Rent payments

Utilities: Should the Landlord or Tenant Pay

Rental utilities can easily get overlooked when a landlord has seemingly more pressing matters to attend to, yet utilities are easily one of the most important elements of owning a rental property. Without proper knowledge of what utilities you should provide and who should pay for what, you can easily end up spending more money than necessary or finding yourself in unwanted legal trouble.

What utilities are there?

Common utilities that you must provide include electricity, water, gas, sewer services, and garbage collection. You might also provide phone, internet and cable services; however, these are usually not a landlord’s responsibility. Ultimately, you are legally responsible for making sure your property is habitable, so you ensure that all essential utilities are available.

Who pays for what utilities?

Generally, water and garbage are incorporated into your tenant’s rent. Depending on your location, you may also want to include heat or natural gas into the rent; however, you can also require your tenants to be responsible for this utility. In most cases, you do not have to include electricity and other optional utilities such as cable, phone and internet. For any utilities that are your tenant’s responsibility, you should look for provisions with the utility companies that will notify you if the tenant fails to pay their bill. Some companies will notify you automatically if a tenant misses a payment, while others will only give you information should you if you specifically request it. Either way, make sure you stay on top of any utilities your tenants are responsible for, so that you can avoid the property incurring irreparable damage, such as frozen pipes or sewage blocks.

Whatever arrangement you decide works best for your property, you should specifically state in each rental agreement which utilities are included in rental payments and which ones are the tenant’s responsibility. This is essential should a tenant claim that your property has become uninhabitable. Additionally, in the rental agreement you should include the consequences of late payments or non-payments; who is responsible for managing what utilities; and where the utility payments should be made (through you or through an individual tenant account).

If you do decide to include additional utilities in monthly rent payments, be aware that you cannot legally set limits on your tenant’s usage. This means that if a tenant does go over the usage you expect, you cannot discontinue the service. Therefore, it may be smarter financially not to include optional utilities in your tenant’s rental payments.

What to do with utilities during vacancies

You may also be wondering what happens to your utilities when a tenant decides to leave your property, particularly when some utilities are in their name. In most cases, you will want to make sure that essential utilities like sewage, gas, and water stay on even if a unit is vacant; this will prevent irreparable damage from occurring to your property.

In order to make sure that utilities stay on even when tenants leave a property, you should select utility companies that provide a “Revert to Owner Agreement.” This is an agreement, sometimes called a landlord interim billing agreement, that is a contract with a utility company, which automatically reverts the account back to your name, should you be between tenants. For most utility companies, this agreement means that the transfer will happen automatically and without any additional costs.

Are any other options possible?

Yes. If you should decide to do so, you can include any and all utilities in the rent you charge. With a Third Party Billing system, you will be billed for utility usage based on your entire property’s usage and then will divide the bill up equally between each tenant. In this system, your tenants will not be charged based on their individual usage, but rather will be charged based on the building’s total usage. Many landlords opt for this type of system in order to minimize fears of utilities being shut off because of a tenant’s late payments or non-payments. Most states will require you to inform your tenants and applicants up front if you are using this system of utility billing, so ensure that this is included in writing in the rental agreement.

You can also charge a specific amount for utilities each month as part of the rent. Again, this will minimize the possibility of utilities being shut off. This system also creates the possibility for additional profits if what you are charging each month for rent and utilities is more than the actual amount you need to pay for the usage that month. Although this may be tempting, you will most likely lose money if you decide to choose this route; most tenants will overuse utilities if they are included in their rental costs. On average, you’re likely to pay up to 50% more each month than what the tenant would pay if the utilities were in their name instead.

In addition, because prices may fluctuate throughout different seasons depending on where your property is located, it is difficult to estimate exactly how much money you will need for utilities each month. For example, you might increase your profits during spring when your tenants do not need their heat, but may lose money during winter because heat and gas costs will increase. Therefore, if you do wish to include utilities in the rent, you can cut down on costs by purchasing energy efficient and water efficient appliances for all units in your property. In the long run, these purchases will decrease utility costs and increase your potential for profits.

How to advertise your utility offerings

The utilities you chose to provide actually can be an additional selling point to get tenants into your properties. If you have decided to include utility payments in the rent, the number you advertise will likely be higher than competing apartments that do not include the costs of utilities. When you advertise this online or in print, you should make the included utilities a selling point and even put it in the ad’s title. For example, you might post online, “2 Bedroom Apartment, All Utilities Included.”

You should also include quality photos of all utilities that you are including in the rent, such as appliances, water, internet, cable, etc. Another way to advertise your utilities is to record and post a walkthrough video online; as you show the property on camera, you should mention and show any utilities that are included. These photos and videos can easily be used on social media to attract younger Millenial and Generation Z renters who thrive on interactive content.

Should you decide only to include essential utilities like water and garbage in the rent, you can hopefully charge a lower rental price for your unit and advertise this; potential renters will be drawn to the lower price. This does not mean, however, that you should specifically state that utilities are not included. Instead, inform applicants about utility costs and responsibilities during the application process.

What does the law say?

In order to avoid potential lawsuits, you should be aware of all laws relating to utilities in a rental property. Because non-payments on sewer and garbage can cause a lien on the property, you should always place these two utilities in your name. Even if it is your tenant’s fault that these utilities have gone unpaid, you will be legally and financially responsible if they fail to pay. All other utilities can legally be placed in either your name or your tenant’s name.

For utilities that you have agreed are the owner’s responsibility, you will not be obligated to pay any bills that the tenant fails to pay; however, you will likely want to figure this out as soon as possible in order to minimize potential damage to the property. Should your tenant fail to pay for utilities that are in their name, you may be able to serve them with an eviction notice if they are in violation of their lease agreements. This can help you restore utilities to the property and save you from irresponsible tenants.

The law also specifies that you can never shut off a tenant’s utilities in retaliation for unpaid rent or utility payments. If you decide to do this, the tenant can take you to court for this and will most likely win the lawsuit against you. Currently, 31 states allow for tenants to sue you for a specific amount, such as three month’s rent, if you decide to do this.

The law also protects your tenants if you must interrupt their utility service for construction or repair work. Make sure that you inform your tenants in advance and in writing that their service will be interrupted to avoid a potential lawsuit. Because your property must be legally habitable, state laws may require you to deduct some money from their rent if utilities are shut off for an extended period of time.

Laws regarding utilities can vary greatly from state to state, so it is advisable that you look into getting a landlord-tenant lawyer for specific questions concerning your property and applicable state laws.

Whatever way you choose to delegate and provide utilities, make sure to always be in accordance with the applicable laws.

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