Advice for a tenant breaking a two year lease

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Advice for a tenant breaking a two year lease

Marshall White
Rental Property Investor · Indianapolis, IN · Member since 2019 · 30 posts · 27 votes

Hey everyone! 

I'm new to BP and wanted to get opinions from other landlords or PM's that have dealt with this type of situation. 

I have a tenant who signed a 2 year lease in March 2019. They just informed me that they need to move back to another city (an hour away) for work purposes and are strongly considering breaking their lease. The lease does not have an early termination clause and the remaining amount of the lease owed is over $50K. I would like to work out an alternative option that works for both the tenant and myself but I am not sure of the best course of action to take. 

My partner and I are considering having them pay the rent until a new tenant is placed and keeping their security deposit. We are always very flexible with our tenants and understanding of issues that may arise in their lives. In some cases, we are more lenient than we probably should be so we want to ensure we are providing an option that is fair to us as well as them.  

We are speaking with our real estate attorney tomorrow to get the legal perspective for this. 

I'd love to hear about other people's experiences on similar situations or any suggested alternatives on how to resolve this. Any insight is greatly appreciated! Thank you!

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

Many tenant will offer to sign a two-year lease just to beat out other applicants, knowing full well they won't stay the full term. I stopped accepting leases beyond one year because I discovered the majority of tenants break them.

There is nothing "unethical" or "mean" about charging a penalty. The tenants willingly entered into a two-year lease and are legally obligated to fulfill it. Letting them out early is your nice but you should be compensated for your loss. 

Here's my process:

Tenant requests to break lease early. If they have more than six months remaining on their lease, I tell them they can pay me an early termination fee equal to two months rent, stay responsible for rent and utilities for a full 30 days (whether they occupy or not), and allow me to market the unit and show it to prospective renters. If they have less than six months, they pay a penalty of one month. The fee is due when they give 30 days notice, not when they move out, and it cannot be taken from the deposit. 

If they refuse to pay the penalty, I hold them to the original terms of the agreement. Let's say they refuse to pay the penalty and move out June 1st. I start marketing the property as soon as I verify they are out. I do my move-out inspection, clean and repair, and then wait. If I find a tenant in 15 days, I use the deposit to cover the turnover costs and the unpaid rent up until the new tenant takes over. If it takes me three months to find a new tenant, I hold the original tenant responsible for three months of rent.

In my experience, about 80% of my tenants choose to pay the fee because they don't want the risk of additional costs and they want a good Landlord reference.

In my experience, almost 100% of those units are rented quickly and the penalty fee is extra income.

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  • Hubert Kim
    Property Manager · Los Angeles, CA · Member since 2017 · 216 posts · 110 votes
    7y

    If the tenant is willing to put faith in your actively seeking a new replacement tenant and continues to pay rent, this might be the best solution. Essentially, once a new tenant is qualified, a new lease is signed, any repairs are made, and the new tenant moves in, only then would you terminate the existing lease (and return the security deposit after any deductions as appropriate) and stop collecting rent. If appropriate, you may be able to collect a fee if the tenant agrees. However, this may not be so simple because if you are unable to get a new tenant right away, your existing tenant may not be happy. And if the tenant stops paying rent, you may have to go through the eviction process (although it may be somewhat less complex with an unoccupied unit).

    Another viable option may be to negotiate a settlement amount for breaking the lease. This theoretically could be any amount from $0 to the full $50k+ left on the lease. Depending on your knowledge of your property and area, you may be confident that you will be able to do repairs and find a new tenant in, say, 2 months. Then perhaps ask for 3 months rent to terminate the lease.

    Unfortunately, either of the above involve extra work and, as always, things may not go as expected. I would be interested in reading any other good options from anyone else.

    Good luck and let us know how it turns out.

    8Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    7y

    @Marshall White  How much notice are they giving you?  30 days?  If so, tell them that they need to make the unit available for showings (with notice from you ahead of time) and you will try to minimize the disruption. If you are able to find a new tenant, to move in as soon as they move out, then they won't have to continue paying rent after that day.  However, until you find a new tenant, they need to keep paying the rent.

