Introduction

All landlords typically follow the same process when renting property. We recognize that a landlord with 40 (or 400) units has different business challenges than a person with an in-law cottage in the backyard or a duplex around the corner. Still, the basic process of filling rentals remains the same:

1. Decide the terms of your rental, including rent, deposits, and the length of the tenancy.
2. Advertise your property.
3. Accept applications.
4. Screen potential tenants.
5. Choose someone to rent your property.

In this chapter, we examine the practical and legal aspects of each of these steps, with an eye to avoiding several common legal problems. Because the topic of discrimination is so important we devote a whole chapter to it later in the book (Chapter 9), including advice on how to avoid discrimination in your tenant selection process.

For comprehensive information and over 40 forms on advertising, showing your rental, screening applicants, and accepting and rejecting prospects, see Every Landlord's Guide to Finding Great Tenants, by Janet Portman (Nolo).

Adopt a Rental Plan and Stick To It

Before you advertise your property for rent, you'll want to make some basic decisions, which will form the backbone of your lease or rental agreement -- how much rent to charge, when it is payable, whether to offer a fixed-term lease or a month-to-month tenancy, and how much of a security deposit to require. You'll also need to decide the responsibilities of a manager (if any) in renting out your property.

If you haven't made these important decisions, the details you need are in Chapters 2, 3, 5 and 6.

In renting residential property, be consistent when dealing with prospective tenants. The reason for this is simple: If you don't treat all tenants more or less equally -- for example, if you arbitrarily set tougher standards for renting to a racial minority -- you are violating federal laws and opening yourself up to lawsuits.

Of course, there will be times when you will want to bargain a little with a prospective tenant -- for example, you may let a tenant have a cat in exchange for paying a higher security deposit (as long as it doesn't exceed the legal limits set by law). As a general rule, however, you're better off figuring out your rental plan in advance and sticking to it.

Advertising Rental Property

In some areas, landlords are lucky enough to fill all vacancies by word of mouth. If you fit this category, skip to the next section.

There is one crucial point you should remember about advertising: Where you advertise is more important than how you advertise. For example, if you rent primarily to college students, your best bet is the campus newspaper or housing office. Whether you simply put a sign in front of your apartment building or work with a rental service or property management company, be sure the way you advertise reaches a sufficient number of the sort of people who are likely to meet your rental criteria.

Legally, you should have no trouble if you follow these simple rules:

Make sure the price in your ad is an honest one. If a tenant shows up promptly and agrees to all the terms set out in your ad, you may run afoul of the law if you arbitrarily raise the price. This doesn't mean you are always legally required to rent at your advertised price, however. If a tenant asks for more services or different lease terms, which you feel require more rent, it's fine to bargain and raise your price. And if competing tenants begin a bidding war, there's nothing illegal about accepting more rent -- as long as it is truly freely offered. However, be sure to abide by any applicable rent limits in local rent control areas.

Don't advertise something you don't have. Some large landlords, management companies, and rental services have advertised units that weren't really available in order to produce a large number of prospective tenants who could then be "switched" to higher-priced or inferior units. This type of advertising is illegal, and many property owners have been prosecuted for bait-and-switch practices.

Be sure your ad can't be construed as discriminatory. Ads should not mention age, sex, race, religion, disability, or adults-only -- unless yours is senior citizens' housing. (Senior citizens' housing must comply with CC § 51.3. Namely, it must be reserved for persons over age 62, or be a complex of 150 or more units [35 in nonmetropolitan areas] for persons over age 55.) Neither should ads imply through words, photographs, illustrations, or language that you prefer or discriminate against renters because of their age, sex, race, and so on. For example, if your property is in a mixed Chinese and Hispanic neighborhood and if you advertise only in Spanish, you may be courting a fair housing complaint. In addition, any discrimination against any group that is unrelated to a legitimate landlord concern is illegal. For example, it's discriminatory to refuse to rent to unmarried couples, because the legal status of their relationship has nothing to do with whether they will be good, stable tenants.

Example: An ad for an apartment that says "Young, female student preferred" is illegal, since sex and age discrimination are forbidden by both state and federal law. Under California law, discrimination based on the prospective tenant's occupation also is illegal, since there is no legitimate business reason to prefer tenants with certain occupations over others.

