If tenants use utilities at your rental property, you may wonder who should assume the responsibility of paying for them. Should the landlord or the tenant pay for utilities? Or can you divide the responsibility between both parties?
In this article, we explore the different options for paying for utilities at rental houses and explore factors that can affect the arrangement you settle on.
Key Takeaways
- While the landlord decides who pays utilities, they must follow local and state rental regulations to ensure compliance.
- Many state laws prohibit landlords from overcharging tenants for utility bills.
- If a landlord includes some utilities, it’s common for them to include trash and water because determining individual tenant usage can be challenging.
- Utility provisions in your lease agreement should clearly outline each party’s responsibility, payment method, and whether the base rent includes any utilities.
Common Practices
There are three standard practices for paying utilities in a rental property:
- The landlord and tenant share the cost of utilities
- The landlord pays all the utilities
- The tenant pays all the utilities
Explore each of these practices and their pros and cons:
1. The Landlord and Tenant Share Utility Costs
Some landlords choose to share the cost of utilities with their tenants. Under this method, landlords pay for utility services that a tenant can’t put in their name, and the tenant pays for the rest. For example, a landlord may include utilities like trash and water in the base rent and require the tenant to assume responsibility for other utilities.
Sharing utilities can be a fair and cost-effective approach. Under this approach, both parties contribute a certain percentage or amount toward the utility bills.
This practice may lead to disputes and complications if the landlord or tenant disagrees with the cost allocations or one party fails to contribute their share. The parties must specify and document which utilities they’ll share and their exact allocation.
Pros
- Allows for shared responsibilities
- Promotes a fair distribution of costs
- Encourages tenants to be more mindful of energy consumption
Cons
- Disputes may arise if there is a disagreement on the allocation of costs
- One party may fail to contribute their share
2. The Landlord Pays All Utility Costs
Another approach is for the landlord to pay for all rental property utilities. Sometimes, a landlord might invoice a tenant for each utility individually. Then, the tenant pays the landlord, and the landlord uses the tenant’s payment to pay the utility provider.
However, the more common approach is for the landlord to charge a set fee, whether it’s an allowance included in the monthly rent payments or a flat monthly fee in addition to the base rent. This approach streamlines the payment process, significantly reducing the potential for misunderstandings or disputes over utility expenses.
In addition, including utilities can attract prospective renters as they won’t have to worry about dealing with utility payments and management. However, landlords should be cautious not to overcharge and ensure that it aligns with the actual utility costs to avoid potential legal issues.
Pros
- Streamlines payments for landlords and tenants
- Allows for more predictable expenses for tenants
Cons
- Introduces the risk of overcharging
- May limit the pool of potential tenants due to higher rental costs
Can a Landlord Profit from Utilities?
Profiting from utilities by extensively overcharging can be illegal in some states. Even if utilities are included in the rent, tenants have the right to access detailed utility bills.
A minimal administration fee can be harmless if both parties agree. Nevertheless, landlords should charge an amount that accurately reflects the utility bill.
3. The Tenant Pays All Utility Costs
Despite the advantages that incorporating utilities into the rent may provide, some landlords prefer tenants to pay their own utility bills. Under this method, the tenant must create and manage their own utility accounts with the utility company, which bills the tenant directly for their usage.
While this approach may require more administrative work for tenants, it gives them more control over their utility expenses. Landlords benefit by having fewer financial responsibilities and liabilities, keeping their costs predictable.
Additionally, landlords can advertise their properties at more competitive rates by not bundling utilities into the rental price. A lower base rent makes the rental more attractive to prospective tenants who perceive a lower upfront cost as a significant saving, potentially leading to quicker rental agreements.
Pros
- Tenants have more control over utility expenses
- Landlords are relieved of managing utility bills
Cons
- Tenants may face challenges in setting up and managing utility accounts
- Landlords need to intervene if tenants fail to pay
What Happens If My Tenant Fails to Pay?
Even if tenants fail to pay for utilities under their accounts, ensuring they pay is in your best interest. Without utilities, the tenant’s habitable living situation may be compromised, creating legal issues. Property damage, such as mold growth or frozen pipes in the winter, may occur without functioning utilities.
Contact the tenant to understand why they aren’t paying and discuss possible solutions. Review your lease terms regarding utility payments and tenant responsibilities to learn your rights and determine a suitable action. If appropriate, you may need to issue a formal notice of non-compliance, eventually leading to eviction.
Factors to Consider When Deciding Who Pays Utilities
Consider the following factors when deciding who should pay utilities in a rental property:
Rental Market Trends
Research the rental market in your area to determine the most common method for making utility payments. Tenants may expect one method over another, so it may make sense for you to adhere to the prevalent pattern.
Advertising Tip
When you advertise your property, your rent price may appear higher than other listings if you include utilities. If possible, highlight that fact in the header (e.g., Rent includes electricity and water).