    3Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    7y

    Many tenant will offer to sign a two-year lease just to beat out other applicants, knowing full well they won't stay the full term. I stopped accepting leases beyond one year because I discovered the majority of tenants break them.

    There is nothing "unethical" or "mean" about charging a penalty. The tenants willingly entered into a two-year lease and are legally obligated to fulfill it. Letting them out early is your nice but you should be compensated for your loss. 

    Here's my process:

    Tenant requests to break lease early. If they have more than six months remaining on their lease, I tell them they can pay me an early termination fee equal to two months rent, stay responsible for rent and utilities for a full 30 days (whether they occupy or not), and allow me to market the unit and show it to prospective renters. If they have less than six months, they pay a penalty of one month. The fee is due when they give 30 days notice, not when they move out, and it cannot be taken from the deposit. 

    If they refuse to pay the penalty, I hold them to the original terms of the agreement. Let's say they refuse to pay the penalty and move out June 1st. I start marketing the property as soon as I verify they are out. I do my move-out inspection, clean and repair, and then wait. If I find a tenant in 15 days, I use the deposit to cover the turnover costs and the unpaid rent up until the new tenant takes over. If it takes me three months to find a new tenant, I hold the original tenant responsible for three months of rent.

    In my experience, about 80% of my tenants choose to pay the fee because they don't want the risk of additional costs and they want a good Landlord reference.

    In my experience, almost 100% of those units are rented quickly and the penalty fee is extra income.

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  • Marshall White
    OP
    Rental Property Investor · Indianapolis, IN · Member since 2019 · 30 posts · 27 votes
    7y

    @Hubert Kim

    Great point about charging a termination fee. The property was just remodeled and I don't foresee searching for a new tenant taking very long. However, If it does take long like in the example you gave they may not want to pay a fee after carrying the cost of rent for all of that time.

    Thank you for the information and I will definitely provide an update when we reach a resolution!

    1Reply
  • Marshall White
    OP
    Rental Property Investor · Indianapolis, IN · Member since 2019 · 30 posts · 27 votes
    7y

    @Theresa Harris @Nathan G.

    They want to leave sooner than later but they are flexible. I will definitely make sure they have the unit ready before any showings are conducted.

    Nathan, I never thought about tenants offering a longer contract to beat out other applicants but it makes perfect sense and this property had so many leads and applicants in a small amount of time.

    Thank you for sharing your process and I think what you offer your tenants sounds really fair to both parties. Since I'm a newer rental investor I do sometimes feel like it's "wrong" or "mean" to charge a fee but the truth is this is a business and they signed a contract.

    Thank you so much for the information you provided!

    3Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    7y

    You cannot arbitrarily keep their deposit. Security deposits BELONG to the tenant and are refundable if they don't do any damage. Find a new tenant and let them go. 

    1Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    7y
    Originally posted by @Marshall White:

    @Theresa Harris @Nathan G.

    Since I'm a newer rental investor I do sometimes feel like it's "wrong" or "mean" to charge a fee but the truth is this is a business and they signed a contract.

    It took me a while to figure this out. Essentially, my policy is that I am going to charge the tenant and or landlord anytime they require me to deviate from the contract or their actions result in additional work. Some examples:

    - Adding/removing a tenant from the lease

    - Adding a pet

    - Early termination

    - Tenant locked out

    - Landlord requests additional inspections

    My time isn't free. If they cause me additional work, they will pay for my time. It's not mean; it's business.

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  • Marshall White
    OP
    Rental Property Investor · Indianapolis, IN · Member since 2019 · 30 posts · 27 votes
    7y

    @John Thedford Thanks for the feedback! I definitely wouldn't keep a tenants deposit arbitrarily, I was considering keeping the deposit amount as a termination fee. After briefly speaking with a RE attorney about the situation I believe it is better to word it as a termination fee equal to one (or more) months rent.

