Avoiding the Pitfalls of Corporate Housing

by Stephen D. Pahl and Karen K. McCay

Mary has just landed a great new job at the corporate headquarters of the national corporation, ABC Company, in Anywhere, U.S.A.

As part of her compensation package, ABC has told Mary that it will pay for her moving expenses and provide her with corporate housing for one month. This will give her time to scope out her new city and find a permanent residence.

The firm's human resources manager approaches you — the property manager of a luxury rental complex in the heart of Anywhere, U.S.A — and asks to lease an apartment for Mary for 30 days. After that period, the firm wants to use the apartment for other new employees as they are hired and begin to relocate to the area.

What do you do? Who is your renter? How do you keep track of who is living in your unit? Who needs to qualify for the unit? On whose background do you run your background check? What happens if Mary is fired before the 30 days have expired?

A growing rental trend

The foregoing scenario is one that more and more owners and property managers in the rental housing industry are facing today. The business boom of the 90s has created a new market in the rental housing industry: The corporate housing market. This is a practice in which a corporate employer rents apartments for its employees as part of the employees' overall compensation package.

Corporate housing is an increasing segment of the rental housing industry. Because of the lack of standard industry practices in this area, property managers should know and understand how to cope with the issues that are arising. There are several options, however, that will help both corporations and apartment management avoid legal pitfalls as well as deal with other issues that may arise.

Who is the renter?

The first issue that property managers and owners face in corporate housing is: who is the resident? There are two choices in the corporate housing situation: either the employee, who actually will be occupying the unit; or the corporation, which will be responsible for paying the rent for the unit.

There are advantages and disadvantages to either choice. If the employee leases the unit, the normal background checks can be run and financial qualification standards can be applied and the lease can proceed as a normal tenancy. In this scenario, however, there is no contractual obligation of the corporate employer to pay the rent — and the only benefit to the property owner or manager is a steady stream of short-term referrals from the corporate employer.

To avoid this limitation, and to hold the corporate employer liable for the employee's rent, corporate housing management can require the employer to execute a guarantee or security agreement in which the employer guarantees payment of rent in the event of default by the employee.

Resident identification a must

When the corporation itself leases the apartment, nonpayment concerns are often reduced. Yet, a number of other issues may arise.

A corporate employer may use the rental unit as it sees fit and often ends up shuttling several different employees in and out of the apartment according to the needs of the firm. For various safety, security and management reasons, property owners and managers generally want to know who is occupying their units.

Where the employer is the tenant, management should consider adding provisions to the lease agreement that create a continuing obligation of the corporation to notify the property manager of the identity of all occupants of the unit at all times.

If the corporation does not adhere to an "identification of occupant" provision in the lease agreement, corporate housing owners will have the contractual right to terminate the agreement with the corporation.

Too many friends in the pool

Another possible pitfall of having the corporate employer lease the apartment is overuse of common areas. If the corporate employer is the tenant, then it theoretically can grant any of its employees access to the facilities of the complex.

A corporation may overuse common areas by giving nonresidents access to the common areas, such as a swimming pool, fitness center or similar amenities. To avoid this problem, corporate housing owners should institute strict house rules that allow only actual residents/occupants and a certain number of guests to use common areas and apartment complex amenities.

Whichever leasing route you choose, make sure your lease agreement and any addendums or related agreements, adequately address these concerns. Make sure that all parties — the property owner, the employee and the employer — are clear on their respective rights and obligations.

The termination dilemma

The largest potential pitfall in the corporate housing situation is what happens when an employee/resident is terminated: who is entitled to possession of the unit? If the employee signed the lease, he or she may claim entitlement to possession of the unit regardless of the employment status. Such a situation could hinder your relationship with the corporate employer, especially since the employee has the lease and not the employer. The corporation wants to make sure that the unit is available for its employees.

Some states have laws that specifically allow a property owner to retake the rental unit in the event a resident who is leasing the unit as a condition of employment is terminated. Even if such a law exists in your area, it is best to spell out clearly in a lease addendum that the lease is being entered into solely as a condition of the employee's job with the corporation and that termination of employment will also terminate the tenancy.

Potential tax issues

When leasing to either an employee or employer, rental housing owners should always be aware of potential tax issues. Most states assess a hotel tax on dwellings that are rented for less than 30 days. In other words, in order for a corporate housing unit to avoid a hotel tax, property managers should require either the employee or the corporation to sign a lease for at least 30 days.

So what should you do when the corporation's human resources director contacts you about an apartment for Mary, who is relocating? In most jurisdictions, we recommend that you enter into a lease agreement with Mary for at least 30 days and obtain a written guarantee from ABC Company guaranteeing payment of the rent.

In addition, Mary should execute a lease addendum indicating that the lease is contingent upon her continued employment with ABC Company and that, if her employment is terminated, she is contractually required to surrender possession of the unit.

You may end up entering into several short-term lease agreements with employees of the ABC Company, resulting in extra paperwork and increased turnovers. But you will have the benefit of knowing your occupants and having two parties responsible for the payment of rent, while clearly setting forth the legal right to possession of the unit.