How to Create a Rental Agreement

A rental agreement is a legally binding contract between a landlord and a tenant that establishes the terms under which the tenant may occupy and use a residential or commercial property. It defines the rent amount, payment schedule, duration of the tenancy, maintenance responsibilities, and the rights and obligations of both parties. Whether you own a single rental property or manage a large portfolio, a well-drafted rental agreement protects your investment, reduces the risk of disputes, and ensures compliance with federal, state, and local landlord-tenant laws.

Lease vs. Rental Agreement: Understanding the Difference

The terms lease and rental agreement are often used interchangeably, but they have distinct legal meanings that affect the rights of both landlords and tenants.

A lease is a fixed-term agreement, typically lasting one year, that binds both parties for the entire duration. During the lease term, the landlord generally cannot raise the rent or change the terms unless the lease specifically allows it. The tenant is obligated to pay rent for the full term, and early termination may trigger penalties, forfeiture of the security deposit, or liability for the remaining rent unless the lease includes an early termination clause or the state provides statutory remedies.

A rental agreement, also called a month-to-month agreement, automatically renews at the end of each rental period, usually every 30 days. Either party can terminate or modify the agreement by providing the notice required by state law, which ranges from 15 to 60 days depending on the jurisdiction. Month-to-month agreements offer landlords the flexibility to adjust rent, update terms, or terminate the tenancy with relatively short notice. However, they also give tenants the freedom to leave without long-term commitment, which can result in higher turnover and vacancy rates.

Some landlords use a hybrid approach: a fixed-term lease that automatically converts to a month-to-month arrangement upon expiration unless either party provides notice of termination or the parties negotiate a new lease. This approach gives both parties the stability of a fixed term with the flexibility of month-to-month renewal.

Key Clauses Every Rental Agreement Must Include

Parties and Property Identification

Identify the landlord and all tenants by their full legal names. Include the complete address of the rental property, including the unit number if applicable. Specify what is included in the rental, such as parking spaces, storage units, or common areas. If the property is furnished, attach an inventory list as an addendum documenting the condition of all furnished items.

Rent Amount and Payment Terms

State the monthly rent amount, the due date (typically the first of each month), accepted payment methods, and where or how rent should be paid. Specify whether payments can be made electronically, by check, or by money order. Address prorated rent for partial months at the beginning or end of the tenancy. Include provisions for rent increases, specifying how much notice the landlord must give before raising the rent, which is governed by state and local law.

Late Fees and Grace Periods

Define the grace period after the rent due date during which no late fee is charged, if any. State the amount of the late fee, which must comply with state law limitations. Many states require late fees to be reasonable and proportional to the actual damages caused by late payment rather than serving as a penalty. Some jurisdictions cap late fees at a specific percentage of the monthly rent, commonly five to ten percent. Include provisions for returned check fees and the process for handling persistent late payments.

Security Deposit

Specify the security deposit amount, which is regulated by state law in most jurisdictions. State security deposit limits vary considerably. California limits security deposits to one month's rent for unfurnished properties and two months' rent for furnished properties. New York limits deposits to one month's rent. Texas has no statutory cap but requires the deposit to be reasonable. Other states fall at various points along this spectrum.

Detail the conditions under which the landlord may retain all or part of the deposit, which typically include unpaid rent, damage beyond normal wear and tear, cleaning costs, and early termination fees if permitted by the lease. Specify the deadline for returning the deposit after the tenant vacates, which ranges from 14 to 60 days depending on the state. Many states require landlords to provide an itemized statement of deductions along with any remaining balance. Some states, such as Maryland and Connecticut, require landlords to hold security deposits in interest-bearing accounts and pay the accrued interest to the tenant.

Maintenance and Repairs

Clearly allocate maintenance responsibilities between the landlord and the tenant. Under the implied warranty of habitability, which is recognized in nearly every state, landlords must maintain the property in a condition fit for human habitation. This includes maintaining structural integrity, plumbing, heating, electrical systems, running water, and compliance with building and housing codes. Tenants are generally responsible for keeping the premises clean, disposing of waste properly, using appliances and fixtures as intended, and reporting maintenance issues promptly.

Specify the process for requesting repairs, including emergency and non-emergency procedures. Address the landlord's right to enter the property for inspections, maintenance, and repairs, which must comply with state notice requirements, typically 24 to 48 hours' advance notice except in emergencies.

Termination and Notice Requirements

For month-to-month agreements, specify the notice period required from each party to terminate the tenancy. Most states require 30 days' notice, though some require 15, 60, or even 90 days. For fixed-term leases, describe what happens when the lease expires: automatic renewal, conversion to month-to-month, or termination requiring the tenant to vacate.

Address early termination by the tenant, including any applicable fees, the obligation to continue paying rent until a replacement tenant is found, and the landlord's duty to mitigate damages by making reasonable efforts to re-rent the property. Many states require landlords to mitigate damages rather than holding the tenant liable for rent through the end of the lease term.

Pet Policy

State whether pets are permitted and, if so, specify any restrictions on the type, breed, size, or number of animals allowed. Address pet deposits or monthly pet rent and any additional liability the tenant assumes for pet-related damage. Note that the Fair Housing Act requires landlords to make reasonable accommodations for tenants with disabilities who use service animals or emotional support animals, regardless of the property's general pet policy. Landlords may not charge pet deposits or pet rent for service animals.