    0Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    7y
    Originally posted by @Marshall White:

    @John Thedford Thanks for the feedback! I definitely wouldn't keep a tenants deposit arbitrarily, I was considering keeping the deposit amount as a termination fee. After briefly speaking with a RE attorney about the situation I believe it is better to word it as a termination fee equal to one (or more) months rent.

     I believe that is a mistake and will cause you problems down the road.

    0Reply
  • Tracy Scanlon
    Rental Property Investor · Chicago · Member since 2019 · 17 posts · 19 votes
    7y

    Many states and municipalities have different laws covering security deposits.  You've already checked with your RE lawyer, you should be in good hands.

    I charge a 3 month buyout if the tenant just wants to terminate the lease.  If they find a subletter, that's free, but they do the hard work of finding a qualified tenant.

    Good luck!

    3Reply
  • Rob Malda
    Las Vegas, NV · Member since 2017 · 43 posts · 33 votes
    7y

    State laws differ but in my state no judge is going to award more than 2 months rent as damages for breaking a lease. If you can get 2 months from the tenant voluntarily you should take it, it's risk free. Asking for more in damages is unlikely to get you anywhere, the tenant just won't pay and a court will not give you more.

    1Reply
  • Marshall White
    OP
    Rental Property Investor · Indianapolis, IN · Member since 2019 · 30 posts · 27 votes
    7y
    Originally posted by @John Thedford:

    Do you mind sharing your process or what you believe is the correct process for a tenant breaking their lease this early?

    0Reply
  • Marshall White
    OP
    Rental Property Investor · Indianapolis, IN · Member since 2019 · 30 posts · 27 votes
    7y
    Originally posted by @Nathan Gesner:

    - Adding/removing a tenant from the lease

    - Adding a pet

    - Early termination

    - Tenant locked out

    - Landlord requests additional inspections

    My time isn't free. If they cause me additional work, they will pay for my time. It's not mean; it's business.

    Very well said and I couldn't agree more. Thank you for the feedback!

    0Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    7y
    Originally posted by @Marshall White:
    Originally posted by @John Thedford:

    Do you mind sharing your process or what you believe is the correct process for a tenant breaking their lease this early?

    I have a cancellation Clause which the tenant signs. If your lease does not have that you cannot arbitrarily choose to enforce one. See what your attorney advises.

    0Reply
  • Marshall White
    OP
    Rental Property Investor · Indianapolis, IN · Member since 2019 · 30 posts · 27 votes
    7y
    Originally posted by @Tracy Scanlon:

    Many states and municipalities have different laws covering security deposits.  You've already checked with your RE lawyer, you should be in good hands.

    I charge a 3 month buyout if the tenant just wants to terminate the lease.  If they find a subletter, that's free, but they do the hard work of finding a qualified tenant.

    Good luck!

     I'm curious about the subletting part of this, do you feel like they actually search for quality tenants to take over or do they just look for anyone that can pay the rent since they need to move? 

    0Reply
  • Tracy Scanlon
    Rental Property Investor · Chicago · Member since 2019 · 17 posts · 19 votes
    7y

    The subletter would still have to pass my screening criteria (credit score, proof of income, landlord references, background checks), so it is really no different than me finding someone from an ad.  Everyone in my buildings goes through the same process.  The hardest part is finding someone who wants the apartment, giving tours, etc.  If the tenant does that, I'm fine with processing the sublet's application.  If they meet my criteria, they're in.

    2Reply
  • Mary Jay
    Glendale, AZ · Member since 2017 · 1k+ posts · 236 votes
    7y
    Originally posted by @Nathan Gesner:
    Originally posted by @Marshall White:

    @Theresa Harris @Nathan G.

    Since I'm a newer rental investor I do sometimes feel like it's "wrong" or "mean" to charge a fee but the truth is this is a business and they signed a contract.

    It took me a while to figure this out. Essentially, my policy is that I am going to charge the tenant and or landlord anytime they require me to deviate from the contract or their actions result in additional work. Some examples:

    - Adding/removing a tenant from the lease

    - Adding a pet

    - Early termination

    - Tenant locked out

    - Landlord requests additional inspections

    My time isn't free. If they cause me additional work, they will pay for my time. It's not mean; it's business.

