New tenant backing out after signing lease prior to moving in..what would you do?

Question

I typically always do 1 year leases but I had recently agreed to rent my unit on a month-to-month basis to someone starting 6-1 while they had a new home constructed estimating that it would close sometime later this year. The only condition which I thought I'd made crystal clear both in up-front discussions with them ahead of time and in the language of the lease that I needed 60 days/2-rental periods notice to end the month-to-month lease.

This would allow me time to prepare and re-rent the unit without vacancy and allow them flexibility based on variances in timetable for the construction of their new home and the closing. They also agreed to an above market rental rate for this flexibility.

Additionally my existing tenant's lease is up the end of April and they weren't scheduled to move in until 6-1 meaning I'd suffer a month of vacancy until they moved in. I made the decision to accept this cost as it'd give me ample time to clean up the unit and have it 100% for their move-in and because the estimated timeframe of around 4-5 months at above market rates would make up for it. At the very least I'd have 2 months of higher rent which would also be fine.

Sure enough 2 weeks after signing the lease and getting their 1st month and security deposit (equal to 1 month) they reached out and said they've decided to buy a new home that was already constructed in the same neighborhood instead of waiting for one that they've designed and originally planned and therefor don't need to rent. The obvious next question was about getting their sizable deposit back since they don't see paying for something they won't even use.

I explained that there is a 2-month notice required to end the lease and that as a result that although I sympathize I'll already be suffering 1 month vacancy because of our agreement and likely a 2nd month as well. Now I have to relist the property and start doing showings again as well as taking a lower rent for a longer term tenant even if I do fill it in a timely manner meaning no matter what I have to do more work and lose money based on our agreement.

They listened and seemed to understand my position and offered to agree to let me keep 1 month's rent with the understanding that they'd be on the hook if I can't re-rent it for the 2nd month either. They're argument was that they're technically giving me over 2 months notice in this scenario even though one month would be prior to the lease.

What would you do? My understanding of the law (property located in Minnesota) is that I could technically tell them to kick rocks and keep both months rent but I'm inclined to meet them in the middle and refund the 2nd month's lease as I'm confident in my ability to find a qualified tenant by then. Perhaps minus the difference between what we'd agreed on and what the new tenant is paying which is several hundred dollars.

What would you do in this scenario?

Randall Alan · Answer

@Kyle Kipka

When it comes to breaking a lease, my theory is that I don't want to be out any money.  I'm not out to make money on my tenant breaking the lease... I'm out to make sure I don't lose money because they change their minds after they have already committed to renting the unit.

This is basically what I tell my tenants in your situation:

"We are happy to work with you regarding you deciding to rent another house.  In lieu of what the lease states (ie. responsible for up to 2 months of rent for breaking your lease) We will immediately start to show the house so that we can line up our next tenant.  You will be responsible for the rent on the house until the time the new tenant moves in.

So we try and work with renters like that and try to help them out to avoid the harsher penalties the lease calls for where we can. Ultimately I would at least abide by the terms of the lease they signed, but if possible, get a new tenant in as soon as possible and credit the tenants that never moved in for any amount you were able to save them.

Hope it helps!

Randy

James Hamling · Answer

@Kyle Kipka First, step things back and go 1 factual step at a time.

This is an early termination of lease. You have a signed executed contract.

So this now goes to what the contractual terms for early termination designate. That does not seem to be clear in this post as you say you thought you clearly communicated it. Early termination should be clearly defined and spelled out in the lease, not a verbal communication item.

Next we would look at what the contract says for notice period on early termination.

It would be more then fair to, assuming early termination is spelled out in contract, inform tenant of how the early termination clause translates in dates and dollar amounts to this specific situation. And then offer that your going to be taking actions to market and lease the property so any success during a time of their financial requirement, you will waive that $ amount owing to them, that new tenants are covering.

For example, say it's a 1 month over-lap of those financial accountable dates. The canceling tenants were going to pay $3k, new tenant is paying $2,500, you will assess only $500 to the canceling tenants. Because that is your "damages" for that month of early termination, make sense?

But if their move-in date was 6/01, and contract says 60 days notice, and they gave you notice on 4/01, that is 60 days. So you'd not be able to get anything from them UNLESS your contract states an early termination FEE. That's a different thing.