If you have any legal and nondiscriminatory rules on important issues, such as no pets, it's a good idea to put them in your ad. This will weed out those applicants who don't like your terms. But even if you don't include a "no pets" clause, you won't be obligated to rent to applicants with pets. You can still announce the policy at the time you interview a prospective tenant -- and you can use your discretion when deciding whether their pets are acceptable.

Dealing With Prospective Tenants

It's good business, as well as a sound legal protection strategy, to develop a system for screening prospective tenants. Whether you handle reference checking and other tasks yourself or hire a manager or property management company, your goal is the same -- to select tenants who will pay their rent on time, keep their rental in good condition, and not cause you any legal or practical hassles later.

Never, never let anyone stay in your property on a temporary basis. Even if you haven't signed a rental agreement or accepted rent, giving a person a key or allowing him or her to move in as much as a toothbrush can give that person the legally protected status of a tenant. Then, if the person won't leave voluntarily, you will have to file a lawsuit to evict him or her.

The Rental Application

Each prospective tenant -- everyone age 18 or older who wants to live in your rental property -- should fill out a written application. This is true whether you're renting to a married couple sharing an apartment or to a number of unrelated roommates.

[Sample Rental Application Form] omitted for online sample chapter.

You'll find a tear-out version of the Rental Application in Appendix B. The CD-ROM that accompanies this book also includes this form. You can use the .pdf version (print this as is and give it to your applicants), or the .rtf version. You can word-process the .rtf version to add or delete questions, but be aware that extensive changes might affect the form's layout (the margins and available space for answers). Nolo's technical support will not be able to assist you in re-formatting this form.

Complete the box at the top of the rental application, listing the property address and amounts due before the tenants may move in.

Ask all applicants to fill out a rental application form, and accept applications from everyone who's interested in your rental property. Refusing to take an application may unnecessarily anger a prospective tenant, and will make him or her more likely to look into the possibility of filing a discrimination complaint. Make decisions about who will rent the property later.

The rental application form includes a section for you to note the amount and purpose of any credit check fee. (Credit check fees are discussed below.) If you do not charge credit check fees, simply fill in "none" or "N/A".

Be sure all potential tenants sign the rental application, authorizing you to verify the information and references. (Some employers and others require written authorization before they will talk to you.) You may also want to prepare a separate authorization, so that you don't need to copy the entire application and send it off every time a bank or employer wants proof that the tenant authorized you to verify the information. See the Sample Consent to Background and Reference Check, below.

[Sample Consent to Background and Reference Check] omitted for online sample chapter.

You'll find a tear-out version of the Consent to Background and Reference Check in Appendix B. The CDROM that accompanies this book also includes the form.

Don't take incomplete rental applications. Landlords are often faced with anxious, sometimes desperate people who need a place to live immediately. Some people tell terrific hard-luck stories as to why normal credit- and reference-checking rules should be ignored in their case and why they should be allowed to move right in. Don't believe any of it. People who have planned so poorly that they will literally have to sleep in the street if they don't rent your place that day are likely to come up with similar emergencies when it comes time to pay the rent. Always make sure that prospective tenants complete the entire Rental Application, including Social Security number (or an alternative; see below), driver's license number or other identifying information (such as a passport number), current employment, and emergency contacts. You may need this information later to track down a tenant who skips town leaving unpaid rent or abandoned property. (See Chapters 19 and 21.)

Credit Check and Screening Fees

State law limits credit check or application fees you can charge prospective tenants, and specifies what you must do when accepting these types of screening fees. (CC § 1950.6.) You can charge only "actual out-of-pocket costs" of obtaining a credit or similar tenant "screening" report, plus "the reasonable value of time spent" by you or your manager in obtaining a credit report or checking personal references and background information on a prospective tenant. Section D, below, covers credit reports and other screening efforts.

The maximum screening fee you can charge each applicant is $30, but you can adjust for inflation by consulting the Consumer Price Index for the nearest metropolitan area. To determine the allowable charge, go to the Consumer Price Index website at www.bls.gov/cpi and search for the article, "How to Use the Consumer Price Index for Escalation."

Upon an applicant's request, you must provide a copy of any consumer credit report you obtained on the individual. You must also give or mail the applicant a receipt itemizing your credit check and screening fees. If you end up spending less (for the credit report and your time) than the fee you charged the applicant, you must refund the difference. (This may be the entire screening fee if you never get a credit report or check references on an applicant.)

