The Comprehensive Guide to Lease Agreements with Utilities Incorporated

A Primer on Lease Agreements

Lease agreements are legally binding documents created between a landlord and tenant that outline specific stipulations regarding tenants and the like. Although verbal agreements may hold up in court to a certain extent, they are not nearly as trustworthy or efficient as a written contract. Having a written agreement in place between both parties protects all involved and allows for smooth and easy processes as the tenancy progresses. For the landlord, these agreements are necessary not only to protect them from any future issues but are also legally required in some states.
Because of these agreements and their determinants, there is no question of what is expected of the tenant and the landlord because everything is outlined in writing. For commercial lease agreements, these specific details can be particularly important to reduce the risk of misunderstandings that could result from the absence of this written contract. As such, written contracts allow the tenant to hold the landlord to the conditions stated in the lease.
In addition to information regarding tenancy and rights, lease agreements may make provisions for utilities. For instance, some leases may make provisions for utilities such as the following:
For the tenant, this actionable information provides peace of mind in terms of services as well as the actual cost of these services. Commonly , water and power charges make up a large part of the monthly bills for tenants, and having all information regarding these costs up front means that the tenant will be able to budget accordingly and avoid unexpected surprises later. As an example, if a security deposit is $500, a portion of that may be used towards paying for services that the tenant is expected to cover — and therefore if the cost is higher than expected, it will become more and more difficult to recoup that money.
For the landlord, however, providing utilities may mean in increase in revenue by boosting the rent amount. While a utilities-included lease agreement may result in increased rent, the landlord can now expect to receive payment for predictable services — allowing them to account for these payments when creating a budget. Because both parties are now able to see details of billing and usage, this can also reduce the tension that sometimes arises between tenants and landlords — especially if the landlord has previously contributed to payment of these services. Finally, having the landlord pay for some or all services may increase the use of services (i.e., heated pools may be more popular) that requires use of this space that is a good income source for the landlord.

What Does it Mean When Utilities are Included?

Utilities included refers to an agreement in which the landlord covers the utilities as part of the supply of housing. In other words, when utilities are included, the cost of the utilities are factored into the rent, so you won’t be responsible for paying them separately.
Not all utilities are covered by people offering these kinds of leases. In fact, the most common utilities that are included with a lease agreement are water, heat, electricity, and garbage removal. Other, less common, utilities that could be included are cable television, internet, and lawn care.
The utilities that are included in your lease should be listed in the agreement so you know exactly what will be covered for you, but don’t just rely on your landlord being honest with you. You need to have utility department readings at the start and end of your tenancy if the utilities are in your name, or if the utilities are in the landlord’s name you could have them provide proof that the utilities are turned on for your occupancy.
When considering whether or not utilities are included in your lease, be sure to ask your landlord how they deal with overages, or bills that exceed the average for the property. Sometimes when a landlord estimates the utilities included in the rent, they may charge too much or too little, and so if the charges go over this amount, the realtor or landlord may ask you to cover these costs even if it’s otherwise included in your lease.

Advantages and Disadvantages for the Tenant

For tenants, there are both advantages and disadvantages to having utilities included in their lease agreements. Some tenants enjoy knowing that their bills will be the same on a month-to-month basis, while others would prefer the freedom to use as much or as little energy and water as they need within a given month. Some tenants see an "all bills paid" listing as a convenient way to find a rental home, but others simply prefer where they can be in control of their utility use. Having utilities included in the rent provides the security of knowing how much is allotted for each month’s payment. Without having to budget for an additional expense, tenants can enjoy knowing what to expect when making their rent payment. For many, especially those who like to maintain budgets, knowing what to expect can be invaluable. Such an arrangement can also provide some convenience to the tenant if the lease lists the specific providers for different utilities. For tenants who are just moving to the area, learning how to set up utilities through new, unknown companies can be a hassle. A lease with utilities included will usually state the providers, so the tenant won’t have to worry about switching providers or setting them up anytime soon. Despite its advantages, having utilities included in rent isn’t always convenient for every tenant. If the utilities are included, the landlord has total control regarding how they’re paid. A landlord might prefer a new, less expensive provider to the one that was originally used. If the tenant is expected to switch providers, this might require the hassle of cancelling the contract with the old provider and agreeing to a new one with the new landlord. At the same time, the landlord might undervalue the cost of certain utilities when deciding how much to include in the base rent price of the unit for the upcoming year, impacting the tenant budgeted expenses for the following year. Some consider it worthwhile to have utilities included, as a way for the landlord to take control of the premises. If there is an issue with a water leak or disorganized electric bill, it can be a hassle for a tenant to figure out the problem. In such cases, it’s helpful for a landlord to take control of all relevant providers.

