having strangers regularly reside on your property poses an added risk for damages, not to mention an increase in general wear and tear. This may require you to replace flooring, repaint walls or pay for carpet cleaning far more frequently than normal. As such, an additional security deposit is a reasonable request.
The amount of this deposit should also be contingent upon the frequency you expect rentals to occur and should take into consideration how much these repairs and renovations are likely to cost.
[WARNING: Some states limit the amount of security deposit that a landlord can hold under a residential lease. Some states do not limit the amount, but require the landlord to pay interest if the deposit exceeds a given amount.]
6. Landlord shall be able to pre-screen STR tenants
To provide extra protection against damage, you can insist on the ability to do some basic research into all renters in advance, and reserve the right to refuse any rental.
As Levey points out, “How do you know that the person coming in really is a tourist, and is not a drug dealer or terrorist, or for that matter, just someone with diplomatic immunity?”
The opportunity to look into a person’s rental history, credit and/or criminal record can prevent potential problems and help you protect other renters in the building or neighborhood from illegal activity.
If you want to conduct thorough research, such as performing credit or background checks for renters who will be staying for an extended length of time, consider including a requirement that states the tenant must cover any expenses incurred in this process.
Levey says the tenant should recognize “that processing a request for consent is going to cost the landlord administrative expenses and it’s not unreasonable for landlord to charge a fee to process that request.”
The more detail you include in your lease agreement, the more likely you and your tenant are to avoid misunderstandings when it comes to when STRs are permitted and how they’ll be conducted.
Ultimately, including these amendments and discussing them with a tenant won’t absolutely ensure you will know and profit off every short-term rental—you still have to start with an honest tenant.
They can, however, enable you to benefit from a practice that’s increasingly common and difficult to prevent and help protect you from the associated risks.
The above sample language is for illustration only, and should not be used until it has been reviewed and modified by your lawyer to conform with state and local law, and with the existing lease. Some of the sample language may be unenforceable or prohibited under the landlord-tenant laws of some states, or may subject the landlord to unexpected liability. The sample language assumes that the lease already requires the tenant to obtain the landlord’s written consent to any sublease.