[Application Screening Fee Receipt] omitted for online sample chapter.

Finally, you cannot charge any screening or credit check fee if you don't have a vacancy and are simply putting someone on a waiting list (unless the applicant agrees to this in writing).

In light of state limits on credit check fees, we recommend that you:

• charge a credit check fee only if you intend to actually obtain a credit report
• charge only your actual cost of obtaining the report, plus $10, at most, for your time and trouble
• charge no more than $30 per applicant in any case (unless you include an adjustment based on the CPI)
• provide an itemized receipt at the same time you take an individual's rental application (a sample receipt is shown above), and
• mail each applicant a copy of his or her credit report as a matter of practice.

You'll find a tear-out version of the Application Screening Fee Receipt in Appendix B. The CD-ROM that accompanies this book also includes the form.

Nonrefundable move-in fees are illegal. Any "payment, fee, deposit, or charge" that is intended to be used to cover unpaid rent or damage or that is intended to compensate a landlord for costs associated with move-in, is legally considered a security deposit and is covered by state deposit laws. Security deposits are always refundable. (Chapter 5 covers security deposits.)

Terms of the Rental

Be sure your prospective tenant knows all your general requirements and any special rules and regulations before you get too far in the process. This will help avoid situations where your tenant backs out at the last minute (he thought he could bring his three dogs and your lease prohibits pets) and help minimize future misunderstandings.

To put together a rental agreement or lease, see Chapter 2. Once you've signed up a tenant and want to clearly communicate your rules and regulations, see Chapter 7.

Landlord Disclosures

California landlords are legally obligated to make several disclosures to prospective tenants. You can add the military, utility, and environmental disclosures to the rental application or put them on a separate sheet of paper attached to the rental application. Or, you can decide to make disclosures part of your lease or rental agreement. The Megan's Law disclosure must be on the lease or rental agreement. (See Clause 24, Additional Provisions, in Chapter 2.)

Megan's Law Database

Every written lease or rental agreement must inform the tenant of the existence of a statewide database of the names of registered sexual offenders. Members of the public may view the state's Department of Justice website to see whether a certain individual is on the list. You must use the following legally required language for this disclosure:

"Notice: Pursuant to section 290.46 of the Penal Code, information about specified registered sex offenders is made available to the public via an Internet web site maintained by the Department of Justice at www.meganslaw.ca.gov. Depending on an offender's criminal history, this information will include either the address at which the offender resides or the community of residence and ZIP Code in which he or she resides." Chapter 12 explains your duties under this law in more detail. The rental agreement and lease in Appendix B include this mandatory disclosure.

Location Near Former Military Base

If your property is within a mile of a "former ordnance location" -- an abandoned or closed military base in which ammunition or military explosives were used -- you must notify all prospective tenants in writing. (CC § 1940.7.) A sample Disclosures by Property Owner(s) form is shown below.

[Disclosures by Property Owner(s)] omitted for online sample chapter.

It is not necessary to warn prospective tenants of the existence of current ordnance locations, such as presently existing army or navy bases.

Although there are no penalties stated in the law for failure to warn, and although the law applies only to former ordnance locations actually known by the owner, it's only a matter of time before someone sues their landlord for negligently failing to warn of a former military base the landlord "should have known about." Therefore, if you have the slightest idea your property is within a mile of a former military base or training area, check it out. You might start by asking the reference librarian at a nearby public library or by writing a letter to your local Congressional representative. If you have a particular location in mind, you can also check with the County Recorder, who will show you how to trace the ownership all the way back to the turn of the century for any indication the property was at one time owned or leased by the government.

Periodic and Other Pest Control

Registered structural pest control companies have long been required to deliver warning notices to owners and tenants of properties that were about to be treated as part of an ongoing service contract -- but the warning notice had to be issued only once, at the time of the initial treatment. This meant that subsequent tenants would not receive the warning. Now, the landlord must give a copy of this notice to every new tenant who occupies a rental unit that is serviced periodically. The notice must contain information about the frequency of treatment. (B&P § 8538; CC § 1940.8.)

Effective January 1, 2007, landlords who apply pesticides on, in, or near a rental building or unit (including a children's play area) whose occupant is a licensed day care provider must provide advance written notice prior to doing so. See "Family Day Care Homes" in Chapter 2.

