Rental Agreements with Utilities Inclusive Explained
Rental agreements with utilities included in the rent have become a popular option for both landlords and tenants. This arrangement can provide added convenience for the tenant while giving the landlord one less thing to worry about.
In general terms, a rental agreement with utilities included means that the landlord is responsible for paying the utilities and the tenant pays one flat monthly fee to the landlord that includes rent and utilities. This can be attractive for the tenant as it streamlines their monthly process by allowing them to pay one check and simplifies life somewhat. It can also be appealing to the landlord as it allows them to manage cash flow.
It is important to note that there are several things that can make this process more complicated for a landlord. To start, you need to be aware that the laws in your area may limit how you handle such an arrangement. For example, in some areas it may be illegal to include utilities in a rental agreement if you are not a licensed utility vendor. That’s a big area for liability so before you offer such an arrangement be sure to look into your local laws .
Another potential concern for a landlord is that they will need to pay the utilities whether the tenant pays rent or not. If you have a tenant that pays rent very late or not at all, you need to factor the costs of utilities in with your overall financial obligations.
Be sure to include whatever provisions for late payment you deem necessary. Also consider that the tenant may not treat the utilities as seriously as they would if they were being paid separately. These two things combined could lead to the landlord ending up with utility shut-off notices. Many landlords would agree that maintaining good relationships with utilities is an important part of running a property and a lack of timely payment could cause unwanted friction.
If you are going to attempt to enter into this type of arrangement be sure to discuss the clauses in your rental agreement with a qualified legal professional in your area. The laws governing rental agreements and landlord/tenant issues in general may vary significantly from state to state and it is in your best interest to know your local laws.
Advantages for Tenants
For you, the tenant, one of the biggest benefits of a flat-sum rental agreement is predictability. You’ll no longer have to juggle monthly utility bills of varying amounts as you balance your budget. When the total amount due each month stays the same, it’s much easier to plan ahead.
Often, landlords pass the benefits of this budget predictability along to you in the form of a slight reduction in the rental fee. You’re giving up some control of the property by pooling utilities with rent, and some landlords are willing to incentivize you to make that sacrifice.
Utility inclusion isn’t without its drawbacks, of course. If you have the lowest bill of all the tenants in the building, you could end up footing a larger share of the bills that you would otherwise. Some landlords require security deposits on utilities when they’re included with the rent, and tenants who use a lot of utilities may have a hard time getting that money back. Another concern for both tenants and landlords is the prospect of utility overuse. With no way to turn the heat down, many tenants forget their excess power expenditures, and in some cases, those charges are passed along to landlords.
Benefits for Landlords
On the landlord side, offering a rental agreement with utilities included may be more appealing as well. Depending on the energy efficiency of the unit or home, your profit margin could increase. For example, if your residential property is energy efficient and uses less energy than the average home, you could increase your rent and still show the energy efficient home as cheaper to run than the expensive home with utilities in the name of the tenant.
Simplified billing could also be a benefit to landlords who own multiple rental properties. One bill would come to you each month for the property rather than you having to chase down each individual bill for each tenant until the day they move out of the rental agreement.
Essential Clauses to Incorporate
The most important lease clauses for renters who want utilities included in the agreement are the utility reimbursement provision and the maintenance and repair clause.
One of the first things a property owner should do when leasing or renting a property is determine which utilities the owner will pay. It is extremely important to put this information in writing upfront. If you are paying all or a portion of a tenant’s utilities, you need to specify what those utilities are, who is responsible for paying each utility, and any caps/caps on usage. For example, the landlord could pay water up to $45 per month, but would not pay overages. This is also a good opportunity to insert the representative language informing the tenant that it is the tenant’s responsibility to pay all utilities not specifically paid by the landlord. Also consider how disputes over the utilities will be resolved. For example, it is extremely important to divulge in the lease what happens if water rates increase. It is not uncommon for a utility provider to increase their base rate several times during the course of a lease. Give the tenant notice of any increase and specify when your will pass through a proportionate amount of the increase to the tenant. Although it may not seem necessary, homeowners must also maintain heating, air, water and other utility systems, including the appliances. In this case, the lease should define maintenance and repairs and allocate responsibilities between the parties. Emphasize in your lease that the landlord pays for housing systems and appliances, but only at specific times. All utilities belong to the tenant, so you may want to specify that the tenant will be responsible for replacing damaged washing machine hoses, even if you purchased the appliance. A lease provision which explicitly excludes the appliances from the property may be beneficial in the event of loss, damage or injury related to the equipment. A clause stating that the appliances are tenant’s property alone and they are to be maintained and repaired at the tenant’s expense may help. There is no specific template that must be used for maintenance obligations, but a comprehensive schedule listing which party performs which tasks is useful.
