Why Residential Purposes Restrictions Should Exist In Your Lease

Our lease restricts the use of a rental property to "residential purposes" only.  It was quite a surprise recently when our plumber followed up on a repair of a leaking drain line with a simple statement.  "She must have 10 kids she is taking care of."

What?

Turns out our tenant was running an in-home day care in our rental.  It must be rather easy to advertise for kids and pretty soon the home is full all day.  Complicated issues like being licensed or certified are not concerns of our tenant.   She initially tried to dismiss our questions by telling us she was just watching a few kids for friends. I feel certain she is good with the kids ....but this is a business.  A quick internet search confirmed our suspicions when we actually found the address marked as an "in-home day care."  It was likely just a matter of time before the licensing people cracked down on her.

Residential Purposes Defined

The language in any lease should place restrictions on use of the home.  An example:

USE OF PREMISES: Tenant shall only use the Premises as a residence. The Premises shall not be used to carry on any type of business or trade, without prior written consent of the Owner. Tenant will comply with all laws, rules, ordinances, statutes and orders regarding the use of the Premises.

Enforcement Of The Residential Purposes Clause

Our tenant had always paid her rent on time.  She had never been a problem.  Yet, what happens if something tragic should occur with one of these children?  We know the owners do not like their properties to sit vacant.  They typically gives lots of leeway for tenants as long as they do not fall more than 30 days behind on rent.  But the discovery of a non-licensed day care operating from their property is problematic on many levels.

Problems With A Home Day Care (Or Any Kind of Non-Residential Purpose)

  1. Excessive damages from wear and tear.  If you have kids, you know how hard they can be inside your home.  Now multiply that out by 8 hours a day and be the number of kids being cared for.  It is unlikely the security deposit obtained is near enough for this type of use.
  2. Liability associated with taking care of children.  There is a good reason local governments insist that child care providers obtain licenses. Potential charges against the day care and any helpers can include abuse or accidents.  Your insurance likely does not cover these.  Does the tenant even have business liability insurance?
  3. Parking, drop off and pick up in the local neighborhood will cause disruptions that may result in complaints.
  4. Noise- how much additional noise will the day care create when the kids go outside to play?
  5. Your rental is likely not zoned for this use and sooner or later the authorites will discover this non-approved use.

In this case, the concerns were directed at the excessive wear and tear damage to the property and the huge liability issues with this activity.

Resolution

In this case, the child care business needed to cease.  If it was not going to cease,  we offered the tenant 30 days to relocate. A very gracious offer considering that meant 30 more days of risk.

Thirty days is a long time for a lot of damage to occur.  But this decision was humane to the tenants and all of those parents who depended on this child care arrangement.  The 30 day offer might have been different if it was not for the quality of the tenant.  Call it a business decision, she just needed to find a new location.

The notice to the tenant created a lot of debate about what determines residential purposes.  There is a difference in a hobby versus a for-profit enterprise.  This tenant was not caring for a couple of kids, for friends, a couple days a week.  She was operating a child care that allowed her to pay the bills.  The job the tenant had when she applied had been terminated.  She determined that a plan offering child care, when accounting for her own pre-schooler, covered all of her personal needs.

A worthy plan.

One that should not work in a rental for all the reasons cited.

How An Owner Can Reduce The Risk

Interestingly enough, she found another home to rent and they agreed to the child care activities.  Maybe it is easier if you know about it up front?  I don't think so, but it might be easier for a cash hungry owner needing cash flow.  If this is you, just make sure you have assessed the whole risk and take the following actions.

  • Insist that your tenant has business liability insurance,
  • That you are an additional insured on the tenant's liability policy,
  • Take that certificate to your insurer and see if they feel like you might need to adjust your coverages
  • Significantly increase the security deposit required

Should Exceptions Be Allowed?

First, you will want to consider what state your rental is located in before making decisions that force a tenant to move.  In some states, a landlord can't evict a tenant due to the discovery of a use that is beyond the definition of residential purposes.  For example, California landlords can't prevent the use of a rental home as a licensed day care..even if the lease uses a "residential purposes only" clause.  The key word is licensed, and the home must meet building codes.

An example of why you might want to consider how tenant friendly some states are before investing.

 

Looking for a property manager in Central Indiana?

Get your investment to work for you with WILMOTH Group.

I'm Interested!

FOLLOW US

WILMOTH Group is headquartered in Indianapolis and Fort Myers, Fla. WILMOTH Group focuses on providing creative local solutions for a variety of residential real estate needs including, properties for sale, property management services in Indianapolis, and short-term management services in Tampa and Fort Myers.

© 2021 WILMOTH Group

menu