Shared Utility Arrangements

State law requires property owners to disclose to all prospective tenants, before they move in, any arrangements where a tenant might wind up paying for someone else's gas or electricity use. (CC § 1940.9.) This would occur, for example, where a single gas or electric meter serves more than one unit, or where a tenant's gas or electric meter also measures gas or electricity that serves a common area -- such as a washing machine in a laundry room or even a hallway light not under the tenant's control. We address this issue in detail in Chapter 2. While you may use the Disclosures by Property Owner(s) form, your lease or rental agreement is the more appropriate place to disclose shared utility arrangements. (See Clause 9 of our sample lease and rental agreement.)

Intentions to Demolish the Rental

If you plan on demolishing your rental property, you or your agent must give written notice to applicants, new tenants, and current tenants. (CC § 1940.6.) The steps you must follow depend on whether you're notifying applicants, new tenants, or current tenants.

• Applicants and new tenants. If you have applied for a permit to demolish their unit, you must disclose this before entering into a rental agreement or even before accepting a credit check fee or negotiating "any writings that would initiate a tenancy," such as a holding deposit. (CC § 1940.6(a)(1)(D).)
• Existing tenants (including tenants who have signed a lease or rental agreement but haven't yet moved in). These tenants are entitled to notice before you apply for a demolition permit (but the law doesn't specify how much advance warning you must give the tenant). The notice must include the earliest approximate date that you expect the demolition to occur, and the earliest possible date that you expect the tenancy will terminate (you cannot demolish prior to the estimated termination date).

This disclosure requirement packs a punch -- if you fail to give written notification as explained above, a tenant or prospective tenant can sue you for damages (and attorney's fees, which makes such a suit attractive to a lawyer). You can be ordered to pay the tenant's actual damages (such as the cost of living in a motel while looking for a new residence) and moving expenses, as well as a civil penalty (payable to the tenant) of up to $2,500.

Environmental Hazards

Federal law requires landlords to warn tenants about the presence of asbestos and lead paint hazards in the rental property. The subject of landlord liability for environmental hazards is discussed in detail in Chapter 12. Appendix B includes a copy of the required lead-based paint disclosure form.

California landlords must also disclose the presence of dangerous mold. If you know that a rental unit has toxic mold levels exceeding State Department of Health Services (DHS) guidelines, you must disclose that fact to current and prospective tenants. (H&S § 26147.) As of this writing, however, the DHS has not yet adopted these guidelines. When they do, they will post them on their website at www.dhs.ca.gov. Chapter 12 discusses mold in detail.

You'll find a tear-out version of the required lead-based paint disclosure form in Appendix B. The CD-ROM that accompanies this book also includes this form.

Smoking

Landlords are free to specify that some parts (or all of) their property will be smoke free. For example, you may want to prohibit smoking in individual units, but permit it in common areas or certain common areas. In Chapter 2, we explain how to use Clause 23 to describe your policy.

Before you get to the point of negotiating a lease or rental application with applicants, however, you may want to tell them about your policy. You don't want complaints later from a nonsmoker who didn't realize that you permitted smoking in the common areas. Nor do you want the complaint of a smoker who assumed that smoking in an individual unit would be okay.

Checking Background, References and Credit History of Potential Tenants

If an application looks good, the next step is to follow up thoroughly. The time and money you spend are the most cost-effective expenditures you'll ever make.

Be consistent in your screening. You risk a charge of illegal discrimination if you screen certain categories of applicants more stringently than others. Make it your policy, for example, to always require credit reports; don't just get a credit report for a single parent applicant.

Here are six steps of a very thorough screening process. You should always go through at least the first three to check out the applicant's previous landlords, income and employment, and run a credit check.

Check With Previous Landlords and Other References

Always call previous landlords or managers for references -- even if you have a written letter of reference from a previous landlord. Also, call previous employers and personal references listed on the rental application.

To organize the information you gather from these calls, use the tenant references form, which lists key questions to ask previous landlords, managers, and other references.

You'll find a tear-out version of the Tenant References form in Appendix B. The CD-ROM that accompanies this book also includes this form.

Be sure to take notes of all your conversations and keep them on file. This information will come in handy should a rejected tenant ever ask why he wasn't chosen or file a discrimination charge against you. (These issues are covered in the discussion of recordkeeping, below.)

