Dana Point, CA · Member since 2014 · 17 posts · 0 votes
I'm looking for some protection against a tenant who will break a lease, especially during the winter months when it might take more than one month to find a replacement tenant. A early termination fee in the lease, where the tenant has to pay a significant fee to break that lease, seems like that might work.
But, I'm concerned about how legal such a clause would be and whether or not it would hold up in court if the tenant contested it. Just because a tenant agrees to an illegal contract does that make the contract legal or enforceable. Has anybody gone to court over the issue of an early termination fee and how did the judge rule on that matter?
Unless there's a specific statue in the law, wouldn't the landlord's duty to mitigate damages and the prohibition against double-dipping trump any such early termination fees?
I usually turn to Nolo in such matters because I find it both comprehensive and understandable at the same time. Nolo, however, doesn't mention using a early termination fee so I don't know if its silent on this matter because it doesn't believe such a clause would be legal or if there wasn't enough room to write about it.
When I googled this question, I did find this one thread where they were debating this very issue:
@Sarah Lewis No legal advise. Honestly that is the number one addendum that I would have forever. I have it in my lease and love it! We almost had to go to court last week over it and my attorney was not worried at all. You hear alot of issues where landlords say tenants will not abide by it. In my class A rentals it works well. I had a tenant that tried to leave but when she realized how much it was going to cost her she decided to stay. Other had paid and left. The clientele that stay him my homes have the ability to pay the fees and/or have the means for me to go after.
As always real estate is different in all areas and for different people. This works brilliantly for me but probably wouldn't for everyone!
If you haven't sat in the eviction courts for a week sometime it would be eye opening in your area. Most tenants do not show up and you get automatic eviction. The other ones that do they like to place the landlord and tenant in front of mediator if they both agree.
Only a small percentage of cases go before the judge.
Laws even have grey areas and what you as landlord deem right and fair may have no basis in the judges ruling. I have seen judges go both ways on multiple issues before depending on how bad of a day they were having and how they interpreted a law.
So at first issue is what you are saying is it even legal to put into a lease agreement?? If it is legal and you put it in there a small percentage might contest it but the others it might result in your desired affect not to break the lease at the worst time. Some states are tenant friendly and others landlord friendly.
The next part of even if your lease is legal and you have that clause in there it might be deemed UNENFORCABLE or considered excessive by the judge that is hearing the case.
So any researching is likely not going to give you the absolute assurance you are looking for. It's a roll of the dice which judge you get that day and the time the case I heard. Beginning of the day judges are usually chipper and have a longer attention span to hear you out on how you arrived at your amount for charges and fees. End of day they just want to get out of there.
We had a per day late fee in the lease to try to force tenants to pay up or it would get worse instead of just a 100 late fee it was 20 dollars a day each day past the 5th etc. It worked on the tenants but the few who went to court we would be awarded past rent, filing fees, and initial late charge but daily was deemed excessive and thrown out.
As I posted in your original thread, I thought Elizabeth's suggestion was interesting enough to call my lawyer about it, and the response I got was that my statutory duty to mitigate damages is going to trump any lease language.
This is not legal advice to you (it was to me) and is specific to New Hampshire in any case. But you are right to at least me concerned about the enforce-ability of such a clause, and should absolutely check with a lawyer.
Also, I just accepted an application for a tenancy that will begin December 1st. In NEW HAMPSHIRE. I really think someone is Southern California could think of better things to worry about.
I was thinking about including this my leases, but I'm not sure it would have any effect. We've had tenants that have asked to break the lease for various reasons, and some had the interest and the time to cooperate in helping find another tenant.
We had a tenant earlier this year that simply gave 3 days notice and left the state. He also left about $7K in damages, but even if that hadn't happened, what are the chances that a termination fee could have been collected? If a tenant skips town, and doesn't want to pay, the best scenario is no damage.
@Sarah Lewis No legal advise. Honestly that is the number one addendum that I would have forever. I have it in my lease and love it! We almost had to go to court last week over it and my attorney was not worried at all. You hear alot of issues where landlords say tenants will not abide by it. In my class A rentals it works well. I had a tenant that tried to leave but when she realized how much it was going to cost her she decided to stay. Other had paid and left. The clientele that stay him my homes have the ability to pay the fees and/or have the means for me to go after.
