Learned a Valuable Lesson About 2 Year Lease Terms

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Learned a Valuable Lesson About 2 Year Lease Terms

Jim Macedon
Round Rock, TX · Member since 2017 · 86 posts · 45 votes

Well, put me in the camp of no longer accepting two year leases.  The problem, as I've learned recently, is that the lease really only binds the landlord.  The tenant can still leave whenever he wants.

One of my tenants who still has 8 months left on a 2 year lease emailed me the other day to say that she got married, she has a house under contract, and she's moving out November 30th.  "Sorry, I know this is early, but this is what is best for my family."  I responded, congratulated her on her wedding, and politely explained that unless she is the victim of domestic abuse or is a member of the armed services with official orders, she is contractually obligated to pay rent until the end of the lease.  However, I would love to work with her and if she could pay through January to give me at least some opportunity to market after the holidays, I'd waive February through June.  She has not responded, and my wife and I came to the obvious conclusion that she's probably just going to leave November 30th and there really isn't anything I can do about it.  Am I really going to hunt her down and sue her?  No.  Therefore, 2 year leases are worthless for the landlord.

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Nathan GesnerBusiness Member
Moderator
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
7y

As soon as I saw your headline, I knew it was a tenant leaving early. In my experience, tenants terminate early about 80% of the time on leases longer than 12 months. I can't explain why.

I only allow one-year leases and I include a termination clause that requires them to give 30 days notice in writing and pay a penalty for terminating early. If they meet my requirements, they walk away free-and-clear, get a good Landlord reference, etc. This is a money-maker about 90% of the time. The remaining 10% opt to take their chances and continue paying rent while looking for a replacement tenant. We almost always get a new lease before they leave or shortly thereafter, so the tenant doesn't pay much out of pocket.

The last tenant to move out and cause a loss was almost two years ago. I attribute a lot of this to proper screening and a higher-quality tenant.

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  • Jason Hirko
    Lender · San Antonio, TX · Member since 2016 · 1k+ posts · 1k+ votes
    7y

    @Jim Macedon this is kind of the case with any residential lease. A lot of landlords do sue their ex-tenants. I never bothered, but to each their own

    2Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    7y

    As soon as I saw your headline, I knew it was a tenant leaving early. In my experience, tenants terminate early about 80% of the time on leases longer than 12 months. I can't explain why.

    I only allow one-year leases and I include a termination clause that requires them to give 30 days notice in writing and pay a penalty for terminating early. If they meet my requirements, they walk away free-and-clear, get a good Landlord reference, etc. This is a money-maker about 90% of the time. The remaining 10% opt to take their chances and continue paying rent while looking for a replacement tenant. We almost always get a new lease before they leave or shortly thereafter, so the tenant doesn't pay much out of pocket.

    The last tenant to move out and cause a loss was almost two years ago. I attribute a lot of this to proper screening and a higher-quality tenant.

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  • John LaBanca
    Investor · Atlanta, GA · Member since 2018 · 59 posts · 78 votes
    7y

    I'm surprised her contract doesn't include a clause that allows the tenant to cancel with some amount of notice and a cancelation fee. Maybe that varies by region. My contracts all include a 60 day notice + two months rent cancellation policy. The one time somebody moved out early (and they used the exact same "what is best for my family" line), in order to appear accommodating I told the tenant "the lease requires a 60 day notice plus two months rent. I can waive the 60 days notice, but unfortunately I can't waive the two months rent because it's a real cost for me. I need to pay the realtor one month commission when he rents it out, and it usually takes a month to rent."  I also usually explain that cancelling the contract early doesn't affect their security deposit, and that will still be based on the condition of the property when they leave.

    This is also a good conversation to have over the phone so you can genuinely congratulate her on her wedding, ask her a few questions and tell her that you're happy for her.  Then you can broach the subject of cancelling the contract in a nice way, make it seem like you're working with her to find an acceptable solution. It's a lot harder for her to ignore you when you're on the phone talking kindly to her.

    3Reply
  • Ned J.Pro Member
    Investor · Manteca, CA · Member since 2017 · 1k+ posts · 2k+ votes
    7y

    Why I prefer M2M...long leases protect tenants....not landlords.