Bad tenants often provide phony references. Make sure you speak to a legitimate landlord or manager, not a friend of the prospective tenant posing as one. One suggestion is to call the number given for the previous landlord or manager and simply ask for the landlord or manager by name, rather than begin by saying that you are checking references. If the prospective tenant has really given you a friend's name, the friend will probably say something that gives away the scam.

If you still have questions, consider driving to the former address and checking things out in person. Finally, if you have any doubts, ask the previous landlord or manager to pull out the tenant's rental application so you can verify certain facts, such as the tenant's Social Security number. If the so-called landlord can't do this, you are perhaps being conned.

Verify a Potential Tenant's Income and Employment

You want to make sure that all tenants have the income to pay the rent each month. Call the prospective tenant's employer to verify income and length of employment. Again, make notes of your conversations on the Tenant References form, discussed above.

Some employers require written authorization from the employee. You will need to mail or fax them a copy of the release included at the bottom of the Rental Application form, or the separate Consent to Background and Reference Check form.

If you feel that verifying an individual's income by telephone or accepting a note from her boss is not reliable enough, you may require applicants to provide copies of recent paycheck stubs. It's also reasonable to require documentation of other sources of income (such as disability or other benefits checks). Where a large portion of an applicant's income is from child support or alimony payments, you might want to ask for a copy of the court decree for the support payments. However, don't go overboard by asking for copies of tax returns or bank statements, except possibly from self-employed persons.

How much income is enough? Think twice before renting to someone if the rent will take more than one-third of their income, especially if they have a lot of debts. Be careful, however, if you're dealing with an applicant who is disabled and who cannot meet the "one-third" standard. If that applicant is otherwise qualified and presents you with a cosigner, you will need to evaluate the cosigner's financial ability and trustworthiness, despite any rules you may have against dealing with cosigners. ( Giebeler v. M & B Associates, 343 F.3d 1143 (2003).) Cosigners are discussed in detail in Chapter 2; your duty to provide accommodations for disabled renters is covered in Chapter 5.

Be careful if you ask to see proof of an applicant's citizenship or immigration status. Under federal law, you're probably on solid ground if you ask all applicants for proof of immigration status. See "Request Proof of Immigration Status," below.

Obtain a Credit Report From a Credit Reporting Agency

Many landlords find it essential to check a tenant's credit history with at least one credit reporting agency. These agencies collect and sell credit and other information about consumers -- for example, whether they pay their bills on time or, if reported by prior landlords, whether they've failed to pay the rent. As long as you use the information only to help you decide whether to rent to that person, or on what terms, you do not need the applicant's consent.

However, many people think that you must have their written consent before pulling a credit report to evaluate them as prospective tenants. For that reason, we have explicitly called for applicants' consent in our application (and on a separate form). But there's another reason for our caution: This written consent should help you if later, when the applicant is a tenant (or an ex-tenant), you decide that you need an updated credit report. For example, you may want to consult a current report in order to help you decide whether to sue a tenant who has skipped out and owes rent. Without a broadly written consent, your use of a report at that time might be illegal. (FTC "long" Opinion Letter, July 7, 2000.)

Never order a credit report unless you are doing so in order to evaluate a potential (or current or ex-) tenant. If you ask for a report for any other reason (such as a wish to check out the solvency of your future son-inlaw or the resources of your ex-business partner whom you're considering suing), you could face a lawsuit and penalties of thousands of dollars.

Information covers the past seven to ten years. To run a credit check, you'll need a prospective tenant's name, address, and social security number (or other identifying information, such as a driver's license number, ITIN, or passport number).

Some credit reporting companies also gather and sell "investigative reports" or background checks about a person's character, general reputation, personal characteristics, or mode of living. If you order one of these background checks, federal law requires that you disclose certain information to the prospective tenant. (See "Background Checks Trigger Disclosures Under the Fair Credit Reporting Act," below.)

If you own many rental properties and need credit reports frequently, consider joining a local credit reporting agency (they charge about $20-30 in annual fees plus $10-$15 per report). You can find tenant-screening companies in the Yellow Pages of the phone book under "Credit Reporting Agencies." Or, if you only rent a few units each year, see if your local apartment association (there are about two dozen in California) offers credit reporting services. With most credit reporting agencies, you can get a credit report the same day it's requested.

