Primarily, two methods of structuring a lease for multiple tenants are available: you can sign each tenant individually (or “by-the-bedroom”), or you can sign the tenants jointly. Individual leases provide flexibility during the leasing process while joint leases provide flexibility during the management process. Depending on what you’re trying to accomplish, where you’re renting and to whom, one structure may be better than the other. Let’s take a moment to examine each so that you can make the right decision for your rentals.
What is an Individual Lease?
An Individual Lease is a rental agreement in which two or more people living in the same unit take responsibility only for their room and use of communal spaces. Therefore, each tenant pays rent separately to the landlord. For this reason, individual leases are often referred to as “by-the-bed” leases because each person only pays for his or her room. You may choose to add an additional expense or line item for common areas like the kitchen or living room and for general expenses, but most landlords simply bake these costs into the price of the bedroom itself.
The key to understanding the implications of an individual lease is understanding the implications of liability in this context. Yes, an individual lease largely refers to the way in which rental payments are split among tenants. However, it also refers to damages, behavior, eviction, and many other important aspects of renting. In a pure individual lease, each resident is solely responsible for his or her own actions. In other words, if Tenant A breaks a television in the shared living room, Tenant A must pay for it. Unfortunately, it is not always clear how damages occur in common areas. This is mainly because the guilty party may be unwilling to confess to any wrongdoing. To avoid confusion and mitigate the dangers of an individual lease, you may choose to add clauses that make damages to common areas the responsibility of all tenants. Many landlords go this route.
No specific laws state who needs to pay utilities or how utilities should be split between tenants. It is up to you as the landlord to set crystal clear expectations with your tenants before signing a lease. Communicating these expectations verbally is one approach. But, adding a clause to the rental agreement provides the most protection and consistency.
Similarly, the landlord determines general maintenance procedures. You can implement costs for lawn care or pest control, for instance, on an as-needed basis. Otherwise, you can include these fees in the total rental amount. Either way, you need to ensure that you make the decision transparent and that you document it in a lease clause to address any uncertainty. As far as eviction is concerned, you can only evict the tenant who defaults. If two people are living together on individual leases and you evict one of them, the eviction does not affect the other tenant.
What are the Pros and Cons of Individual Leases?
An individual lease provides you with a great deal of flexibility. You can control who occupies your property down to the bed – saying yes to some and no to others. Since liability isn’t spread out among a group of tenants, you can charge higher prices per lease or bed to offset the additional risk. Furthermore, you can negotiate rates individually with tenants. If you choose to do so, you need to be careful with price variability, and be prepared to justify any differences. Another advantage is accountability. Each tenant will be responsible for abiding by his or her own lease terms, so none of your tenants can play the blame game. You’ll know exactly which tenant is violating the terms of his or her lease if any issues pop up.
By signing individual leases, you are putting yourself at greater risk. Your tenant could skip town or cause significant damage to your property. It is then your responsibility to fill that spot. And as we’ve discussed before, finding a new tenant can be expensive.
You’ll also have to collect and enforce separate rental payments. In an individual lease, each tenant only pays his or her portion of the rent. This means you’ll likely have several tenants who each pay rental amounts that are distinct from one another, all via separate payment methods. These payments may be difficult to track, making collection a time-consuming process. And, if one of those tenants is late or skips town and stops paying you rent, you have no recourse beyond tracking that person down and demanding payment.
However, you can mitigate both collection and enforcement challenges by using a software management tool like Innago to keep track of every payment in a single portal, regardless of the payment method. An indirect perk of this kind of arrangement is that payments are aggregated into a single deposit, which makes tracking rent clearer and less cluttered.
What is a Joint Lease?
A Joint Lease is a rental agreement in which two or more tenants rent an entire apartment or house as a single unit. Therefore, a joint lease is the exact opposite of an individual lease: all tenants are not just held equally responsible for their private room and common areas but also for the rooms and behaviors of their roommates. This includes rental payments, maintenance charges, utilities, late fees, etc.
Joint leases place accountability on all tenants, which can provide significant benefit to a landlord. If one roommate out of four has not paid rent, you’ll often find it easy to enlist the others to assist in the collection process. After all, they’re equally responsible for late fees and eviction penalties.
The key to any joint lease is the inclusion of the joint and several liability clause, which states unequivocally that each renter is jointly and separately responsible for the entire rental property. If you intend to use a joint lease, it is critical that you understand and wield this useful tool correctly.
For instance, let’s say Tenant A is convinced that he or she can start a “controlled fire” indoors. (You’d be surprised how often that happens.) Not surprisingly, they burn a large hole in the living room carpet and decides to flee the property rather than pay for his last month of rent. In this case, Tenant B would be liable to pay for these charges just as much as Tenant A because Tenant B signed a joint release. Considering Tenant A’s departure, the easiest thing for you to do would be to contact Tenant B and hold him or her accountable for these charges.
Again, in rental agreements with joint leases, all tenants are equally responsible for damages no matter who is at fault. The same goes for utilities and general maintenance of the property. They may choose to split these responsibilities evenly, but they can all be held accountable individually. This means that even if a tenant has completed his or her assigned “tasks,” he or she will still act as surrogate landlord or enforcer, ensuring the whole group has delivered.
What are the Pros and Cons of Joint Leasing?
Joint leasing provides landlords stability and security throughout the management process. Once the lease is signed, it is up to the tenants to stick to the rental terms until the end of the lease period. Even if one or more tenants leave, it is the responsibility of the remaining tenants to find a replacement or cover the additional rental costs. If one or more tenants cannot pay their rent in a given month, you are still entitled to your payment in full.
Your experience remains hassle-free. Usually, you only receive a single rental payment every month instead of getting bombarded by multiple payments. This could vary depending on the clause to which you agreed. (Ideally, a single payment is your best bet.)
A joint lease is filled with advantages, but it does restrict a landlord during the leasing process. Negotiations will need to take place with the entire group, and any changes to the agreement will need to be communicated with and accepted by all parties. What’s more, because of increased liability on the tenant-side, it will be more challenging to charge the rates you might be able to get with an individual lease agreement.
Which Lease Type is Right for You?
As you likely noted, there are not many cons to a joint lease. A joint lease will nearly always serve you well. The only real question is whether an individual lease provides more flexibility in the rental process.
In student housing, for example, it’s common for tenants to fall in and out of love, study abroad, attend internships, have fights with one another, and present you, the landlord, with headaches. Because of this, the flexibility that individual leases afford can be well worth their additional risk. What’s more, parents often fund the property rental. Requiring that a parent co-sign the lease can provide a great deal more assurance than collecting from a bunch of 19-year-olds on a joint agreement.
The bottom line: examine your rentals, your renters, and what you value most as a manager or landlord. With your new, full understanding of the differences between joint and individual leases, you’ll be well equipped to choose the right structure for your properties.