Articles

Avoid Five Common Mistakes Made By Residential Landlords
By Jon L. Farnsworth, Esq. and Michael A. Franklin

The opportunity to purchase inexpensive residential rental properties is a direct result of the depressed real estate market.  However, inexperienced residential landlords owning property in Minnesota should avoid making the following five common mistakes:

1. Failure To Have A Written Lease.

   Some landlords rent properties based solely on an oral agreement.  Since laws are commonly written in favor of tenants, it is imperative for landlords to have a written lease that contains the terms of the landlord-tenant relationship.  Form leases are commonly available on the internet; however, such leases often fail to provide comprehensive protections for the landlord in the event of a tenant default and may omit necessary terms to comply with Minnesota law.  Regardless of whether an attorney’s assistance is sought, written leases should be individually tailored to the landlord’s needs.

2. Failure To Obtain A Background Check For Prospective Tenants.

   Landlords should obtain prospective tenants’ eviction records.  Tenants with eviction records who are unable to obtain leases from more sophisticated landlords, such as large corporations and apartment complexes, often turn their attention to unsuspecting landlords who fail to perform adequate background checks. 

   Eviction records provide valuable information about tenants’ failures to perform under the terms of their prior leases.  The most common reason for eviction relates to the non-payment of rent.  Accordingly, tenants with prior evictions may be more likely to be delinquent on their future rent payments.

   Tenant background checks may be obtained through a handful of private companies for a fee or by searching the Minnesota State Court’s database. 

3. Failure To Obtain A Damage Deposit And Include It In The Lease.

   Landlords should obtain a sufficient damage or security deposit, which is equal to at least one month’s rent.  The deposit should be placed in an interest-bearing account during the tenancy.  The deposit should be promptly returned to the tenant at the end of the tenancy, unless there is damage to the property or some other contingency that allows for the withholding of the deposit.

   Under Minnesota law, residential landlords may only use the deposit to remedy tenant defaults in the payment of rent if such provisions are contained in the lease.  If the landlord lacks such an agreement, the landlord is unable to use the security deposit in lieu of rent.

4. Owning Property Personally Rather Than “Incorporating”.

   Individuals can protect their personal assets and insulate themselves from liability (e.g., lawsuits etc.) if the leased property is owned by a legal entity, such as a limited liability company.  Without limited liability, individuals who lease property may be subject to indefinite personal financial exposure from a lawsuit.  With limited liability, the financial exposure is borne by the company, not the individual. 

   While individuals do not necessarily need assistance from an attorney to organize a limited liability company, an attorney can provide the services at a reasonable cost as well as invaluable advice regarding how to properly use the LLC structure as a viable business.  A competent real estate attorney can also provide great assistance in structuring the transfer of real property from an individual to a newly formed company.  Individuals who fail to understand how to properly operate an LLC or transfer the real estate from the individual to the LLC may not receive the anticipated limited liability protections. 

5. Neglecting To Include Appropriate Penalty Clauses In The Lease. 

Landlords should adequately protect their interests by including penalty clauses within the lease. Among other things, landlords should include provisions for late fees that reasonably relate to the landlords’ actual damages due to the late payment.  A new statute that is effective for new and renewed leases on or after January 1, 2011, provides the late fee must appear in the lease for the penalty to be effective, and cannot be greater than 8% of the overdue rent payment.  

The lease should also contain an attorneys’ fees provision that allows for the collection of attorneys’ fees and court costs in the event of an eviction or collection proceeding is necessary.  However, residential landlords should be aware of a new law that is effective for new leases entered into on or after August 1, 2011, and for leases renewed on or after August 1, 2012, and provides that any attorneys’ fees that are recoverable by the landlord under the lease, are also recoverable by the tenant under the same circumstances.  For instance, if the landlord is eligible to receive attorney’s fees if it brings a successful eviction complaint, the tenant is also eligible to receive attorney’s fees if it successfully defends an eviction action.

Conclusion

Owning residential rental property can be a rewarding and profitable experience.  Landlords will better position themselves for success by taking proper legal procedures to protect their interests and by avoiding the above-listed five common mistakes. 

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