[Tenant References Sample] omitted for online sample chapter.

Landlords who have accounts or other ongoing business relations with the credit reporting agencies need not supply an applicant's date of birth (DOB) in order to get a report -- a name and social security number or ITIN will suffice. However, consumers ordering their own credit report must supply their DOB; and, presumably, small-scale landlords, who have no reason to set up an account with a credit reporting agency, could order reports as if they were the applicant, after asking the applicant for their DOB. We urge you not to try this route, because once you have a DOB, you open the door to a discrimination claim if you reject an older applicant who decides to impute age discrimination motives to your decision. Instead, investigate setting up an account or join an apartment association.

See If Any "Tenant-Reporting Services" Operate in Your Area

Just as regular credit reporting agencies keep tabs on retail purchasers' creditworthiness, businesses such as UD registry of Van Nuys keep tabs on eviction suits (called unlawful detainer, hence the "UD") filed against tenants. The fact that a tenant has been involved in an eviction lawsuit, regardless of the outcome, can be reported by the tenant-reporting services. (These agencies will have a difficult time, however, learning of eviction lawsuits that the tenant won, as explained below.) Your local apartment association may recommend other services of this type. Tenant-reporting services charge from $20 to $50. As with credit reporting agencies, if you don't rent to an applicant because of information from a tenant-reporting service, you must notify the applicant of the nature of the report and provide the name and address of the company.

Check With the Tenant's Bank to Verify Account Information

If an individual's credit history raises questions about financial stability, you may want to take this additional step. If so, you'll probably need an authorization form such as the one included at the bottom of the Rental Application, or the separate Consent to Background and Reference Check form. Banks differ as to the type of information they will provide over the phone. Generally, banks will at most only confirm that an individual has an account and that it is in good standing.

Be wary of an applicant who has no checking or savings account. Perhaps the bank dropped the individual after many bounced checks.

Review Court Records

If your prospective tenant has lived in the area, you may want to review local court records to see if the tenant has been sued in a collection or eviction lawsuit. Checking court records may seem like overkill, but now and then it's an invaluable tool if you suspect a prospective tenant may be a potential troublemaker. Since court records are kept for several years, this kind of information can supplement references from recent landlords. You can get this information from the superior court for the county in which the applicant lived.

Tenant-friendly legislation narrows your ability to learn whether an applicant has been involved in an eviction lawsuit. Courts are required to keep records on eviction lawsuits secret and sealed for 60 days from the date the landlord filed the unlawful detainer complaint. If the tenant wins the case within that 60 days, the court must keep the records sealed indefinitely. The sealing requirement does not affect eviction lawsuits that were filed before January 1, 2004. (CCP § 1161.2.)

You'll need to go in person and ask the civil clerk to show you the Defendants' Index, usually kept in microfiche form. If a prospective tenant's name is listed, jot down the case number so you can check the actual case file for details on the lawsuit and its resolution. You can often determine if a prospective tenant asserted a reasonable defense and if any judgment against the tenant was paid off.

Check the Megan's Law Database

For many years, the California Department of Justice ("DOJ") has maintained a database on the names and whereabouts of felons who have been convicted of violent sexual offenses and offenses against minors. The DOJ has made the information available on its website, which should be viewed only by those seeking to "protect a person at risk." (Penal Code § 290.46(j)(1).)

Unfortunately, the law does not define the term "at risk." Common sense would suggest that women and children fit within this category, and that, at the very least, landlords who have multi-unit properties in which women and children already reside would be permitted to check the database to protect these tenants. But what about a landlord whose current tenants happen to be men, but who correctly realizes that it's quite possible that subsequent tenants will be women and families (after all, it's illegal to discriminate against women or families)? Must this landlord use the website to screen applicants in order to protect future tenants? And suppose a landlord rents a single-family residence, but there are women and children next door or nearby? Can this landlord use the website to look out for the safety of these neighbors?

We don't know the definite answers to these questions. The issue is troubling because the law makes landlords liable for large money damages if they knowingly or even carelessly expose tenants to dangerous conditions, including dangerous neighbors -- and to avoid lawsuits, smart landlords check the backgrounds of prospective tenants very carefully. For example, a landlord who rented to a repeat pedophile and failed to check references might be liable if that applicant later injured another tenant. Yet landlords may also be liable if they deny housing to someone whose name they've found on the website database unless they are acting to protect someone at risk. It seems that landlords are caught between their duties to protect other tenants and also not to use the website database for an illegal purpose.

