Should You Rent to Tenants Running Home Businesses in Your Property?

This depends on your lease agreement. Some home businesses may be more problematic than others. For example, a tenant running a daycare from your property carries much more liability than someone using your property as a home office for a remote job. It’s a good idea to ask tenants for more information about the nature of their business, and if necessary, add conditional clauses to the lease agreement to restrict problematic home-based businesses.

In most cases, tenants are allowed to work in the housing unit. However, there are several considerations every landlord has to take before allowing a tenant to work from home. From the landlord’s perspective, a home-based business might cause problems with neighbors and other tenants, which could ultimately hurt your reputation and even raise legal issues.

First, as a landlord, it is important for you to know the size and the type of company that a prospective tenant is planning to run on your property. Naturally, a fifteen-people heavy machinery start-up should raise more red flags than a single-person digital marketing agency. Using this example, let us think of the potential concerns a fifteen person business may cause for the residential community. In the beginning, we might expect these fifteen employees to overuse the common areas in the building such as elevators, corridors, stairways, or parking spots. This is especially true in smaller residential buildings. Likewise, heavy machinery operated by fifteen people could well cause noise complaints from other tenants. At the same time, neighbors may complain about increasing safety issues, given that they might not know who the employees are. Finally, potentially hazardous situations might occur once a heavy machinery company is running next-door to a residential building.

In this case, one obvious risk for the landlord is reputational damage as a landlord and as a neighbor. Another less obvious risk is legal. If you as a landlord knew or should have known that the tenant was running a particular home-business on your property, you may be deemed as negligent and thus held legally liable for damages caused to the property and health of other tenants. Moreover, you could even be held criminally responsible as an accomplice if the tenant’s company is involved in criminal activity.

Additionally, there is a general problem of clear regulation. Legally speaking, a residential lease agreement differs from a commercial lease agreement since the latter is used for commercial properties, whereas the former’s primary purpose is to provide a property for a person to live. Depending on the nature of the contract, some cities might have local zoning laws that prohibit residential leases in commercial areas, and vice-versa. Likewise, residential and commercial leases are subject to different tax treatment in most states. Furthermore, some local authorities might require special licenses for landlords of commercial real estate. For this reason, residential real estate and businesses do not always mix well.

In general, it is advisable to add a conditional clause for the operation of home businesses.

Here are some examples for your reference:

• Requiring that once the business grows to a certain level, in terms of employees, clients, or volume of supplies, the tenant will have to move out

• Explicitly restricting certain types of businesses, such as the ones that are illegal under State and Federal law or likely to cause a considerable disturbance to other tenants or neighbors

• Stating clearly in the contract that you as a landlord are not aware of your tenant conducting any sort of illegal business operations in your property

• If you are unsure about the local zoning regulation for your property, you can even prohibit all businesses through the lease agreement, even if they do not cause any disturbance to other residents

Some landlords don’t want to go through the trouble of determining whether or not the business will be problematic, so they preemptively prohibit all businesses in the lease agreement.