Understanding Rental Agreements Before Lease: A Comprehensive Overview

Pre-Lease Rental Agreement: What Is It?

A pre-lease rental agreement, commonly referred to as a rental reservation agreement, is a legally binding contract struck between a landlord and a potential tenant who has not yet occupied a residential unit or rental property. The name of this agreement adequately describes its purpose; the landlord would like to rent out the residential unit or rental property to the potential tenant once the current tenant has vacated their unit.
Essentially, the agreement is a way for the landlord to reserve the property for the potential tenant. Because the potential tenant physically occupies none of the premises until he or she moves in , a pre-lease rental agreement allows for all of the financial arrangements of the unit or property to be agreed upon so that the tenant will not change his or her mind and go elsewhere. It also allows the landlord to not list the property so that it is reserved for the potential tenant.
The pre-lease rental agreement will usually outline the rent amount that the potential tenant must pay each month, the security deposit amount, and the monthly service fee that is associated with living on the premises.

Advantages of Pre-Lease Rental Agreements

The benefits of a pre-lease rental agreement
Securing a Tenancy
From the landlord’s point of view, an obvious benefit of a pre-lease is that it secures a tenancy for a tenant that otherwise might fall through. A pre-lease guarantees to the landlord that the tenant will be occupying the premises once the lease term starts. It also protects a tenant from other landlords who may be offering premises.
Planned Financial Commitments
A tenant can plan their finances much more effectively when they know how much time they have to pay a deposit or how they should budget for moving and furnishing a new home. A pre-lease that clearly sets out the rent can also prevent disagreement about rental amounts at the end of the lease.
Money Back
If the landlord cannot keep their end of the bargain, the tenant has some measure of protection. Not only would the tenant be able to claim back their deposit, but damages might also be possible for any expenses incurred.

Top Clauses to Include in a Pre-Lease Rental Agreement

A pre-lease rental agreement will include many of the standard lease clauses. However, the following clauses are particularly important and noteworthy in this situation:
Duration Clause
If an applicant wants to put down a hold, a landlord will typically prepare a pre-lease rental agreement that is signed by both parties. This agreement will specifically set out a period of time during which the apartment will be held. It is critical that the landlord set a clear timetable in the document that distinguishes between the period for which the prospective renter is intent on holding a property and any subsequent dates that might be set by the owner if the renter eventually returns the property back to the owner. The holder should be clearly identified in the agreement.
Deposit Clause
In most cases, a renter will provide a security deposit together with the holding fee. This amount, according to law, must be returned to the renter within fifteen days of returning the key. The landlord can only retain funds from the holding deposit if he or she would have been permitted to retain them according to law from a security deposit.
Contingency Clause
Once again, it is a good idea to include contingencies that address the possibility that the renter decides not to move in at the end of the term of the agreement. Accordingly, the landlord should indicate that the money will be returned if the applicant has not signed the lease or taken possession of the unit by a specific date. If, on the other hand, the applicant signed a lease but failed to move in, the landlord could return the holding deposit less any holding fee that the applicant is contractually bound to pay.
The above-mentioned clauses may also be addressed directly in the lease. However, the pre-lease rental agreement permits the landlord to address them beforehand, and it establishes the relationship between the applicant and the property owner.

Common Myths Surrounding Pre-Lease Rental Agreements

As with all areas of the law, there are frequently misconceptions about the rules and regulations that apply for pre-lease agreements. First and foremost is the confusion between a rental agreement and a pre-lease agreement. A rental agreement binds the landlord and tenant to an apartment, while a pre-lease agreement simply indicates the intent to enter into a lease, but does not deliver the apartment until a lease is signed. Many people mistakenly believe that a rental agreement signed by one party without the other results in a binding contract. Under the law, this is not true, and unless both parties sign an agreement, there is no enforceable contract. Even with a signed contract, a pre-lease agreement may be either legally binding or unenforceable based upon the circumstances under which it was signed.
Another common misconception is that because of the nature of a pre-lease agreement, it can automatically be reinstated if the tenant must withdraw. This is not automatically true. If a tenant is required to relocate due to a new job, that form of withdrawal may be excusable, but other less compelling reasons such as sudden illness of a family member is generally not held to be a good enough reason. The ethics of the situation have created a judicial reluctance to enforce a contract when the situation has changed or evolved.
The one way to guarantee that the courts will enforce the agreement is to specifically include an exception to the contract’s termination clause. For example, a tenant and landlord may insert language in the contract allowing the tenant to withdraw or cancel if the tenant is called back to military duty.
These kinds of agreements are sometimes referred to as soft call options or early termination clauses, and these arrangements are particularly important in states with strict tenant movement laws. If the agreement does not include specific statutory language related to a soft call option, however, the courts will likely decide against enforcing the contract.
A common misconception overseeing the implementation of soft call options is their use as a way to get around the infamous Texas ratification of rental agreements. If a pre-lease agreement forces the tenant to sign a rental agreement within a specific time period, with a small penalty for failing to do so, the spirit of the law is recognized and upheld. However, if the penalty is considered particularly harsh, the courts may strengthen their stand against enforcing the penalty provision.
Some landlords have mistaken the concept of pre-lease agreements and brought lawsuits against their tenants for their failure to properly sign the contracts. Because of the strong consumer protection laws in certain states, this can have a strong backfire effect on landlords.