Again, all depends on your exact early termination structure and language. Done correctly, that clause should have the required notice period, that tenant is liable for all rents up to and during that notice period AND there is an early termination FEE.

If you have an early termination fee, that stands regardless of duration of their occupancy of unit, however short it was. It's a situation just like this that such a fee exists in a well constructed lease.

The devil is in the details. Much hinges on the specific language of your early termination clause.

Nathan Gesner · Answer

1. Don't hold properties vacant for a month. That's a really bad practice. My policy is that I will hold a rental for someone for ten days, no more. If they want to rent it a month from now, they can start paying rent early. If they don't want to do that, they can wait and hope the rental will be available for them when they are ready (it never is).

2. Your primary goal is to avoid losing money. Create an agreement that ensures you lose nothing. If you market the rental and find someone to move in June 1, then you haven't lost any money. You have plenty of time to make that happen.

3. This guy has offered you a month of rent, which is sufficient. You can find a renter by June 1 so there's no loss, and you'll have an additional month of rent from the guy that canceled, so you are actually one month of rent gained and everything has worked in your favor. Accept the deal, put it in writing, and let him go. Be sure to document the agreement. You don't need a complex letter like Patti shared, but have something in writing that says exactly what you agreed to and have it signed by both parties so there's no confusion.

4. I recommend you develop policies in advance, before the problems occur. This ensures you've given it some thought and aren't reacting in the heat of the moment or a panic.

5. Consider buying "Every Landlord's Legal Guide" by NOLO. Written by attorney investors, it's full of practical advice pertaining to management of investment property, has sample forms that can be edited, and - most importantly - they tell you what your primary state laws are and where you can read them. It's updated every year and is the best $40 you'll spend as a Landlord. There is one book for 49 states and a separate book for California.

Rod Graf · Answer

I'd let them out. They've tried to meet you part way and I'd consider doing the same. If the rental market where you are is tight (and they all are), you shouldn't have trouble getting another tenant. Unless I'm in danger of losing the place, I try to put myself in my tenant's position and be kind.

Bob S. · Answer

Nope they get nothing, if they move. HOWEVER, if you want to play nice, Tell them sure I will refund when I get a new tenant without any lose to me,

Patti Robertson · Answer

Find out what your state law says for this scenario and follow that.  We have a Requestion for Mutual Termination form on my website that a tenant can submit. Essentially they have to agree to abide by all lease terms until we find a new tenant, and pay the commission we pay to an agent to find the new tenant. We require they put up 2 months rent in good faith and sign the doc before we will start advertising.  I am attaching a copy of the form we use.  Feel free to plagiarize it.  Example of a Request for Early Lease Termination Form

Anthony Cortello · Answer

I would keep full deposit & let them know if I get it rented in a timely manner to cover my costs  I'll return the deposit only, not t he month thats been paid for. Or give them 50% of the deposit back as a compromise and move on.

Ryan Schroeder · Answer

In similar situations (breaking a lease) I always inform the tenant that they are responsible for the entire lease (in this case two months) but that if I rent it in advance of that their obligation would cease.  I would not agree in advance to limiting their liability.  After all, you are already out either way due to no fault of your own.  I would submit that you need not waiver on that point.  You will never see them again and they are breaking the contract, not you.  BTW, I am assuming this is all written down somewhere such that you could prove the agreement

Sherief Elbassuoni · Answer

This is an early termination of contract. Stick to the contract.

If you wanted to play nice, let them know you may refund part of the security deposit if you got another tenant.

Kyle Kipka · Answer

I appreciate all the insights and agree that I will likely meet them in the middle as planned (they cover 1 month). As James mentioned, I could see how an argument could be made either way based on the specific written wording in my lease and the need to strengthen the verbiage for future instances but even then it would be 1 month due according to the date I was notified in this case.

Rod, I agree that I shouldn't have much trouble finding a qualified tenant at this time of year and have already started marketing it once more. I try to be reasonable as well and have made a number of concessions to tenants in the past when I could have been more strict according to the law although I do get the impression that I've considered things that would have been outright rejected by any type of corporate landlord. I suppose that's a balance we all have to figure out for ourselves if we self manage.

New tenant backing out after signing lease prior to moving in..what would you do?

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