Legal Implications and Tenants’ Rights
When it comes to rental agreements that include utilities, legal considerations largely depend on the jurisdiction. However, as a general rule, such agreements are viewed favorably under landlord-tenant laws and interpreted in ways that are fair to the tenant. For example, utilities that are advertised as being included are required to be appropriately sized, effecient and safe. Failure to provide such utilities can lead to legal action taken against the landlord.
Tenants have the right to receive notice of any changes to bills and rates. As an example, if a lease states that all utilities are included in rent, but the agreement has been modified to require the tenant to pay for them directly , the tenant must receive timely notice of the change in the appropriate format, such as a letter in the mail or an email. Landlords who do not provide notice may face litigation from the tenant for violation of the terms of the rental agreement.
When utilities are included in rent, tenants have the right to receive bills that are reasonably correlated with how much utility service was actually consumed. If the utilities are measured through a utility meter, the bill should indicate a reasonable corresponding amount to the meter reading. If the agreement just includes a flat fee, the tenant can expect to pay a fair and reasonable amount that corresponds fairly with others within the region. When supplying utilities, landlords must comply with the law.
Best Practices for Crafting a Strong Agreement
Working with your attorney, when drafting a rental agreement with utilities included you should keep the following tips in mind. First, be sure that the rental agreement sets forth clearly and concisely the terms regarding the maintenance, use and payment of the included utilities. Second, if the agreement provides for apportioning payment for the aforementioned items between the landlord and tenant, be sure to include clear instructions and/or a formula for arriving at the amounts. Third, be sure that the rental agreement states whether the landlord or tenant is responsible for timely payment of the included utilities. Fourth, where one party must pay the landlord for their share of the utilities, be sure to have a formula for arriving at the actual amount due. Fifth, it is best practice to require that any utilities be paid contemporaneously with the rent payment by a separate certified check or money order so as to avoid any claims or confusion over partial payment of rent because the tenant is claiming a right to offset other claims against the landlord. Sixth, if there are utilities included, be sure to specify that the tenant is responsible for reporting any problems with the utilities to the landlord, failing which, the tenant may be responsible for the repair cost. Finally, if necessary, either party should consult with an attorney to review and advise on the terms of the rental agreement.
Common Pitfalls to Avoid
When approaching rental agreements that include utilities as part of the monthly charge, there are a few mistakes a tenant or landlord can make.
Not Defining Terms
As with any contract, the terms of the agreement should be written out. Utility costs to be provided in addition to the monthly rent should be called out specifically. The specific utilities themselves should be identified. If more than one unit is included, the appropriate percentage attributes should be spelled out and identified. If the amount is not a percentage, but rather a dollar amount per month, this should also be clearly defined. This may seem obvious but it is not uncommon for disputes to happen where no terms were actually defined in the signed writing.
Not Identifying the Utilities to be Provided
Important to document as well, along with the amounts, are the specific utilities the landlord/tenant will be responsible to pay. Sometimes these terms should run in concert, such as when they a specific dollar amount is identified and the amount of utilities is defined as exceeding a certain percentage. It doesn’t always have to be a dollar amount, but sometimes utilities will get out of whack as demand increases (such as heat during cold or air conditioning during heat) and qualifications as to what is attributable to the tenant can be helpful in understanding the increases in costs in any given month . Be specific and thorough when discussing the utilities – what they are, what they may be in the future and how they are calculated.
Not Covering All Costs Related to the Utilities
For example, under some rental agreements tenants will be responsible for more than just paying the utilities. Under some agreements the tenant must also reimburse the landlord the cost of maintaining those utilities. If the cost of changing a furnace filter is required of the tenants, the manager of the property should be clear that this is a cost that must be reimbursed to the landlord. Failure to do so could leave a tenant stuck when the bill for changing the furnace filter is received.
Not Properly Documenting Expenses or Agreements
For example, if the parties will be responsible to pay only the gas and electric bill, the parameters can be clear in the rental agreement and the amount of those monthly bills can be provided to the tenant. However, if at the time the agreement is made a utility bill is directly provided to the tenant to directly pay, over time the tenant should not be responsible for that utility bill if no longer provided with the direct bill. An agreement should be reached as to how these billings will be handled. Will they be adjusted monthly by the made amount or averaged over multiple months? Will they be the direct responsibility of the tenant or simply passed through? These are relevant questions and should be answered as such.