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An expert’s analysis: 5 risks arising from the rental agreement

07.09.2022

An expert’s analysis: 5 risks arising from the rental agreement

A rental agreement is a basis for any tenancy relationship, regulating the rights, obligations, and understandings of both the landlord and the tenant. Although the rental agreement must always be by the Law of Obligations Act, there are still nuances that both parties should observe. Otherwise, either party may find themselves in a disadvantageous situation because they have not comprehended what was written into the contract.

Lia Siht, Head of Legal and Compliance and lawyer at Rendin, mentions the risks of a living space rental agreement along with more detailed explanations. 

1. Compensation for the natural wear and tear of the living space

The Law of Obligations Act, which regulates tenancy relations, allows a clause to be written into the tenancy agreement which requires the tenant to compensate for natural wear and tear. At the end of the contract, the tenant must return the rental home in such condition that the normal wear and tear has been eliminated, or the tenant will bear, within reason, the necessary costs related to this. If nothing has been said about it in the contract, it cannot be collected from the tenant afterwards.

Compensating for normal wear and tear is common in Europe. Because, in many cases, the rented-out apartments are newly built or freshly renovated. As a result, they are essentially empty white boxes with no furniture. Thanks to this, it will be easier to refer to the changes that have occurred later. 

The circumstances are different in Estonia. Many landlords are on our market because they have inherited an apartment from someone. These are primarily aged dwellings, where natural wear and tear has existed for a long time. 

The procedure for natural wear and tear compensation is a relatively new topic from the law's point of view because it entered into force in the Law of Obligations Act of 2021. These agreements are rarely made in tenancy relations, so there is not much to show for effective practice.

To avoid confusion later on, we recommend that the lease agreement be apparent on what the tenant is responsible for. 

Does natural wear and tear fall under Rendin's asset protection?

No. Natural wear and tear cases do not fall under Rendin's asset protection. In our opinion, the landlord must always consider that their living space needs to be repaired after some time, a home appliance needs repair, or the furniture needs to be replaced. This is the cost of being a landlord next to generating monthly income because no matter how much effort is made, it is impossible to maintain their original condition forever.

2. The procedure for paying rent and paying rent in cash

The rental agreement must state the date the rent is due and how billing is done (the recipient's details with a bank account number). Leaving a written record of the transaction is crucial if the rent is paid in cash. For example, the landlord may send the tenant an e-mail confirming that they have received the rent payment. 

Can the dates for signing the agreement and making the rent payment differ? 

Yes, they can. Sometimes, it is necessary and justified. For example, we recommend that the rent payment date and the tenant's payday are close. This way, it is inevitable that the tenant will pay the money at the right time.

3. Payment of utility bills

In addition to the rent, the landlord and tenant must also agree on how to pay utility bills. One option is to arrange it through the landlord: the tenant pays the specified amount based on invoices to the landlord's bank account by a specific date. Another option is to pay the service provider directly: the landlord forwards invoices to the tenant, and the tenant pays the invoices based on this.

PS! The parties should also go over previous utility bills so that it is clear what the price level of heating, electricity and other building costs is. 

Does the tenant have to pay for building maintenance and improvement costs and the repair fund?

The Law of Obligations Act regulates these aspects. The act allows all maintenance and improvement costs of the building to be included in the tenant's obligations if they are known at a certain level at the time of signing the agreement and do not increase rapidly during the tenancy period, for example, due to extensive renovations.

The payment of expenses must be fixed and listed in the initial rental agreement, and the fees must not change significantly (for example, triple). Therefore, the landlord cannot assign these costs to the tenant by making a supplement to the agreement later.

4. Increasing rent

If a rent increase is not in the contract, the landlord has the right to increase rent once a year. The owner must give at least 30 days notice of the intention, and the tenant can contest this. Disputing is possible under the following conditions:

  • The landlord does not comply with the statutory notification deadline.

  • The notice of the rent increase is not correctly formalised.

  • The new rent price is excessive.

A rent increase is not excessive if it is economically justified. 

However, if there is a preliminary agreement in the rental agreement, it cannot be contested.

We see that rent increase clauses are used more often in rental agreements. The correct way is to fix the extent of the rent increase through the contract or explain the basis for calculating the rent increase (a specific amount, percentage, or index). In addition, the parties must agree on whether the rent will increase within the contract term or upon the tenant's notification.

5. The rental agreement's contents must follow the Law of Obligations Act

Everything written in the residential rental agreement must not conflict with the Law of Obligations Act. This applies to the points mentioned above and to other important ones that were not discussed in more detail in this article. For example:

  • The procedure for fines and arrears

  • The accommodation of other persons on the rented premises

  • The conditions for terminating the rental agreement

Luckily, many tenancy relationships work out so that no significant misunderstandings occur throughout the agreement. However, neither party always has 100% certainty that would guarantee an entirely positive experience. Therefore, a legal rental agreement plays a crucial role in protecting yourself. If there are special conditions (primarily the owner's creation), then in case of problems and serious disagreements, they become invalid. 

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