How to Keep Both You and Your Tenant Happy When They Want to Break the Lease

by | BiggerPockets.com

After all that work marketing your property and screening your tenants, you’ve finally found the perfect renter for the year-long lease on your investment. But suddenly you discover your renter wants to cut out early and leave you with a vacant property months before the lease is supposed to end.

Despite the renter’s best intentions to give you notice about their plans to move out, you know as an professional investor that your tenant can’t just up and leave. The tenant signed a contract; he or she is obligated to pay you rent through the entirety of the lease term.  

When you encounter a renter who wants to break their lease, you have a couple of options. You can:

  1. Say no. This can result in a disgruntled tenant who becomes increasingly difficult to manage. This is also subject to your state’s laws regarding breaking the lease.*
  2. Say yes, with the consequence of a lease breaking fee, which was hopefully already mentioned in the original lease.

Both of these scenarios result in a less than ideal outcome. Either your tenant is frustrated they can’t move out or you are left with a vacant property.

Related: 6 Reasons Good Tenants Don’t Renew Their Leases

But is there a way for you both to be happy? Can your tenant can move out but the property remain occupied with rent payments still coming in on time, with minimal effort on your end?  

The answer is secret option number three: the lease assignment.

Regardless of the policy you choose, make sure to include it in your lease agreement. Discuss the policy with your tenant during the lease signing process.

lease-signing

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Tenant Lease Assignment

When a tenant transfers the rental lease and rental obligation to another tenant, the act of transfer is referred to as an assignment. The old tenant will no longer be responsible for paying rent as the new tenant completely takes over the terms of the rental lease.

A lease assignment should result in zero vacancy and no turnover time because you do not have go through the standard move-out procedure one would at the end of a traditional lease.

Most residential lease agreements do not automatically include lease assignment language. But including details on a lease assignment gives you an easy process to follow for when you encounter a tenant that wants to break their lease early.

How Do Lease Assignments Work?

The old tenant will be responsible for marketing the property, interviewing tenants, and presenting them to you to complete the rental application and tenant screening process.

Most state laws require that you be reasonable when accepting a new tenant for a lease assignment. Reasonable means you have to work with your old tenant to try and find a qualified tenant. You can’t make the process harder on them by delaying your tenant screening process.  

You do not, however, have to do disregard your tenant screening qualifications. Remember to run a credit, criminal, and eviction check on all your future renters, even lease assignment tenants. And always remember to follow the Federal Fair Housing Act.

Lease Assignment vs. Sublease

In a lease assignment, your old tenant transfers all the lease obligations and contract to a new tenant. Once complete, you will not interact with the old tenant.

In a sublet, your old tenant is still responsible for sticking to the terms of the original lease. They will collect rent from the subletting tenant and pay you, the landlord. If the new tenant does not pay rent, the old tenant will be responsible for paying the rent.

Related: 38 Addendums Every Landlord Needs for a Battle-Ready Lease

Regardless of sublet or lease assignment, your renter will need to get your approval to move forward with the process, as outlined in the lease agreement.

How is the Security Deposit Handled During a Lease Assignment?

The easiest way for a landlord to handle the security deposit during a lease assignment is to let the tenants deal with it. In most cases, the new tenant will pay the old tenant the security deposit directly. This goes hand and hand with the lease transfer part of it, the old tenant “transfers his security deposit” to the  new tenant.

Check out this language for a Assignment of Lease provided by UC Berkeley: “7. Assignment of Security Deposit. Tenant assigns all of his/her interest in the security deposit to Assignee, and will have no right to request any portion of the security deposit from Landlord.  Assignee has reimbursed Tenant for his/her share of the security deposit.”

Make sure security deposit transfers for lease assignments are allowed in your state before including this language on in your official rental documents.

master-lease-option

Lease Assignments During Property Sale

Lease assignments are not solely encountered on the tenant end. If you ever sell or purchase a renter-occupied investment property, you might need to have a lease assignment between owners.

An Assignment of Lease is not always required but can be a good idea for the protection of the new owner to receive full rents from the investment property.

What if a Renter Legally Breaks a Lease?