Utility Types
Consider the utility types. You may consider including essential utilities, like water, electricity, and gas, in the rent to guarantee tenant access. While you can benefit from including essential utilities, you may exclude optional utilities like internet and cable and have the tenant pay for them themselves.
Property Type
The type of rental property can also influence who pays utilities. For example, it may be more practical for the landlord to pay for utilities in multi-unit buildings with shared meters. However, in single-family homes, tenants are typically responsible for their own utilities.
Many states require landlords to explain how they divide shared utility costs before asking for payments. They must provide this explanation in writing as part of the lease or another document.
Energy Consumption
Energy consumption and the level of insulation can significantly impact gas and electricity bills. If you consider including utilities in your rent, assess the type of appliances you have and the structure of your rental unit to determine which utilities to include and exclude. Ask yourself questions such as the following:
- What is the R-value (insulation rating) for the windows and walls? The R-value measures a material’s resistance to conductive heat flow. [1] The higher the value, the more insulated your building is.
- Are the lights and appliances energy-efficient? The more energy-efficient your lights and appliances are, the more tenants can minimize energy waste. [2]
If you include utilities in the rent, you should determine the most accurate price that covers the scenarios for varying and atypical usages of utility. Consider price fluctuations throughout different seasons, such as gas increasing significantly during the winter. Anticipate how tenants may take advantage of the all-inclusive utility fee in the rent and use gas, water, or electricity more excessively.
Historic Trends
Look through past utility payments to understand the average utility costs.
For example, consider Jim, a landlord who owns a one-bedroom house that he rents to others. In their lease, he and his current tenant agreed to $1,425/month for rent and $75/month for utilities, making the tenant’s monthly payment $1,500/month because Jim covers utilities as the landlord.
After looking at month-to-month data, Jim determined that the utilities cost him the following amounts on average:
- Electricity: $70/month
- Water: $70/month
- Gas: $40/month
- Total Cost: $180/month
Jim only accounts for $75 in utilities each month, but the actual usage cost is $180. This means that he has lost about $105/month in unaccounted-for utility expenses. For his next tenant, he will choose not to include utilities in the rent. He thought about raising the rent to $1,605/month ($1,500 plus the $105 he was missing), but then his rental property would be priced too high to compete with other rentals.
Potential for Dispute
Even if your tenants are responsible for paying utility bills, disputes may still arise. They may approach you with questions and concerns about utility usage, suspecting that factors like the age of the house or inefficient appliances are causing their bills to spike.
Additionally, late payments on utilities can lead to further disputes, affecting the financial dynamics and straining the landlord-tenant relationship. Be prepared for these potential issues and manage your expectations to maintain a positive rental experience.
Utilities Provision in Lease Agreements
No matter which method you and your tenants agree on, your lease agreement should detail the expectations and responsibilities to prevent future issues and misunderstandings.
Key points to address can include:
- Who is responsible for managing which utilities?
- Will the payment be made through the landlord’s or tenant’s account?
- What is the due date for utility payments? Are there late fees?
- What utilities come with the rent?
- If any utility is shared, what is the allocation breakdown between the landlord and tenant?
The lease agreement can help prevent utility disputes by clearly outlining the responsibilities of both you and your tenant.
Laws on Utilities
Landlords must be aware of the state and local laws regarding utilities in rental properties. Landlord-tenant laws can vary by jurisdiction, so it’s crucial to research the specific regulations in your area. Some common legal considerations include:
- Habitability: Landlords are generally required to provide habitable living conditions, which may include ensuring access to essential utilities such as water, heating, and electricity.
- Non-Retaliation: Landlords cannot shut off utilities or take adverse actions against tenants in retaliation for exercising their legal rights, such as reporting code violations or requesting repairs.
- Fair Housing: Landlords must ensure that their policies regarding utility payments do not discriminate against protected classes under fair housing laws. [3]
- Transparency: In the case of shared utility bills, landlords must provide clear explanations (usually in writing on the lease agreement) regarding how costs are apportioned before signing the lease. In addition, landlords must provide tenants access to all utility bills if they request them during tenancy.
- No Overcharging: Some states like California [4] and Texas [5] prohibit landlords from charging tenants more than what utility services ask for when paying utilities. Furthermore, New York [6] requires landlords to refund and adjust tenants’ past overcharges due to shared meter conditions.
- Security Deposits: Landlords may be allowed to keep a portion of the tenant’s security deposit if they have unpaid utilities. However, they must adhere to applicable regulations and limitations.
- Safety Requirements: Landlords must comply with local building and fire codes and ensure they appropriately install and maintain water, gas, and electrical systems.
Final Thoughts
Choosing who should pay utilities for a rental house or property should be a well-thought-out decision. Regardless of the approach you settle on, you should communicate each party’s responsibilities in the lease and comply with applicable laws and regulations. Consult with a local attorney or housing authority to ensure compliance and create a positive rental experience.