Guest and Occupancy Policies

Define the maximum number of occupants permitted in the unit, which must comply with local occupancy standards and should not violate fair housing laws related to familial status. Establish guidelines for guests, including how long a guest may stay before being considered an unauthorized occupant. This provision helps prevent unauthorized subletting and ensures the landlord knows who is living on the property.

Fair Housing Compliance

Every rental agreement must comply with the federal Fair Housing Act (Title VIII of the Civil Rights Act of 1968, as amended), which prohibits discrimination in housing based on race, color, national origin, religion, sex, familial status, and disability. Many state and local fair housing laws add additional protected categories such as sexual orientation, gender identity, source of income, age, and marital status.

When drafting a rental agreement and screening tenants, landlords must apply the same criteria consistently to all applicants. Tenant screening should be based on objective, non-discriminatory factors such as credit history, income verification, rental history, and criminal background checks where permitted by law. Several states and municipalities have enacted ban-the-box laws that restrict landlords from asking about or considering criminal history during the initial application process.

The rental agreement itself must not contain any terms that disproportionately impact members of a protected class. For example, overly restrictive occupancy standards may violate fair housing laws if they have the effect of excluding families with children. The Department of Housing and Urban Development (HUD) uses a general guideline of two persons per bedroom, though this is not a rigid rule and local standards may vary.

Habitability Standards

The implied warranty of habitability imposes a non-waivable obligation on landlords to maintain rental properties in a condition fit for human occupation. While specific standards vary by state, the following conditions are generally required in all jurisdictions:

Structurally sound walls, floors, ceilings, and roof that protect against weather and intruders
Functioning plumbing with hot and cold running water and proper sewage disposal
Adequate heating and, in some states, air conditioning
Electrical systems that are safe and in good working order
Smoke detectors and, in many jurisdictions, carbon monoxide detectors
Freedom from pest infestations including rodents, cockroaches, and bed bugs
Compliance with all applicable building, housing, and health codes
Working locks on doors and windows for basic security

When a landlord fails to maintain habitable conditions, tenants may have several remedies depending on the state, including the right to withhold rent, repair and deduct the cost from rent, or terminate the lease without penalty. Some states allow tenants to report habitability violations to local code enforcement agencies, which can impose fines on non-compliant landlords.

Step-by-Step Process for Creating a Rental Agreement

Step 1: Research State and Local Laws

Before drafting the agreement, review the landlord-tenant laws in your state and municipality. Key areas to research include security deposit limits and handling requirements, required disclosures such as lead-based paint for properties built before 1978 (required by federal law under 42 USC Section 4852d), notice periods for entry, termination, and rent increases, habitability standards and repair obligations, late fee limitations, and any rent control or rent stabilization ordinances.

Step 2: Identify All Parties and the Property

List the full legal name of the landlord or property management company and all adult tenants who will sign the agreement. Include the complete property address and describe the premises being rented, including any included amenities, appliances, and furnishings.

Step 3: Set the Lease Term and Rent

Decide whether the agreement will be a fixed-term lease or a month-to-month rental. Set the monthly rent amount based on market analysis, property condition, and local regulations. Specify the start date, and for fixed-term leases, the end date.

Step 4: Define Financial Terms

Document the security deposit amount, late fee structure, returned check fees, and any other charges. Ensure all amounts comply with state and local limits. Include information about how the security deposit will be held and returned.

Step 5: Outline Rules and Policies

Draft clear policies on pets, guests, smoking, noise, parking, common area use, and any other house rules. Ensure all policies are applied uniformly and do not discriminate against protected classes.

Step 6: Include Required Disclosures

Attach all disclosures required by state and federal law. Common required disclosures include lead-based paint disclosures for pre-1978 properties, mold disclosures, bed bug history, flooding or environmental hazards, registered sex offender databases, and the name and address of the property owner or authorized agent.

Step 7: Add Maintenance and Entry Provisions

Clearly describe each party's maintenance obligations and the landlord's right to enter the premises for inspections, repairs, showings, and emergencies, consistent with state notice requirements.

Step 8: Review, Sign, and Distribute

Both the landlord and all adult tenants should read the entire agreement carefully before signing. Each party should retain a signed copy. Many states require the landlord to provide the tenant with a signed copy of the agreement within a specified time frame. Electronic signatures are valid under the ESIGN Act and UETA in most jurisdictions.

Common Mistakes to Avoid

Including provisions that violate state or local landlord-tenant laws, such as waiving the tenant's right to habitable conditions or requiring excessive security deposits
Using discriminatory language or policies that violate the Fair Housing Act
Failing to include required state and federal disclosures
Setting late fees that exceed state limits or are deemed punitive rather than compensatory
Omitting clear procedures for security deposit handling and return
Not specifying the process for requesting and performing repairs
Using a generic template without customizing it for the specific property, state, and local jurisdiction
Failing to address what happens when the lease term expires
Not including provisions for subletting or assignment
Neglecting to document the condition of the property at move-in with a written checklist and photographs

Using an online rental agreement generator like Forms Legal helps you create a comprehensive, state-compliant agreement that covers all required clauses and disclosures while being customized for your specific property and jurisdiction.