As always real estate is different in all areas and for different people. This works brilliantly for me but probably wouldn't for everyone!
No on residential leases, HUD prohibits fees that are punitive.
Commercial can be a little different to indemnify the owner for actual expenses of letting a new lease, very limited as those expenses are set aside over the entire term as part of the rents. A lease of say $6,000 a month, advertising can be contracted through a PM, fee set may be $1200 as a flat fee, 6 months in the tenant terminates, that will mean $600 was not collected. If the tenant had terminated 14 months into a 2 year lease, that contracted ad expense would have been received as contracted and the tenant wouldn't have any further liability. Contingent liabilities can be passed on arising out of early termination, but not punitive fees.
There can be special equipment required by a tenant and equipment leased, the equipment provider may require the building owner to be on the lease or consent being responsible for removal fees. Some equipment must be anchored into the floor for example, claims of attachment could arise. This is a separate contract but can be tied into the lease, in this example removal fees can be under two aspects, set based on termination period or set as an expense to place the building in it's original condition, either being a liability of the tenant.
Infill is often the responsibility of the tenant as well, on a 5 year lease an owner may accept the costs of removal over a long term but if there is an early termination those expenses might be shown or described as an early termination charge.
When a termination fee is tied to a contingent liability, a cost that is incurred due to early termination of a lease, the landlord can justify that fee as a basis for an additional amount to be paid. Residential tenants usually can't incur contingent liabilities of a landlord, but if they did, it can be a separate matter aside from the lease.
Escalating rents are another aspect that can be seen as punitive. A residential lease that has an increased rent for pets, for example. The tenant who brings in a pet 9 months into an annual lease, where the lease provides for higher rents from the date of the lease, as a retroactive charge is predatory, there was no risk incurred by the owner prior to the pet being taken in at the date of the lease and that date the pet was taken in would need to be proven by the tenant. Not a termination fee but a punitive charge none the less. :)
As @Richard C. alluded to, mitigating the "damage" will be considered necessary, so I suggest you use wording that limits the "damage" you collect to the lesser of two months rent or pro-rated per diem rent until a replacement tenant is found. Then if you have somebody actually break the lease, make sure you have documentation to prove you attempted to mitigate the "damage" by getting the place rent ready ASAP, and that you advertised for tenants in a timely manner, and that you had showings, and that your asking rent was reasonable.
@Bill Gulley , with all due respect, aren't you the one who has previously posted that you used a lease clause that required the tenant to pay a fee for not returning trash cans / carts to their proper place? Would that not be considered punitive by some? Sure sounds like that to me, as well as late charges and some other charges that are typically found in residential leases ...
Yes, I sure did. it was to pay for additional administrative and/or additional activities required which were unforeseen at the time the lease was made, the agreed rents were also a tad under market rents and fees were not cumulative adding one infraction on top of another, so even with additional charges rents were not excessive.
The basis was for the time required to address these unforeseen matters, charge was by the hour and the time spent or claimed was actual or my estimate and never excessive and was rarely used.
The lease was approved under HUD regulations by/and our City Attorney for low/moderate income tenants under an economic development program where a "funny money" loan was assumed on the property, I bought the property from the city.
A punitive fee, should have mentioned is a late charge, acceptable, justified, common and generally regulated by state law. So, yes, some punitive fees are charged, but there is a line not to cross as being indemnified for some activity or expense and using fees as an additional profit center, just sticking it to a tenant.
Good catch Steve, I see your point.
My post above was getting long so I didn't address the loss mitigation issue, that is to collect agreed rents, not an additional charge and you're absolutely right, a landlord can't just sit back and allow a property to remain empty and try to collect rents. :)
Bill S. has a current blog post on this very subject {BTW: I disdain the latest misappropriation of the term hack which seems to have become an "in" expression}.