    Having stiff penalties for early termination are great ..... IF you can get the $$ from those penalties....and that depends on the tenant and the deposit vs damage/charges after move out etc etc. So you have to have a tenant you can actually get that $$ from for that plan to work..... and that can be easier said than done....

    In your case I would use the lease as leverage to start marketing the property ASAP....... start showing before they move out etc.....get filled as soon as you can so the financial impact to the moving out tenant is as small as you can make it and benefits her to work with you to get it rented ASAP

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  • Stephanie P.Pro Member
    Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
    7y
    Originally posted by @Ned J.:

    Why I prefer M2M...long leases protect tenants....not landlords.

    Having stiff penalties for early termination are great ..... IF you can get the $$ from those penalties....and that depends on the tenant and the deposit vs damage/charges after move out etc etc. So you have to have a tenant you can actually get that $$ from for that plan to work..... and that can be easier said than done....

    In your case I would use the lease as leverage to start marketing the property ASAP....... start showing before they move out etc.....get filled as soon as you can so the financial impact to the moving out tenant is as small as you can make it and benefits her to work with you to get it rented ASAP

    I wish I could vote multiple times for this post.  We've had month to month leases for the last 10 years and never (and I rarely speak in absolutes) had a problem re renting when the tenants leave.

    2Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    7y

    Why would anyone renting out their property want more than 12 months on a lease . Insanity 

    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    7y

    I also only use M2M for past 10 years and have never had a issue. They still require 30 days notice and since it is very rare for landlords to collect a penalty for breaking a lease I see absolutely no advantage for any landlord having a term lease. Tenants will leave when ever they dam well please, leases mean nothing to them.

    Aside from the benefit of being able to easily non renew a M2M I have also found that tenants are very much more open about their plans when in M2M. They know they are not breaking a lease and will always inform me well in advance of moving. I very rarely have vacancies as a result unless I choose to reno. They obviously never do a midnight run.

    It is beyond my comprehension why landlords believe a term lease provides any security. I also actually believe that the approach of the end of a lease prompts tenants to think about moving rather than getting tied down to another term. Greener grass.

    Good tenants will stay longer on M2M, bad tennats get the boot.

    2Reply
  • Ned J.Pro Member
    Investor · Manteca, CA · Member since 2017 · 1k+ posts · 2k+ votes
    7y

    Having a piece of paper that says "you owe me $$" and actually getting that $$ is a whole different ball game....

    0Reply
  • Anthony Wick
    Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
    7y

    Those that insist the M2M lease is the only way to go, I need to know where your properties are located. In some areas of the country, there isn't a lot of movement in the winter. To state M2M always works best is ignorant and short sighted to your own situation. 1 year works, and is the norm, here. Oh, and if the tenant decides to leave early, in December? Then state law requires landlord to attempt to mitigate their damages by renting out unit asap. You know, like you do if your M2M tenant gives notice. The only difference is, my tenant is legally responsible for the days the unit is not rented out. And, why would you NOT take the tenant to court if they do not pay? OP said there isn't anything he can do about it, and why would he "hunt" her down? Well, if your employer refused to pay you your salary of $1,000 or more, will you just shrug your shoulders and keep on working? 

    BTW: 2 year leases are not worthless. A landlord that doesn't feel the need to make the tenant honor the lease is the problem. I mostly do 1 year leases, but I have a unit with a 2 year lease. The tenants had already been there for 18 months and wanted a longer commitment. And, if their situation changes and they need to move? Well, I'll let them know that the lease states they are responsible for rent until I get a new tenant. And, if need be, there will be small claims court and credit dings and not a good reference if they need it. 

    3Reply
  • Ray Harrell
    Investor · Chicago, IL · Member since 2016 · 1k+ posts · 930 votes
    7y

    Month to month is the way to go. They are just easier to deal with. Even a year lease doesn't bind anyone to your property.

    0Reply
  • Ned J.Pro Member
    Investor · Manteca, CA · Member since 2017 · 1k+ posts · 2k+ votes
    7y

    @Anthony Wick...my units are in CA, so weather is not a big factor for us in turnover etc.

    My question for you....have you ever had a tenant early terminate a lease and pay the $$ owed for the time it was vacant that they were legally responsible for? Ever gone to court....won the judgment.....and then actually saw the $$ and had a net profit after all the time effort and cost to go to court? Some have...no doubt...but in  my experience its a small % of success.

    If you have, then fantastic.....congrats. If that work for you, then more power to you.