You'll need to evaluate each situation on its own, keeping in mind that your duty to watch out for the welfare of others begins with your own tenants and is somewhat less with respect to neighbors or strangers or future tenants.

The usefulness of California's Megan's Law database is debatable. Investigative reports by journalists suggest that the records are outdated and incomplete. Although the Department of Justice is charged with updating the website on an "ongoing basis," there's no guarantee that the information going up will be current. The lesson for landlords is clear: Make sure that you don't stint on checking with references, prior landlords, and employers. Thorough checking on all fronts will usually reveal the facts.

Request Proof of Immigration Status

Some of you may wish to make sure that every person you rent to has a legal right to be in the United States. There's nothing illegal about adopting this policy, but you must apply it to everyone you rent to, not just those whom you think are "illegals." If you ask only certain applicants for proof, you're courting a fair housing lawsuit based on national origin discrimination -- even if the people you suspect turn out to be here illegally!

As you probably know, all employers are required by federal law to check right-to-work status by giving new hires IRS form I-9 to fill out (the form asks employees to produce documents that establish their right to work, such as a passport). However, someone might have the right to be in the United States but not have the right to work in the U.S. -- so if you relied on an applicant's ability to meet the I-9 test, you might unfairly reject applicants who are otherwise acceptable. For example, some students have the right to be here but cannot work.

If you want to confirm legal status, you may want to start with the I-9 form, since everyone who has the right to work here necessarily has the right to be here (you can download the form from the IRS website). But if you encounter someone who claims the right to be here but cannot supply the documents to satisfy the W-9, be sure to inquire further.

For a thorough discussion of screening on the basis of immigration status, including a form that you can give to all applicants that will ask specifically for proof of that right, see Every Landlord's Guide to Finding Great Tenants, by Janet Portman (Nolo).

Choosing -- and Rejecting -- a Tenant

After you've collected applications and done some screening, you can start sifting through the applicants. Start by eliminating the worst risks: people with negative references from previous landlords or a history of nonpayment of rent, poor credit, or previous evictions. Then make your selection.

Assuming you choose the candidate with the best qualifications (credit history, references, income), you should have no legal problem. But what if you have several more or less equally qualified applicants? The best response is to use an objective tie-breaker. Give the nod to the person who applied first. But be extra careful not to always select a person of the same age, sex, or ethnicity among applicants who are equally qualified. For example, if you are a large landlord who frequently chooses among lots of qualified applicants, and who always avoids an equally qualified minority or disabled applicant, you are exposing yourself to charges of discrimination.

See Chapter 9 for a detailed discussion on how to avoid illegal discrimination when choosing an applicant.

Recordkeeping

A crucial reason for any tenant-screening system is to document how and why you chose a particular tenant. Be sure to note your reasons for rejection -- such as poor credit history, pets (if you don't accept pets), insufficient income relative to the rent, a negative reference from a previous landlord, or your inability to verify information -- on the tenant references form or separate paper. Keep organized files of applications, credit reports, and other materials and notes on prospective tenants for at least three years after you rent a particular unit (but see your duties for disposal, "Federal Disposal Rule," below).

These Tenant References forms may become essential evidence in your defense if a disappointed applicant complains to a fair housing agency or sues you for discrimination. With your file cabinet full of successful and unsuccessful applications, you can:

• find the applicant's form and point to the stated, nondiscriminatory reason you had for denying the rental. Of course, the rejection must be supported by the facts -- you can't reject on the basis of a negative employer reference if you never called the employer, and
• pull out other applications that show that you consistently rejected applicants with the same flaw (such as insufficient income), regardless of color, religion, and so on. This kind of documentation will make it difficult for someone to claim there was a discriminatory motive at work.

Another reason to back up your decisions and keep applications on file is that a rejected applicant may want you to explain your reasons, apart from any claim of discrimination, as explained below.