In our home jurisdiction, as a residential landlord, I am permitted to recapture lost revenue in the event of early termination of the lease. This is the loss mitigation mentioned by @Bill Gulley above: the departing tenant remains obligated to pay rent under the terms of the lease until such time as the unit is relet or the end of the original lease term is reached. As nice as it would be to simply collect rent on an empty apartment - revenue w/o wear and tear - as a landlord, I am required to make commercial best efforts to secure a new tenant and relet the unit.
The idea of charging an early termination/discharge fee - like the bank charging IRD or three month's interest on early discharge of a mortgage note - as attractive as it might be to the landlord, does not sit well with the Rentalsman or magistrate and there is precedence for setting aside such charges.
In the world of commercial leases, the residential tenancies act does not apply and the patriarchal treatment of tenants is not present. Leases are pretty much in-line with any other business contract and reasonable early termination fees (recovery of capital improvements; cost of services with third-parties entered into on behalf of the tenant; lost revenue, etc) can be contracted.
A ETF is not punishment and I disagree with @Bill Gulley 's assertion that it is, it's a clause that allows the tenant to lock in and quantify their costs related to termination of their rental agreement with me.
Re-leasing a property is not free. It takes roughly 20 hours of my time and that doesn't include my direct expenses such as mileage for showings. I know this because I self manage. If I had a PM it would cost the equivalent of a month's rent plus vacancy. It is not free to a landlord to re-lease a residential unit. The ETF allows the tenant to lock in their costs and be done with the situation. The monkey is now on my (or my PM's) back to get it rented. If I do that quick or am able to raise rents bonus to me. If I go to the beach instead of showing the place or increase rent I'm asking but it doesn't rent, that's on me. It's a win for everyone IMO.
Now whether or not I can make this stand up in court in front of tenant loving judge is a totally different manner. I also offer the tenant the option of sub-lease to a qualified tenant (my state law requires this). Most tenants don't think that's too good of an option when I point out that when they sub-lease they are still financially responsible for the rent and damages. Makes them think twice about going to Craig's List for someone to step into their shoes. Most take my ETF.
There is no guarantee that you will win or lose in court on any one issue. Anyone that tells you otherwise does not know the court system.
I doubt I would actually sue a tenant for an ETF if that was the only thing they owed. For example say a tenant bolted and I was able to use the SD to cover my other costs I wouldn't take them to small claims court for only the ETF amount. Life's too short to deal with the brain damage of court for something court may or may not award. On the other hand, if a tenant bolted leaving behind $4K in damage I would certainly include the EFT in my claim.
If I sued and it went before a judge they might throw it out but they also might not and the also might throw something else out if the ETF was not there. If it came to negotiations with a tenant, I am more than willing to work something out that works for us all. I never want to be in front of a judge. It takes my time and is a gamble.
The bottom line is. If you don't ask you won't get it and you would be out your time and be locked into the previous rent rate.
Bill, I understand your point and justification, just as I mentioned in commercial leasing.
The bottom line, HUD does not allow punitive fees for termination, not a law but policy. I would think that any judge, if aware of such policy they would rule in line with such.
If you have justifiable expenses arising from an early termination you have deposits that are available to be indemnified. If you have damages that exceed deposits you still have the right to make your claim for expenses, that includes all justified expenses arising out of early termination. Saying it again is rather redundant.
Stating it as a fixed cost, like $500.00 is really nothing more than a gig fee, you can't even show that someone won't walk up and ask about renting when you open the door to go in a clean the place. You also can't show that you actually have to clean the place. This has happened to me more than once, a neighbor sees the move out and tells a friend and the place gets rented before it's cleaned up and, often a tenant will take the place as is saying they will clean it up.
And, that's pretty much why landlords are entitle to rents from a lease until the property is relet. The underlying reasoning is to indemnify the owner, not giving the owner some additional profit margin.
Your time may be an expense to you, it's also the requirement of being a landlord, part of the business. I'd like to hear the justification for your time being consumed being more valuable than due to an early termination than at the end of the leas term which sets off your next time consuming business duties off to the end of a new term.
