Using a Standard Rental Contract

A standard rental contract can be useful to protect yourself and you clients or tenants' rights. As for apartment renting and some equipment rentals the renter will be required to make a security deposit, or an amount of money kept by the renter as an insurance policy that will be returned at the end of the rental agreement, provided there are no costly damages to the apartment, housing or equipment. When renting a living space, an agreed upon duration of the rental contract is enough for a landlord to hold onto your security deposit.

Some landlords have more detailed rental contracts than others but it is most definitely a binding contract that tenants must plan their life around. In turn the landlords must also maintain the building and grounds, fixing gas leeks and regular wear and tear damage. It is a liability for landlords to not immediately take action to repair living situations that violate health and safety regulations that could cause a building to be deemed uninhabitable. Lawsuits can arise if both parties are to blame for example if there is bug damage but the tenant in a diagnosed obsessive compulsive hoarder and has created the problem themselves.

Hopefully your standard rental contract has covered your specific situation, or the tenant is cooperative, if not it will be up to the courts and eviction laws as to what is to be done. In case of an immediate and unforeseen need to travel, tenants will often attempt to "sub lease" their living space while they do not need it in attempt to reclaim their security deposit when the standard rental contract matures.

In the standard rental contract landlords may specify if the renters can have pets, smoke, and can set a due date for each months rent with a late charge if the tenants pay the rent after a certain day of the month or week. The lease may end normally or with various types of eviction notices such as a Pay or Quit Notice from non payment, a Cure or Quit Notice if you do something you previously agreed not to when signing your rental contract or if other tenants complain about you, and finally a Non-Eviction Move Out Notice which is fairly open ended they could want to remodel your living space or to get a new tenant. It does require a seven, thirty or sixty day notice depending on if you are renting weekly or monthly and on the laws in your area. The eviction laws are detailed and many and tenants have rights to counter claim and fight back. Usually if the behavior in question is corrected or you pay rent in full, this will resolve the problem.

With cars, sound and video or computer equipment there is always the risk of damage to the rented product. Will the rocker smash the guitar into a speaker or blow it out or will the sixteen year old get in a fender bender? To cover these potential unfortunate occurrences which may produce financial loss for the company, renting companies are free to specify rental details in a standard rental contract. Maybe the car company will only rent to 18 year olds with a valid ID and clean driving records and strongly encourage adding a non refundable insurance fee to the bill. Maybe the band must have enough money for a security deposit that will be held on their credit card till the equipment is returned safe and sound. Often before doing business renters are required to sign these standard contracts after downloading them from company website or when picking up the equipment or having it delivered or before moving in. Standard rental contracts are set in place to protect both the renters and the rental companies' rights.

Contract Purchase - Sale - a true story.

More than a decade ago, three friends got together to start a company. They invested money and time into the start-up and got it going. Early on, they had a buy-sell agreement prepared.

Fast forward to late 2006. My friend was called in to discuss the prospects for selling the company. As part of his engagement, he priced the business for the owners, concluding that his best single-point estimate of value in a sale was $20 million for their collective equity, or about $6.7 million each. He reviewed the company's buy-sell agreement and found a troubling provision. The agreement had a fixed price, the value of life insurance taken out on each of the owners' lives, or $1.0 million per one-third share. This price had been set in 1994 and had not been updated since then.

Realizing the problem instantly, my friend alerted the owners of the disparity between the company's current value and their buy-sell agreement price. If one of them should die at the present time, the estate would have an agreed-upon value of $1.0 million for an interest worth close to $7 million. To the owners' collective credit, they all recognized the problem immediately and slowed down their sale discussion long enough to have their agreement price updated to a current value. Having done so, they've authorized my friend to pursue interested buyers and to conclude the sale of the business. The sale will occur or it won't. Things happen along the way to closings. But my friend's involvement with the owners of this company has been of enormous value to all three shareholders, regardless of the outcome.

The bottom line. Value per interest grew over time from $1 million to nearly $7 million. Had there been an untimely death of any of the three shareholders along the way, the agreement would not have protected his family. The real bottom line is that my friend's involvement with this company has had enormous value to its shareholders, regardless of the outcome of this current sale initiative.

Reprise. Fixed price buy-sell agreements are dangerous. Let me be clear about my recommendations:



If you have a fixed price in your agreement, revisit it now.

If you have a friend with a fixed price in his or her buy-sell agreement, encourage him or her to revisit the price now.

If you have a client who has a fixed-price buy-sell agreement, set up an appointment to talk about fixing the Problem