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In this episode, we're joined by Ron Rohde. Ron is a Dallas-based real estate attorney who specializes in all aspects of transactional residential real estate. He advises his clients on LLC formation, residential leases, short-term rentals, contractor disputes, lien issues, and much more.
In today's episode, we discuss the various aspects of residential lease agreements, how lease agreements are being impacted by COVID-19, what Ron's clients are doing to mitigate vacancy during this crisis, and a lot more!
Components of a Good Lease
A lease is the relationship between a property owner and someone living there. It's important because it's the only document that outlines the relationships. It's the only opportunity, every year or every couple years, where you get to revisit the structure of that relationship. Payment terms, responsibility, roles in damages and complaints, how to solve problems that come up - a well-written lease is really a win-win arrangement. It reflects the goals of the investors and owners and reflects the needs of the tenant. It's not just maximum price - we're starting with assumptions that clients want a passive, stress-free return. They aren't looking for an active, problem-solving challenge.
Key Parties Involved
Outside of landlords and tenants, other parties are involved. A property manager is likely involved, and brokers as well. If the lease is complicated, attorney's will become involved to draft clauses when the situation isn't standard or you need something unique. The attorney needs to draft clear, enforceable language.
When to Involve an Attorney?
For a commercial deal, any time you're making changes that are more than a sentence, you may want to consult an attorney. Even for residential leases, you're investing in a certain clause or a certain parameter for the property. If there is a parking situation that's unique for your multifamily building, you're going to use that one clause over and over again.
Key Parts to a Residential Lease Agreement
There are generally two sets of investors. The first group wants to include everything under the sun and micromanage the tenant and the relationship. There is often much more pushback from the tenant and the leases get very long and cumbersome. Landlords do have power, but can't go overboard. There are certain statutory rights and tenant protections in place. Landlords can't discriminate or limit certain groups or interactions. On a state level, there is a certain quality of a home that the landlord is responsible for maintain - too much responsibility can't be placed on the tenant.
Coronavirus Impact on Lease Agreements
This is a fascinating study right now. On one hand, for landlords, this is a short period of time so far. A complete shutdown and pause on the economy has happened. Many with steady, predictable incomes found that source reduced to $0 overnight. This caused much stress on tenants. This poses a new problem for landlords with tenants who did not pay or made partial payments. No evictions are taking place and the courts are closed. Many areas are accepting new filings, but you won't get a judgement or a hearing. Many tenants know this and have no problem delaying payments. Some tenants are even grouping together and going on rent strikes.
We also now have the forbearance for certain federally-backed loans. This can be a dangerous option. If you forbear you mortgage payments, you also agree that you will not evict anyone during that time period. This situation exists for many investors: If you are at or near occupancy, you aren't getting rent in, you don't have to pay your mortgage, and you also can't evict anyone. How do you solve your problem, you have hit pause on the entire operation. What does forbearance do other than delay everything?
Landlord-Tenant Relationship Post-Coronavirus
The new equilibrium may need to be a greater density in each apartment. The new normal may be transitioning to some roommate situations where tenants are moving from studio or 1-bedroom apartments and joining into a 2-bedroom residency. With the work and income environment changing, some tenants may be unable to afford their leases going forward. Those leases were signed before the Coronavirus crisis, and working hours and tip and payment schedules may be reduced or otherwise changed. The goal of this is to put the tenants in a more sustainable situation. At the end of the day this is reducing the cost per square foot per tenant - the last thing anyone wants to deal with is evictions.
Force-Majeure Clause
This clause basically states that if something happens that neither side could or would have reasonably predicted at the time of the contract, it releases both sides from the contract. Neither side has any obligations to pay or deliver. It's blowing up everything, you're hitting the big red button. This is generally less-common in commercial leases, using this clause is an uncommon nuclear solution.
Adjusting to the New Normal
Many investors and businesses in general may need to re-analyze their investment thesis. Not reacting too quickly, but taking a look at the shifts in the US-based market. For example, we may see an uptick in manufacturing and warehousing in the US. People are going to take less risk in the supply chain being flung across the globe. Critical components of the business will be stockpiled and held in greater amounts in inventory or even manufacture some components on US territory. Class A apartments and hospitality have taken such a hit, it's not always rainbows and sunshine there. Ultimately, cash on hand is very important.
How is Ron Handling the Crisis in his Business?
Ron has seen a surge in clients asking for a lease review and a double-check from investors looking for the peace of mind from the custom agreement. Ron's firm is also switching to virtual, slowly adopting remote work. More video calls, email, and online interaction are going to change how business is done and offices are managed in the future. Many employers may realize they don't need a huge office with all employees in person every day, but Ron also sees that some companies are more vulnerable and don't want to deal with this permanent change - some of the concerns over the future of commercial office and retail space may be exaggerated.
Learn more about Ron and his work: https://ronaldrohdelaw.com/