That line of reasoning means you could simply push off your required management duties forever if you had tenants leaving early, no judge is going to buy your time is more valuable at one point or another or that you aren't expected to incur the risks and expenses of being in the business, those "expenses" are already in the rents agreed to.
In order to justify such fees or expenses, you rents can't be at market rates, they would need to be lower, otherwise management expenses are already considered.
I suppose if you can collect a fee such as that from a tenant if they agree, then you can gig them above what they will already be owing over the term until you let a new contract. I see it as a gig fee unless there is some real expense caused by the tenant that would not otherwise be incurred at the end of the lease.
It's not customary in residential leasing either, just about any time a residential landlord tries to find extra money to squeeze out of a tenant, that isn't customary, they will be getting on the side of predatory dealing. Anytime you try to get creative around long standing practices and acceptable expectations your unorthodox dealings can have consequences, the concept of leasing a home is pretty well cast in stone, those in the business need to accept what acceptable business practices are before getting into the business. :)
@Roy N. I apologize for the misappropriation of work "hack". Just trying to be hip.
"Hack" is kind of a mess now. One of its more common, dictionary definitions is to do something shoddily. Then we moved into the tech world use, where mostly it refers to unauthorized and/or illegal network break-ins. How did shoddy and/or illegal get to be hip? :)
"Hack" is kind of a mess now. One of its more common, dictionary definitions is to do something shoddily. Then we moved into the tech world use, where mostly it refers to unauthorized and/or illegal network break-ins. How did shoddy and/or illegal get to be hip? :)
KMP:
Actually, the use of "Hack" to represent unauthorised access to networks or systems is also a misuse of the term perpetrated by the mainstream media (the correct term for this is "crack" and those who perpetrate the break-ins are "crackers"). To those of us old-timers in the Tech world, a "hack" is a cleaver and extraordinary, but frequently inelegant, application of a technology to achieve an effective solution to a problem.
@Roy N. I apologize for the misappropriation of work "hack". Just trying to be hip.
"Hack" is kind of a mess now. One of its more common, dictionary definitions is to do something shoddily. Then we moved into the tech world use, where mostly it refers to unauthorized and/or illegal network break-ins. How did shoddy and/or illegal get to be hip? :)
KMP:
Actually, the use of "Hack" to represent unauthorised access to networks or systems is also a misuse of the term perpetrated by the mainstream media (the correct term for this is "crack" and those who perpetrate the break-ins are "crackers"). To those of us old-timers in the Tech world, a "hack" is a cleaver and extraordinary, but frequently inelegant, application of a technology to achieve an effective solution to a problem.
Extraordinary but inelegant solution is a great definition for hack. You can see why people outside of tech would want to run with that.
I would take that discussion with a grain of salt. The person who was so adamant that an ETF would not be legal was also the same person who claimed, "Non-refundable fees are not legal in CA." But, that's not true. Otherwise, we wouldn't be able to collect a non-refundable application screening fee.
Honestly that is the number one addendum that I would have forever. I have it in my lease and love it! We almost had to go to court last week over it and my attorney was not worried at all.
Could you please give me a copy of your early termination fee addendum. Since we're both California landlords and your attorney approved it, I want to see if its different from some of the other non-California early termination fee forms I've found on the internet.
And, are you offering the tenant the choice to choose between an early termination fee or mitigation of damages? For the tenant, it would seem that their best move for them would be to always choose mitigation over a early termination fee. Or, are you only offering your rental on the condition that they agree to this early termination fee?
I have had that happen. Tenant left early, paid 2 months lease breakage fee and I had the place rented again in 2 weeks. This tenant left to buy their own home so cared about their credit and agreed to pay the fee to leave early.
How clever, you did a mini extortion trick using their credit to take rents that you didn't lose and kept the money I'm sure. Amazing that you'd post that angle. Now that they don't have to rely on your credit submission as a landlord for their mortgage, they might wise up and sue you, some states allow ten times the loss of such intentional charges.
Any ethical landlords left out there or is the new game, how can I screw more money out of my tenant?
@Bill Gulley - I feel compelled to respond once again.