    As I stated before....having a piece of paper that says they owe you $$ and actually seeing that $$ is a different ball game....in a substantial % of cases, that doesn't happen, so many feel its a huge false sense of security that just isn't reality in many cases. Maybe it is for you, which is great.....

    If I had strong proof that I will actually be able to recover that $$, I would unquestionably do long term lease....but I don't...and the upside for me is I can quickly terminate a lease anytime I feel the need.....I have the control....not the tenant.

    Just a different opinion.... to each his own

    0Reply
  • Anthony Wick
    Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
    7y

    @Ned J.  Well, it's not really just a "difference of opinion". It's a difference of geography. I very well may do a MTM if my property was in CA. I lived in Cali for 8 years. A completely different situation than Iowa, and I don't just mean weather. Californians, when I was there, tended to move a lot (renters). In Iowa, they tend to stay put longer, and they certainly tend to stay put in the middle of winter. To answer your question, Yes, I have had tenants break their lease. Twice. And, one of my tenants just told me he may be getting a great job offer in Texas and would need to break the lease. I've never lost any money. I've worked hard to re-rent right away, just like Iowa law states I have to. No, I didn't get extra money for my extra work, but I didn't lose any money either. Then again, if it was a MTM lease, it wouldn't be extra work, it would just be work, when the tenant gave notice. 

    As you may be able to see, I'm not a "my way works and your way doesn't" kind of person. Hence I said, 2 year leases are not "worthless". I'm sure some are. So are some tenants. It's the nature of the business. 

    1Reply
  • Ned J.Pro Member
    Investor · Manteca, CA · Member since 2017 · 1k+ posts · 2k+ votes
    7y

    @Anthony Wick....yeah I've never had units in weather sensitive areas, so I'll defer to those with the experience of dealing with that part..... so if no one moves in winter, then in general turnover should be very small in those months whether you have a long lease or M2M I guess it protects for rare occurrence when people do move during those months and you struggle to find someone to move in....totally understand wanting to do that....I get it...... but if you cant rent it back out quickly and will never see the $$ from the previous tenant, then its a false sense of security....sounds great IF you can get the $$ from the previous tenant....but that's a huge IF to me.....

    If you have a longer lease and start working hard to fill it as soon as you get notice that they will terminate early.....and usually get it rented quickly...and the old tenant isn't getting stuck with paying for vacancy in most cases....then its really not any different than having a M2M. The only difference is that with a long lease that if YOU want to terminate it early, YOU have a much harder time of doing it.

    To me the bottom line is the tenants will move when they want/need to....and a lease isn't going to stop them....and I will rarely see the $$ for the "penalties" for early termination, so why give up the power for ME to terminate the lease early if I choose to do so....

    0Reply
  • Anthony Wick
    Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
    7y

    To put it another way.....

    IF you have a 1 year lease and the tenant leaves early, you MIGHT get the rent payment from them if you cannot rent it out right away (or you keep the damage deposit for lost rent). 

    IF you have a MTM lease and the tenant moves out, you MIGHT get it rented out right away, but if you do not, there is a 100% chance nobody will be paying rent for the vacant unit. 

    We all manage our units the best way that we know how. And depending on areas of the country, it is different. Around here, if somebody is on a MTM lease, it usually means they had a 1 year lease that both parties let roll into MTM after that 1 year. I also feel that a lease does indeed keep tenants from moving early. If they have a job offer somewhere, or they lose their job, perhaps not. But tenants aren't just moving on a whim if they are locked into a lease, most of the time. Most people are responsible. Every time I place a tenant, I'm assuming they are a good tenant, because I've screened them extensively. 

    1Reply
  • Hai Loc
    Specialist · Toronto, Ontario · Member since 2012 · 2k+ posts · 891 votes
    7y
    I just leased my commercial garage for 2 years. My tenant wanted 2 years. No way he can run away early. Commercial leases are much more bullet proof than residential.
    0Reply
  • Bart H.
    Dallas, TX · Member since 2016 · 1k+ posts · 745 votes
    7y
    Originally posted by @Stephanie P.:
    Originally posted by @Ned J.:

    Why I prefer M2M...long leases protect tenants....not landlords.