Benefits for the Landlord

Offering lease agreements with utilities included can also be a smart strategy for landlords. From providing a competitive edge when attracting new tenants to offering a more controlled environment for operational expenses, they offer a range of advantages.
Firstly, they tend to attract more tenants. An all-inclusive rent simplifies the decision-making process for prospective renters. No need to navigate the costs of individual utility bills, and possibly a variable rent increase from their new landlord too, because they know what they’re up for in a month, and can more easily budget for themselves. This in turn means more viewings and enquiries regarding vacancies when it comes to a rental property.
Secondly, simpler billing means those expensive, mundane and annoying tasks of chasing and collecting any arrears are removed from the table. Tenants are left to sort out their other outgoings without having to worry about a separate bill for this as well. Landlords should never have to chase a utility bill based upon a gas or electricity price rise. Having all these bills included in CGI, so that if the landlord suffers a price increase they can cover the increase from their already negotiated rent. They can pass on some or all of the increase to the tenant. No need to attempt to claw back from the tenant what may well turn out to be minuscule amounts. It can be fraught with arguments, and much more time and money wasted in the attempt.
Thirdly, as the operational costs of many properties will remain fixed to some degree, having utilities included means that the landlord is not forced to pass on operational costs to the tenant. The reason why some landlords will want certain utilities included in the agreements is because they are natural monopoly suppliers (but others are natural monopolies too, witness telecommunications). Being able to choose from a large pool of suppliers gives rise to significant bargaining power against those supplier monopoly control.

How to Calculate Just Rent

As a Landlord, your goal is to provide housing for a tenant at the most competitive rent possible. This goal is generally achieved by determining a base rent, then charging the tenant for a certain percentage of the utility costs in excess of a threshold usage. This allows the Landlord to charge a lower base rent, while charging the tenant for utilities only in abundance.
Depending on how energy efficient a property is, determining your lowest rental price could take some time. On one hand you would like the overall monthly rental payment to be as low as possible to attract tenants; on the other hand you do not want to set your base monthly rental price so low that you have to charge excessive utility use fees. The answer is to find a balance.
The first step is to determine the cost of your utilities (water, sewer & electric) for twelve months of the year. With this amount in hand, add in any additional costs such as snow removal or common area maintenance. Remember that these costs will not only include those you are currently incurring, but a projected increase in utility or other common area costs as well. Once you have these numbers, divide them by the number of units in your building to get an average cost per unit. (Example: Expenses for building: Electric: $800.00 Water: $400.00 Sewer: $100.00 Snow Removal: $300.00 Common Area Maintenance: $200.00
Total Monthly Cost of Utilities: $1800.00 Total Yearly Cost: $21,600.00
Yearly Expense per Unit: 21,600/12 = 1,800.00
This 1,800.00 divided by the total square footage of the building (3,600 Sq. Ft.) = $500.00 per unit)
Next compare your average monthly rent of other comparable buildings in the area. The average rent of your competitor should be the most you would generally be willing to accept for a unit comparable to yours. You would then have to deduct the average utility use fee from your competitors’ rents being charged to get to their base rent. (Example: Your average utility use fee for the season is 700.00. The average rent for a similar unit in your area is 1,300.00. Subtract the utility use fees from the overall rent, yielding a base rent of 600.00 for the unit. This would mean you could charge the tenant between 500.00 and 600.00 for utilities under your lease agreement)
Next take into account what you are willing to accept as a monthly fee for the utilities upon lease execution. Doing this should allow you to come to some figure that is satisfactory to you. (Example Rental Price Calculation: 800.00 + 500.00 = 1,300.00 1,300.00 – 700.00 = 600.00 Base Rent Total: 1,300.00)
The end result is that the tenant pays exactly the same as they would have if the rental price were inclusive. You are protected from increases in utilities or services (increases in heating oil prices or water rates), because the tenant is paying their proportionate share. Most importantly everything is disclosed in writing through the Lease Agreement.

Legal Issues to Be Aware Of

It is essential to define the scope of included utilities in clear terms within the lease agreement. Identifying whether the landlord is responsible for all utilities or whether certain utilities such as water and gas will be separately metered and billed to the tenant is crucial. Additionally, you may want to define the turnaround time the landlord must provide notice to allow the tenant to pay and/or otherwise remedy the situation to avoid penalty, including disconnection.
Landlord failure to provide certain services can be treated as a material breach of the agreement. Many landlords provide only basic services due to the high cost of such service. Landlords also must comply with all applicable zoning and safety standards regarding provided utilities , which may result in fee increases if the property is non-compliant.
Utilities tend to fall within maintenance and/or repair obligations, which cover access to the premises with prior written notice. Access may be for a range of issues and includes any remedial actions addressed by the lease agreement. Many agreements will address rights of entry for routine maintenance, repairs, construction of alterations and/or improvements, and/or inspections.
Disputes can arise when utility companies have a policy of using bailiffs to enforce the right of entry of landlords. Once entry occurs in the case of a dispute, there can be no recovery of damages to the property. You will want to limit the circumstances that allow the landlord rights of entry.