1) Stating that HUD does not allow termination fees as proof they are illegal is not a valid argument. HUD does not have funds to pay those fees so they disallow. They are the government and they have rules. If you participate in their program you have follow their rules. They set rent for the programs. That in no way compels landlords outside of the system to charge the same rent.
2) The idea that some judges throw out ETFs makes it no more a requirement than giving a tenant two weeks of free rent at the end of the lease to build up their moving funds is a requirement. Some judges allow non-paying tenants facing eviction an additional two weeks so they can save up money for the move.
3) Stating that my cost to turn a property is already covered in the original rent amount and I am not entitled to any compensation for my time because a tenant moves early is not accurate. My leases and property are managed so that my tenants stay and average to 2-3 years. Tenants that stay shorter than that cost me additional money. Those that stay one year are part of the average but those that bail early for whatever reason are not and cost me money. That is a real cost.
4) Simply stating that because something isn't "customary" makes it wrong or illegal, is not true. How in the world would the business ever change? It didn't used to be (150 years ago) customary to include a refrigerator with the rental. Written leases were not used years ago as well. What about application fees and credit checks? They were not available years ago either but now we wouldn't think of leases a place without taking an application and associated fee.
5) I can't see how offering a tenant a fix amount to end their obligations and to fix those costs is taking advantage of them or even punishing them.
The only time the validity of an ETF would be questioned is when I am before a small claims court judge. The small claims court judge would be the one to rule on the validity of my charges (assuming the tenant left without paying them) when I went to court to collect them, and the former tenant showed up in court to contest my claim. How many landlords have gone through this process to have judges throw out various charges in an attempt to be "fair" or to "split the baby". Sometimes it's carpet, sometimes it's paint, sometimes it's cleaning, sometimes it's damages and many times it differs between judges in the same court.
While I understand this is very clear in your mind and I doubt I'll convince you otherwise, I obviously don't see it the same way.
It doesn't make it right or wrong but I've had tenants thank me for the option to exercise it. I've also had tenant pay it and then the next year show up and rent another unit from me. It's something they understand and accept and it's present in the market place.
I'd say you're still justifying the costs you claim, however you want to bill it, I'm not seeing anything contrary, I can agree with many of your points, not so much, except;
#1, HUD guidelines are the base line as to what is acceptable, not saying there can't be variations nor did I say they were illegal. #4 is rather a silly argument but I get your point. Yes, what is customary evolves.
Charging fees needs to be justified, in residential, due to the more social aspects, such are viewed in a different light than commercial. There are also long standing opinions of what costs are accepted being in the rental business, trying to justify things differently isn't going to change that, not in my lifetime I'm sure.
Why not charge applicants for you gas to go show the unit? Needs to be a line somewhere is the point.
Evidently I rubbed your blog the wrong way, I have never seen it, wasn't the intent, but my opinions stand, I'm sure yours do too, that's perfectly fine. :)
@Bill S. - Honest question, because I don't understand this. What costs does a landlord incur trying to lease a new apartment? How much, on average, do you spend when a tenant breaks a lease?
Yes, you may have to keep utilities running while the space is empty. But otherwise, don't most landlords post an ad online (free on craigslist or on their own website), and then wait for a tenant to e-mail or come to the complex's lease office? There might be an occasional trip to show the apartment, if you're an individual landlord (and not, say, a larger company leasing a whole complex). But it's hard to believe that costs two-months' rent. I recently had a situation where a landlord required two months notice to terminate, specific fees to clean, plus two months' rent as an ETF, essentially 4 months rent for an apartment that they'll post online and simply wait for someone else to rent. This to me, feels like gouging.
In my mind, laws passed requiring landlords to mitigate their damages were not intended, in any way, to permit a situation where the tenant owes $3-$4,000+ to break a lease in the age of the Internet.
This is a very old thread and many of the people on it are not currently active
Many landlords have property managers and incur leasing fees of 100% of the first months rent to secure a new tenant. Even if they self manage, there is time and effort to rent a property other than a free craigslist ad. What is the property is 30 minutes away? Driving across town takes time.
Saying that, I do think 4 months for early termination seems excessive. My lease agreement charges 1 months rent for ET