Make sure you organize and update your records after a tenant moves in. Set up an individual file for each new tenant, including the tenant's rental application, references, credit report, signed lease or rental agreement, and the Landlord/Tenant Checklist (discussed in Chapter 7). After a tenant moves in, keep copies of your written requests for entry, rent increase notices, records of repair requests and how and when they were handled, and any other correspondence or relevant information. A good system to record all significant tenant complaints and repair requests will provide a valuable paper trail should disputes develop later -- for example, over your right to enter a tenant's unit or the time it took for you to fix a problem. Be sure to keep up to date on the tenant's phone number, place of work, and emergency contacts. You should also note the tenant's bank. (You can get this information from the monthly rent check.) If a tenant leaves owing you money above the security deposit amount and you sue and receive a court judgment, you may be able to collect that money from wages or a bank account.

Information You Must Provide Rejected Applicants

The Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act of 2003, requires you to give certain information to applicants whom you reject (or take other negative action towards) as the result of a report from a credit reporting agency (credit bureau), a tenant-screening or reference service, or any other third party (except your own employees). (15 U.S.C. §§ 1681 and following) Known as "adverse action reports," these notices must be given not only to applicants who are rejected, but also to those whom you accept with qualifications, such as requiring a cosigner on the lease, a higher deposit, or more rent than others pay based on the report. The federal requirements do not apply if your decision is based on information that you (or your employee) gathered on your own.

If you do not rent to someone (or you impose qualifications) because of negative information (even if other factors also played a part in your decision) or due to an insufficient credit report, you must give the applicant the name and address of the agency that provided the credit report. You must tell applicants that they have a right to obtain a copy of the file from the agency that reported the negative information, by requesting it within the next 60 days. You must also tell rejected applicants that the credit reporting agency did not make the decision to reject them as a tenant and cannot explain the reason for the rejection. Finally, you must tell applicants that they can dispute the accuracy of their credit report and add their own consumer statement to their report.

Use the Notice of Denial Based on Credit Report or Other Information form, shown below, to comply with the Federal Fair Credit Reporting Act when you reject an applicant because of an insufficient credit report or negative information in the report.

Appendix B includes a blank, tear-out copy of the Notice of Denial Based on Credit Report or Other Information form. The CD-ROM that accompanies this book also includes this form.

Holding Deposits

Accepting a holding deposit is legal, but we don't advise it. This type of deposit is usually offered by applicants who want to hold a rental unit pending the result of a credit check, or until they can come up with enough money for the rent and a formal deposit. Why not take a holding deposit? Simply because it does you little or no good from a business point of view, and all too often results in misunderstandings or even legal fights.

Example: A landlord, Jim, takes a deposit of several hundred dollars from a prospective tenant, Michael. What exactly is Jim promising Michael in return? To rent him the apartment? To rent Michael the apartment only if his credit checks out to Jim's satisfaction? To rent to Michael only if he comes up with the rest of the money before Jim rents to someone who comes up with the first month's rent and deposit? If Jim and Michael disagree about the answers to any of these questions, it can lead to needless anger and bitterness. This can sometimes even spill over into a small claims court lawsuit alleging breach of contract.

[Notice of Denial Based on Credit Report or Other Information] omitted for online sample chapter.

Another prime reason to avoid holding deposits is that the law is very unclear as to what portion of a holding deposit a landlord can keep if a would-be tenant changes his mind about renting the property or doesn't come up with the remaining rent and deposit money. The basic rule is that a landlord can keep an amount that bears a "reasonable" relation to the landlord's costs, for example, for more advertising and for prorated rent during the time the property was held vacant. Keeping a larger amount will amount to an unlawful penalty.

If, contrary to our advice, you decide to take a holding deposit, it is essential that both you and your prospective tenant have a clear understanding. The only way to accomplish this is to write your agreement down, preferably on the holding deposit receipt, including the amount of the deposit, the dates you will hold the rental property vacant, the term of the rental agreement or lease, and conditions for returning the deposit.

We've provided you with a sample Receipt and Holding Deposit agreement that you can adapt to your situation -- it will work for a lease or a month-to-month agreement. If your agreement to rent property to a particular individual is not contingent upon your receiving a credit report and satisfactory references, simply delete this sentence from the last paragraph of the form.

You'll find a tear-out version of the Receipt and Holding Deposit Agreement in Appendix B. The CDROM that accompanies this book also includes this form.

[Receipt and Holding Deposit Agreement] omitted for online sample chapter.