*There are some cases in which you have to allow your tenant to break a lease agreement without consequence. This can include active military duty, as protected under the Servicemembers Civil Relief Act, and victims of sexual assault or stalking. Check your state and local landlord-tenant housing laws to learn more about your rights and obligations around lease breaking and lease assignment policies.

Final Thoughts

By creating a lease assignment policy and including it in your lease agreement, you establish a system for your current tenant’s to transfer their lease agreement to another approved renter, with zero vacancy and minimal marketing effort on your end.

Do you use lease assignments? Why or why not?

Comment below!

About Author

Nathan Miller

Aside from being a landlord and real estate investor himself, Nathan founded Rentec Direct, a software company that serves the rental industry. Today he works with over 13,000 landlords and property managers by providing them automation software and education to effectively manage their rentals.

14 Comments

    • Michael Temple

      Steve,

      Why don’t you like the lease breaking fee idea? I have this on my leases now and wished I had it in there before. I had someone on a 2-year lease that wanted to break it 6 months early. I agreed simply to avoid the disgruntled tenant scenario that was mentioned.

      However, a fee of a couple of months would have been nice. I was still able to flip it quickly without losing any rent, but the fee would have been nice to compensate me for the all the cleaning I had to do early.

    • Nathan Miller

      Two months seems like a nice cushion to get the property re-rented in a lease break situation. I am not sure if tenants in my market would be able to afford it though, but a month’s rent to break the lease would probably be doable. Then again, I live in Oregon, with pro-renter Portland making policies that require a landlord to pay moving fees for no cause evictions, and it’s caused renters across the state to push back against standard landlord processes. Have you had any push back from tenants about the 2-months rent price point for breaking the lease?

  1. JL Hut

    I use a process like this and never have down time. However, I do not let tenants screen or advertise the property. You could have legal problems depending on how your property is advertised by an uninformed tenant. Also, the tenant will soon get mad at you when they find out 80% of the people they send you don’t qualify or meet your screening requirements. Promote and screen tenants yourself. My lease says no subleasing, and I enforce it. My tenants are responsible for all utilities and rent until a new qualified tenant signs a lease and pays the rent , deposit and puts the utilities in their name. Always send your tenant a letter informing them of their obligations as soon as you hear they may be moving.

    • Nathan Miller

      I really like this policy you outline. You make a good point that the current tenant would get frustrated if you keep denying unqualified applicants they send your way. It sounds like a good way to save some overhead to build the marketing and screening into the lease assignment process for yourself.

  2. John C.

    Interesting alternative to the lease break fee – thank you for sharing! Have you considered including a lower fee for the lease assignment? Even if vacancy is eliminated there is still management work that is generated as a result of the contract not being honored.

  3. Domenick T.

    I like the idea of a lease break clause but I like the flexibility of being able to choose the termination date more. I avoid December – March vacancies at all costs so I’d rather negotiate an end date as needed. This way the tenant isn’t held to the full term and I’m not dealing with a winter vacancy. It’s worked well for me so far.

    Thanks for the great article.

      • Domenick T.

        My leases are silent as to early termination. When a tenant wants to terminate early without legal cause, I negotiate a time-frame that works best for both of us and then I send an Early Lease Termination agreement with specifics reinforcing the move out procedure, right to show the unit, etc.

        It’s not ideal but I’ve been able to avoid winter terminations this way. And it’s better than keeping a tenant upset for the duration of the lease which was an excellent point you made in the article. Thanks again!

  4. Just put tenants on a month to month. All of the landlord objection to lease-breaking boil down to landlords wanting to trap tenants with a lease. A good landlord does not need a lease to retain tenants. Happy tenants will stay for years even on a month-to-month. If something happens, emergency, buy a house, whatever, a good landlord will have no trouble attracting a replacement tenant.

    Speaking of buying a house, why should a tenant be discouraged from buying a home simply because they might have several months left on a lease. The house probably won’t wait.

  5. Sonia Spangenberg

    Great timely article for me. My tenant is being transferred to another state on short notice. I requested a letter from employer to verify. We are working to find a new tenant ASAP and have started listing and showing prior to tenant leaving. Tenant understands that they will still be responsible for rent until a new tenant is found but are working with us to get the property shown despite being in the middle of a move process. We are getting lots of responses and chances of getting it rented soon look good.

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