There is a phrase you see in virtually every lease agreement, yet you probably don’t notice it: “residential use only.”
As straightforward as that language may seem, even landlords tend to skip over it and fail to discuss this point with new tenants. Perhaps that’s because these three little words often are buried in the introductory paragraphs, hardly noticeable when verifying the spelling of the tenants’ names.
However, in today’s market, these words carry more weight. Employment figures are improving, putting a huge supply of renters in the market. At the same time, wages are not keeping pace.
These factors mean more tenants are looking for extra income, and they are getting creative.
Unfortunately for landlords, these money-making enterprises often involve an inappropriate use of the rental unit. Those three little words suddenly translate into significant income loss for landlords.
The practice of renting out space in an apartment to people on the Internet is growing at a staggering pace. A typical scenario is a tenant who sleeps over at a friend’s house on weekends, and puts their own bed up for rent to a stranger at the same time.
Why It’s Bad
Needless to say, frequent, short-term rentals greatly increases the risk of injury or property damage.
Tenants who use these services tend to place extraordinary faith in what people say online and easily can fall prey to a scam. Not only are they placing themselves at risk, they threaten the landlord’s investment as well. Tenants are not trained to screen other tenants. They don’t know the right questions to ask. They don’t have access to tenant screening reports.
In many cases, the tenants are not home to supervise the guest, who has unrestricted access to the apartment and community amenities.
Many cities, particularly those with rent control restrictions, are battling the practice through zoning restrictions. Unfortunately, it may be the unsuspecting rental property owner who pays the fine.
The situation is aggravated by the fact that tenants try to hide the practice from the landlord. The landlord does not have the opportunity to explain the risks.
What Landlord’s Can Do
Explain to incoming tenants that “residential use only ” means the tenant agrees to live there, and not to use the property for a commercial or business purpose, like running a makeshift bed and breakfast. Tenants must understand the significant risks posed by these transactions, and that they will be evicted should they violate the provision.
Landlords also should review their guest policies and closes loopholes that could accommodate short-term guests that are found on the Internet.
From catering parties to taking in laundry, to converting a spare bedroom for yoga lessons or a coaching office, in-home businesses change the nature of the rental agreement.
Why It’s Bad
In-home businesses increase foot traffic, parking congestion and noise.
Some businesses will increase utility costs that are covered by the landlord.
Allowing public access to the unit is a security risk to other tenants or neighboring properties.
More traffic increases the risk of injuries like slip and fall.
Noise complaints may increase, both from neighboring tenants and from the tenant attempting to work in a residential space.
What Landlords Can Do
While not every business will adversely affect the rental property or community, it is crucial that landlords reserve the right to know what’s going on in the rental unit. From there, landlords can modify the lease agreement and place any necessary restrictions on the tenant.
It’s important to go over the “residential use only” prohibition with all incoming tenants, even those who are employed offsite. Many people are finding they can’t make ends meet with their current wages, and anyone is susceptible to the idea of easy money from home. Also, anyone could become unemployed during the course of the lease term. If tenants know it’s not an option, they likely won’t pursue it. This policy forces tenants to contact you to discuss their at-home business idea and seek approval before increasing your liability.
While restricting drug dealing seems like a no-brainer, current changes in the law in many states are blurring the lines on marijuana production and use. Other, less obvious business practices also can be illegal, like running a daycare or legal services office without the proper licensing. An activity may be legal until the tenant puts it online or sells broadens the reach beyond state lines. Conducting the business from the neighborhood may violate zoning laws.
Illegal activities place the landlord at great risk for fines, damage to reputation, and other income loss.
Why It’s Bad
An activity like pot production may be sanctioned in the state, but not by the federal government, placing it in a quasi-legal limbo. It is nearly impossible to know if the tenant is following the law because of a lack of oversight. That reality may not mitigate the landlord’s liability if the tenant is busted.
These types of businesses can generate the most complaints, and may lead to poor tenant retention.
What Landlords Can Do
Know your rights. For instance, some landlords believe they have no choice but to allow tenants to grow marijuana, but that likely is not the case.
Don’t get involved in regulating or supervising the business activity.
Prohibit criminal activity such as drug manufacture and sale and prostitution, and make certain the lease provides for eviction in the case of illegal activity.
The safest strategy may be to deny any business use, but if choose to allow an in-home business, it is wise to discuss this option with your attorney before agreeing to modify the lease.
Use your “common sense” radar when discussing the tenant’s business proposition. The idea may seem innocent enough, but the tenant may lack the knowledge or skill to pull it off.
Landlord Tip: As a general rule, any time a tenant asks to conduct business in a rental unit, ask yourself what would happen if every tenant made the same request. Because leasing policies must be applied uniformly to all tenants, that may help you decide whether you are ready to allow any one tenant to set up shop in your rental property.
This post is provided by Tenant Verification Service, Inc., helping landlords reduce the risks of renting with fraud prevention tools that include Tenant Screening, Tenant Background Checks, (U.S. and Canada), as well as Criminal Background Checks, and Eviction Reports (U.S. only).
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Disclaimer: The information provided in this post in not intended to be construed as legal advice, nor should it be considered a substitute for obtaining individual legal counsel or consulting your local, state, federal or provincial tenancy laws.