Top Ten Legal Mistakes That Can Sink Your Landlord Business

Being a successful landlord requires lots of practical know-how, business moxie, and familiarity with the market. It also requires knowledge of the law: Federal law and many states' laws closely regulate nearly every aspect of your business. Not knowing the rules can land you in legal hot water.

1. Using Generic or Outdated Lease Forms

Most landlords know it's important to have a written lease or rental agreement. But using the wrong form can get you into trouble. So-called "standard" forms you'll find for free (or even those being sold) on the internet probably aren't compliant with the laws in your state. If you use a form lease that short-cuts tenants' rights, you could find yourself at the losing end of a lawsuit because of an unenforceable lease clause. On the other hand, some standard forms actually impose greater obligations and restrictions on you than your state's law does! (For example, some forms require landlords to return security deposits within ten days, which is shorter than any state's deadline for returning security deposits.) The best lease or rental agreement forms comply with not only federal law, but also with your state's specific landlord-tenant laws.

2. Asking the Wrong Questions During Applicant Screening

Thorough tenant screening is the most important part of your business—if you choose poorly, you're more likely to end up with tenants who don't pay the rent, trash your place, or worse. But there are limits to what you can ask potential tenants. Many landlords don't realize that even well-meaning questions (such as asking a disabled people about their disabilities or asking if a couple is married) can be illegal forms of housing discrimination. If the applicant doesn't get the rental, even though your rejection had nothing to do with the offending question, the disappointed tenant has ammunition for a fair housing complaint (which fair housing watch-dog groups are eager to pursue).

3. Setting Policies that Discriminate Against Families

Many landlords try to exclude families from their rentals because they believe children cause more wear or because they prefer a more "mature, quiet" environment. These practices aren't justifiable business decisions, though—they are examples of illegal familial status housing discrimination, plain and simple. While landlords are permitted to limit the number of residents in a unit (in most situations, two occupants per bedroom), landlords cannot apply that standard differently when dealing with families. The cost of implementing policies that discourage families from living in your rentals can be a trip to your lawyer's office to deal with a fair housing complaint.

4. Making Promises That You Don't Keep

It's fine to be enthusiastic about your property, and it's necessary to highlight its amenities in competitive markets, but understand that your descriptions of the rental will become binding promises if applicants rely on them when deciding to rent. For example, if you assure an applicant that you will provide a parking space, internet service, or a new paint job, the tenant can likely enforce your statement. Tenants who feel ripped off can legally break the lease or sue you for the difference in value between what was promised and what you delivered. Whether the tenant will win the lawsuit is a secondary concern—you'll have to respond regardless, which will cost time and money.

5. Charging Excessive Late Fees

Late fees can be a powerful tool to motivate tenants to pay the rent on time. And while a higher fee can be a better motivator, some landlords cross the line, by setting fees that bear little resemblance to the actual damages they suffer when tenants pay late. Courts are likely to invalidate excessive late fees that can't be justified with hard evidence. You're better off setting a modest fee that reflects your true damages, and dealing with chronic late-payers with pay-or-quit notices. You should also ensure that your late fees do not violate your state's late fee laws or state or local rent control laws, if applicable.

6. Violating Tenants' Rights to Privacy

Most states have detailed landlord access rules: rules on when, for what reasons, and with how much notice landlords can enter a tenant's home. Yet many landlords stop by unannounced, asking to check things over, perform an on-the-spot repair, or show the place to prospective tenants. Repeated violations of a tenant's privacy (or even one outrageous violation) can excuse a tenant from any further obligations under the lease and might also result in court-ordered money damages against the landlord.

7. Using Security Deposits for the Wrong Projects

The most frequent types of cases heard in small claims court are security deposit disputes. Yet the basic rule—that deposits should be used only to cover damage beyond wear and tear, needed cleaning, and unpaid rent—isn't hard to understand. Still, landlords routinely use the deposit to cover appliance upgrades, cosmetic improvements and other refurbishing, not repairs. Not surprisingly, many of these landlords lose these cases in small claims court.

8. Ignoring Dangerous Conditions In and Around the Rental

Landlords in virtually every state are required to offer and maintain housing that meets basic health and safety standards, such as those set by state and local building codes, health ordinances, and landlord-tenant laws. If you fail to take care of important repairs, deal with environmental hazards, or respond when your property has become an easy mark for criminals, tenants may break the lease and, in many states, withhold the rent or make the repair themselves and deduct the expense from the rent.

Landlords who have failed to make their properties reasonably secure in the face of repeated on-site crime are often ordered to compensate the tenant-victim when yet another criminal intrudes. These are expensive ways to learn the law.

9. Keeping Security Deposits When Tenants Break a Lease

When tenants break a lease and leave early, landlords often keep the entire deposit, reasoning that the tenant's bad behavior justifies doing so, and that they'll ultimately need it anyway to cover rent. In many states, this is illegal—landlords must take steps to rerent, and credit any new rent toward the tenant's obligation for the rest of the lease. Keeping a two months' rent deposit and re-renting within a month is not legal.

10. Failing to Return Security Deposits According to Law

This list wouldn't be complete without another reference to security deposits. Not only are they used improperly, they're often not returned according to state law, either. Many states have deadlines by which landlords must itemize their use of the deposit and return any balance. It's not uncommon for tenants to wait many weeks or months for this accounting. In some states, the deliberate or "bad faith" retention of the deposit will result in harsh penalties against the landlord, such as an order that the landlord pay two or three times the deposit to the tenant.

For More Information

For all the information, explanations, and legal forms the savvy landlord needs to rent property right, read Every Landlord's Legal Guide, by Janet Portman, Marcia Stewart, and Ann O'Connell (Nolo).