    Having stiff penalties for early termination are great ..... IF you can get the $$ from those penalties....and that depends on the tenant and the deposit vs damage/charges after move out etc etc. So you have to have a tenant you can actually get that $$ from for that plan to work..... and that can be easier said than done....

    In your case I would use the lease as leverage to start marketing the property ASAP....... start showing before they move out etc.....get filled as soon as you can so the financial impact to the moving out tenant is as small as you can make it and benefits her to work with you to get it rented ASAP

    I wish I could vote multiple times for this post.  We've had month to month leases for the last 10 years and never (and I rarely speak in absolutes) had a problem re renting when the tenants leave.

    We prefer leases that terminate in the spring, anecdotally its feels like we get leased faster (usually no vacancy, knock on wood), and typically our rents are 10-15% higher than when we try to lease late summer early fall or later.

     We will take leases a couple months longer or shorter to get our leases to end in the spring. 

    2Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    7y

    Yes, you learned the truth that Tenants are incapable of predicting the future. They offer to sign a longer lease to get better terms from the Landlord or to get their application approved over others. Don't buy into it.

    In my experience, one year leases are the best option. I have a lease termination policy that give them two options:

    1. Give 30 days notice to break lease early, pay a termination fee, and let us show the unit to potential renters. In exchange, we release them from liability and they can get a good Landlord reference and their deposit back.

    2. Maintain responsibility for rent and utilities until a new tenant is placed. If we find a new tenant a week after they leave, they only pay one week of rent and utilities and can get their deposit back. If we don't find a tenant for two months, they are responsible for those two months.

    I have dozens of tenants break their lease every year. I make extra money about 90% of the time because the tenants pay the termination fee (1-2 months rent) and I find a replacement tenant quickly. About 10% of the time the tenant leaves with short notice but the deposit covers the lost rent. I only lose money about 1% of the time.

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  • Jim Cummings
    Residential Real Estate Broker · College Station, TX · Member since 2013 · 1k+ posts · 969 votes
    7y

    As most experienced landlord know, tenants remaining for the full period of a 2-Year Lease is rare. And if you agree to the reduced rate you are out-of-luck trying to recoup any of the reduced rent you lost rent when they inevitably break the lease.  

    Try this idea next time someone wants to negotiate a lower price for a 2-year lease. Tell them Year 1 will be at the FULL Lease Asking Price, and in year 2 you will reduce the rent by $XX dollars as an incentive for them to stay. With this technique, you're OK if they inevitably leave at end of year 1 or earlier, and you avoid the costs of make ready, etc. if they stay. 

    1Reply
  • Bart H.
    Dallas, TX · Member since 2016 · 1k+ posts · 745 votes
    7y
    Originally posted by @Jim Cummings:

    As most experienced landlord know, tenants remaining for the full period of a 2-Year Lease is rare. And if you agree to the reduced rate you are out-of-luck trying to recoup any of the reduced rent you lost rent when they inevitably break the lease.  

    Try this idea next time someone wants to negotiate a lower price for a 2-year lease. Tell them Year 1 will be at the FULL Lease Asking Price, and in year 2 you will reduce the rent by $XX dollars as an incentive for them to stay. With this technique, you're OK if they inevitably leave at end of year 1 or earlier, and you avoid the costs of make ready, etc. if they stay. 

     What we always do IF we are willing to agree to a discount, we put the full discount into the last month.

    so lets say we have a year lease and are asking 2000/month.  If the tenant wants (and we agree) a $100/M discount.  We make it contingent on completing the lease, and they get the full discount in month 12.

    So instead of 12x$1900, we do 11x2,000, and 1 month at $800 contingent on completing the lease with no late payments.  That way if the tenant bolts early we dont have the additional loss of having given discount to a tenant who walks.

    1Reply
  • Jim Cummings
    Residential Real Estate Broker · College Station, TX · Member since 2013 · 1k+ posts · 969 votes
    7y

    @Bart H.. Maybe even put half the discount at Month 18 and the remainder at month 24.

    1Reply
  • Bart H.
    Dallas, TX · Member since 2016 · 1k+ posts · 745 votes
    7y
    Originally posted by @Jim Cummings:

    @Bart H.. Maybe even put half the discount at Month 18 and the remainder at month 24.

    Absolutely, but in our case we go 12 months plus or minus to get us to the spring.   

    And we like to put in a price increase, even if it is a small one at least every 12 months. 

    1Reply
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