Alternatives to Having Utilities Included

If you are not a fan of including utilities in your lease, there are alternatives to that arrangement. One of the most common alternatives consists of requiring the tenant to pay the utilities directly to the utility provider. In some cases, particularly for larger communities, it may be possible to set it up so that the utility provider bills the tenant directly. In any event, in this scenario, the utility provider information is listed in the lease agreement and the manager need only keep the contact information on hand as opposed to sending out utility information packets. On the plus side, the tenant is receiving the utility information directly from the utility provider, which is often less error prone. Some utility providers even have web portals for their customers, which makes it easy for the tenant to pay bills electronically (saving you on postage).
The downsides to this arrangement mirror those of having the utilities included in the lease agreement. For example, there is still the issue of when the utility service starts and when the tenant takes possession, which is discussed above. You also run the risk of delays in setting up the utility accounts, so you slice your control over the property for a period of time.
Another option is to bill back utilities to the tenants. In other words, the property manager receives the utility bill and then allocates the total bill to each tenant based on the square footage of their rental unit. This option is similar to the utilities-included option above, but has the added benefit of ensuring that no money is due directly to the utility provider and eliminating the trouble of terminating utility service in the event of an eviction (in Texas, for example, the water company must be given 3 days prior notice by the tenant to terminate service).
On the downside, billing back utilities means that you will incur the costs of administering that utility bill. You will also need to make sure the bill is actually paid by your tenants, and ultimately the risk of non-payment will fall on the property manager – even if your lease agreement says otherwise.

How to Negotiate Your Lease

As energizing as negotiating your salary, negotiating your utilities could seem equally like a moot point. However, a matter estimated to initially cost you $100 a month in utilities could quickly double or triple to $300 plus and more, and if you’re living in that space long-term, that increase could add up to several thousand dollars over just a few years’ time.
Landlords may find it easier to include utilities in the lease agreement, but that doesn’t mean that this is the most beneficial choice for tenants. Nevertheless, sometimes landlords are willing to negotiate with you on the inclusion of utilities in your lease. Again, we recommend that you balance the benefits and costs to various utility providers to decide which utilities might be left out of your rental agreement. In the event that you agree to include utilities in your lease agreement, make sure that you clarify in writing who pays the utilities, who receives the bill, and how frequently you will pay for utilities. Keep in mind that one frequent complaint about housing deals which include utilities is that landlords failed to pay the utilities monthly. It may be necessary to pay special attention when dealing with utilities provided by the State of Florida, including the following utility companies:
Florida Power & Light
Orlando Utilities Commission
Tampa Electric Company
Gainesville Regional Utilities
City of Tallahassee Utilities
City of Fort Pierce Utilities
Nassau-Amelia Utilities
City of St. Petersburg
The City of Fort Pierce Utilities hosts a website listing all rates for service as well as hookup information. Florida Power & Light states that they will not transfer service for you, stating, which is standard in all Florida leases, that utilities cannot be connected until the lease is signed. In addition, FPL bills residential service on a cycle based on your address. Utilities may be on any billing cycle, and frequent complaints about these utilities involve early disconnects, which we cover in more detail below.

Conclusion and Final Recommendations

The main points discussed in this article are as follows:
While it is almost always beneficial for landlords to pay electric, water and gas, tenants should still take the time to consider the utility situation before deciding whether or not to take a lease with utilities included.
Ideally, the costs involved in having the landlord cover the utilities should be factored into the total rent for the property and not simply be handed to the tenant as an additional cost. For example, if it is estimated that your landlord pays $50 a month in electricity for the apartment, the landlord should charge you $50 more a month in addition to the rent (not $750 in rent plus a $50 utility charge) so there are no surprises .
If your landlord refuses to include the utilities in the rent and instead forces the tenants to turn on the utilities under their own name, do not agree to pay the electricity, water, gas, or other utility bills without receiving a payment from the landlord to cover the monthly fees (again, $50 per month should be more than enough in the Pacific Northwest).
Keep in mind that some utilities will either not provide service until the tenant is named on the account or will require the tenant to provide a previous address to verify registration.
In summary, while a landlord paying for the electricity charges is beneficial, a tenant should consider the rent to utility ratio and must ensure that the cost of the utilities is not simply being added on top of the rent.