     How do u go about adding pets?

    The lease in my rental said no pets but the tenant moved out and they did have a lot of pet hair and pet pee  on a carpet. How do u prove that in court ? 

    0Reply
  • Marshall White
    OP
    Rental Property Investor · Indianapolis, IN · Member since 2019 · 30 posts · 27 votes
    7y
    Originally posted by @Rob Malda:

    State laws differ but in my state no judge is going to award more than 2 months rent as damages for breaking a lease. If you can get 2 months from the tenant voluntarily you should take it, it's risk free. Asking for more in damages is unlikely to get you anywhere, the tenant just won't pay and a court will not give you more.

     That makes sense and thanks for your insight!

    0Reply
  • Jennifer Serviss
    Rental Property Investor · Indianapolis, IN · Member since 2017 · 23 posts · 24 votes
    7y

    @Tracy Scanlon

    Great idea Tracy! It works out to be a win-win. The tenant saves money by having someone else take over the lease and you've found another qualified tenant with minimal effort!

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

    @Marshall White I don't allow subletting or subleasing. If they want to leave and want to find a replacement tenant, they are welcome to do that but:

    1. The new tenant must pass my screening first

    2. The new tenant signs a new lease. They don't just take over the existing lease; and

    3. I charge them for it. Again, moving a tenant out early takes work. Moving a new tenant in before the old lease is up takes work. They must pay for making me deviate from the agreement.

    @Mary Jay you document with pictures, have the place professionally cleaned (don't do it yourself) and then send their refund, if any. If they really had a pet in there, they know they're guilty and they won't bother trying to take you to court.

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  • Tracy Scanlon
    Rental Property Investor · Chicago · Member since 2019 · 17 posts · 19 votes
    7y

    You just have to watch out for local laws.  In my city you must allow subletting and you are not allowed to charge any additional fees.   

    0Reply
  • Marshall White
    OP
    Rental Property Investor · Indianapolis, IN · Member since 2019 · 30 posts · 27 votes
    7y
    Originally posted by @Mary Jay:

    The lease in my rental said no pets but the tenant moved out and they did have a lot of pet hair and pet pee  on a carpet. How do u prove that in court ? 

     When @Nathan G. listed adding pets to the lease I believe he was just referencing that as an adjustment from the original signed lease that would require a fee. 

    As far as proving this in court I agree with him that having proper documentation like pictures and receipts from a third party cleaning company would suffice. Pet hair, pet pee etc. is pretty distinguishable in my opinion and the company you have clean the home will be able to document that.   

    0Reply
  • John Teachout
    Rental Property Investor · Concord, GA · Member since 2015 · 3k+ posts · 3k+ votes
    7y

    A lease should contain a lease breaking clause. Despite what it is, it should at least be addressed. 2 months rent is pretty common with proper notices.

    Some states require you to make every effort to re-lease the property and some don't. ie, you could technically have the tenant pay the whole lease period even if you don't fill it.

    Regarding pets, we used to just not allow pets but based on our experience, almost every house that the owners had no pets somehow winds up with them. So we have an "animal policy". I currently charge a $200 non refundable "fee" and then an additional $20 per month rent per animal. (max 2)  We don't allow cats no matter what as I'm allergic to them. The ESA thing is just a scam for most people to get animals into properties that either wouldn't allow them or avoid fees. We of course would allow an ESA but they MUST provide documentation. (which can be had off the internet in just a few minutes, grrrr)

    2Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    7y

     If there was no pee before they moved in, then it happened while they were there.  Take photos before move in and after they move it.

    0Reply
  • Marshall White
    OP
    Rental Property Investor · Indianapolis, IN · Member since 2019 · 30 posts · 27 votes
    7y

    @Tracy Scanlon

    I would definitely check local laws before changing anything in my business. Also, anytime I hear new techniques online "I trust but verify" before adapting anything new.

    2Reply
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