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:
- 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.*
- 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.
Download Your FREE copy of ‘How to Rent Your House!
Renting your house is a great way to enter the world of real estate investing, but most first-timers (understandably) have a lot of questions. Fortunately, the experts at BiggerPockets have put together a complimentary guide on ‘How to Rent Your House’. All the skills, tools, and confidence you need to successfully rent your house are just a mouse-click away.
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.
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.
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?