A Step-By-Step Guide to Drafting a Pre-Lease Rental Agreement

When drafting a pre-lease rental agreement, the tenant and landlord should consider some of the following:

• Identify the Parties: The Contract must identify the parties to the agreement. Be very specific about who the parties are: Person’s name, address, phone number and email address. Also consider including a "boiler plate" provision that states that both "landlord" and "tenant" include their respective heirs, successors, personal representatives and assigns.
• Identify the Property: Be as specific as possible. A description of the property’s location (for example the street address and/or folio number) including any fixtures or changes to the property must be clear and accurate so as to avoid any confusion or ambiguity. It is also recommended to include the length of time you are renting the property – what is the term of the agreement?
• Provisions:

a. Lease Termination. When is the pre-lease terminated? When the Tenant either signs a lease with a particular occupier or decides not to take the occupation of the property . For example, if the tenant refuses to sign a lease or proceeds with the occupation of the property, the Tenant will be liable to pay the pre-lease fee paid to the landlord and the landlord can retain the cost and any additional costs incurred by the landlord. It is not recommended that a pre-lease be for a period more than between 2 weeks to 1 month.
b. Amount of fee to be paid to the landlord and when it is to be paid to the landlord. Tenant should ensure the amount is agreed in writing and signed by both parties. The landlord shall be entitled to retain the fee as stated above.
c. The payment of utility costs:
i. Which utility costs are to be paid by the tenant?
ii. For example: power, water, telephone, internet or any other services.
iii. Include whether the cost to activate the contract is to be paid by the tenant, for example: the connection fee to the local electricity company.
d. Clearly state whether the property is furnished or unfurnished. The degree to which the property is furnished will obviously determine the pre-lease fee and whether the owner requires a larger portion of the prepayment to be held until the lease is signed.

4. Seek legal advice.

Important Legal Principles Relating to Pre-Lease Agreements

While it appears that no state has passed a law prohibiting pre-lease rental agreements, or any law specifically regulating such agreements, the actual creation and signing of a rental agreement is controlled by state law. States have the authority to regulate contracts. This means that a state could enact laws to stop landlords from accepting large amounts of money from tenants without actually signing a rental agreement.
In fact, if a landlord attempts to sue for money given before a rental agreement is reached, state law may prohibit the landlord from recovering this money unless a rental agreement was actually signed. Some states define what types of agreements must be in writing and what types are valid orally. For example, Missouri requires leases longer than one year to be in writing but will allow payment on a month to month lease with no written contract. If an individual or business enters into a pre-rental agreement and the state where the property is located has laws requiring a written agreement for leases longer than 1 year, the pre-rental agreement may not be valid.
Another concern for landlords is consumer protection laws. Because tenants can be considered consumers, and because operating a rental business in an apartment complex is often considered selling goods and services, states have enacted consumer protections that prohibit landlords or business from engaging in certain activities. Depending on how a pre-lease rental agreement is structured, a landlord may be considered engaging in a trade or commerce and may be subject to consumer protection laws. Tenant advocates may argue that accepting an advance fee to reserve an apartment constitutes engaging in a trade or commerce, making a property owner subject to consumer protection laws. Many state consumer protection laws prohibit landlords from collecting move-in fees, so pre-lease agreements that require advance fees can be problematic.
Some municipalities, such as New York City, require landlords to include specific provisions in rental agreements. If a pre-lease rental agreement anticipates the leasing of an apartment and intends for the parties to proceed with an apartment lease, such provision would apply if the municipality requires specific disclosures in the lease. Failure to include required disclosures would compel the landlord to return the money paid by the tenant.

Dispute Resolution in the Context of Pre-Lease Rental Agreements

When conflicts arise from pre-lease rental agreements, various avenues exist for their management or resolution. For one, landlords and tenants can call for mediation, a voluntary, confidential process overseen by a neutral party with the aim of resolving disputes. In addition to cost effectiveness and flexibility, mediation places no limits on possible outcomes. In contrast, arbitration involves post-dispute resolution, where both parties abide by an arbitrator’s decision on resolving the matter . Should mediation be unsuccessful, both parties retain the right to seek legal action. Litigating the dispute may be necessary for resolving damages, whether the result of the landlord or tenant’s actions. If damages were caused to third parties, i.e. agents or subtenants, both the landlord and tenant may demand compensation from each other and/or the at-fault party.