Do all leases have to be in writing?

The Commission's Legal Division often receives inquiries about residential rental agreements. Many of these inquiries concern the rights and remedies of parties in transactions when the prospective tenant makes a deposit on a unit but does not sign a lease. If the prospective tenant later decides not to rent the unit, is he legally entitled to a refund of his deposit? The answer depends upon whether the parties had formed an oral lease contract.

Not all lease contracts have to be in writing to be enforceable. The North Carolina Statute of Frauds for leases requires that if the lease completion date is more than three years from the date the agreement was made, it must be in writing to be enforceable. All other leases may be oral, as long as the other requirements of forming a contract are met.

Oral lease contracts are formed much the same way as other contracts. The necessary elements are offer, acceptance, communication of acceptance, and consideration. The parties' mutual promises can serve as the consideration; money need not change hands for the lease contract to be enforceable. The parties' oral negotiations must specifically address all of the material terms of the lease contract, which typically include provisions such as the identification of the property, beginning date and term (length) of the tenancy, and amount of rent and deposit and when and how they are to be paid. In addition, the parties must intend to be bound to the terms of their oral agreement.

For example, suppose that at the conclusion of a discussion in which an oral agreement apparently has been reached on the material terms of a rental, a prospective tenant says to the property manager, "Write up a lease for me to look over and if it's satisfactory, I'll sign it." In this example, it appears that the prospective tenant does not intend to be bound to a contract until the agreement has been put in writing and signed by the parties. There is no oral lease contract when the discussion ends. The property manager is therefore under no obligation to the prospective tenant and can rent the property to someone else. Likewise, the prospective tenant has no obligation to rent the property from the landlord and is entitled to a refund of any deposit which he may have made - even if the landlord cannot immediately find another tenant.

Like a written lease, if an oral lease is properly formed, it is enforceable. Thus, if a tenant orally contracts to rent a property, and gives a property manager a security deposit and rent toward that rental, the tenant cannot be assured that he will receive his money back if he later changes his mind and decides not to occupy the unit.

If a tenant breaches the lease by not occupying the property, the landlord or his agent may recoup from the tenant any lost rent for the period during which the property stays vacant (while the landlord makes good faith efforts to re-rent it), plus the actual and reasonable cost of re-rental. The landlord's losses may be deducted from any deposit the tenant has made. If the tenant has not paid a deposit, the landlord or property manager may collect the losses as with any other debt, through formal or informal debt collection or by court action.

Within 30 days after the tenant relinquishes possession of the property (or the right to possession if the tenant has never actually occupied the property), the landlord or property manager must account to the tenant in writing for any deductions from the deposit.

Even when an oral lease is legally enforceable, it is not advisable. When a dispute arises, the parties' recollections may differ as to what terms were agreed to orally. A written lease, although not always required for enforceability, provides proof of the agreed-to terms.

If you and the prospective tenant wish to make a lease contract but it is not possible or practical to put the terms down in writing at that time and place, be sure the prospective tenant understands that he is bound to a lease contract even though a written lease has not been signed; therefore, he cannot change his mind without being liable to the landlord for lost rent and the cost of re-rental. Or, if it is your intent to not be bound until you and the tenant enter a written agreement, make sure the tenant understands that until he signs a written lease, you are not obliged to keep the property off the rental market for him.

In any real estate transaction, the key to good customer and client relations is to assure that the expectations of all parties are consistent with the expectations of the real estate agent involved in the transaction. Few disputes should arise if each party understands what the other party expects of him, even when those expectations are not in writing.