With more people than ever working from home, it's almost inevitable that at some point in a tenant-landlord relationship, a tenant will begin running a business from a rental property. This leaves investors with a lot of questions about the legality and risks of allowing a home business from a rental property. Whether you rent residential property or run a vacation rental business, here's what you need to know.
Is it legal for a tenant to run a business from a rental property?
Yes and no. In most cases, tenants can legally run a business from a rental property, but there are certain circumstances that prohibit them from doing business in a rental unit. The type of business being conducted, zoning laws and regulations, or explicit lease terms prohibiting tenants from operating a business would all disqualify a tenant from being able to do so.
Risks of allowing tenants to run a business in rental real estate
The type of business the tenant wants to conduct is often the biggest determinant to whether it's permissible and how great of a risk it is to you as the real estate owner. If their business operates online, with little to no inventory, there's very little risk involved in allowing them to conduct business. However, if they want to start a massage service, microbrewing business, or car mechanic business out of the garage, allowing them to run the business opens the door to a lot more risk and liability for you as the landlord and may not be permissible by county or city zoning regulations.
If the tenant allows customers to pick up products or receive products or services at the investment property, it increases the chance for injury or other property-related litigation against the landlord. If the business uses tools and equipment that consume a lot of utilities, like water or electricity, those bills could dramatically increase, or the noise produced from the business could irritate neighbors. As you can see, the type of business matters.
Protecting yourself as the landlord
If you don't have terms written into your existing rental lease, negotiating terms with the tenant and putting it into writing stating any requirements for the tenant, limitations, or potential fees for doing business from the property, it's a good idea to have this drafted by an attorney to make sure important clauses about risk, liability, and insurance are included and provide proper protection and notice for both parties.
Investors can also require the tenant to purchase their own business insurance and register their business with the required city or county business license. This helps shift risk and liability from the landlord to the tenant in the event of litigation.
It may also be a good idea to disqualify certain businesses or have a questionnaire the tenant must fill out to help identify potential problems. The form could as the tenant to define:
- Business purpose
- Inventory requirements (if any)
- Hours of operation
- If clients or customers will visit the property to receive goods or services
- Parking for customers or services
- Number of employees that would work in the property
- Where the designated working space/area is located in the property
- What tools and equipment are needed to operate (if any)
This can help guide you to make the judgement as to whether to permit the business to operate.
The Millionacres bottom line
If local zoning or homeowners association (HOA) rules allow for the type of business, it's ultimately up to the landlord, property owner, or property management company to dictate if it's allowable in the lease agreement, including stating what type of businesses are allowed and what steps the tenant must take in order to conduct business in the rental property.
If you discover that a current tenant is conducting a business without authorization from you, check your tenancy agreement to see if they are breaching the terms of the lease contract, and follow the proper legal process in your state to notify the tenant of the breach of contract.
If no clause exists, start negotiations with your tenant to find a resolution that reduces liability or problems, and speak with an attorney on next steps. While you may want them to stop, if it's not against local zoning laws and they have the proper business licenses, you may have to wait for the lease term to expire before you can renegotiate the lease terms or get them out.