Regarding a tenant’s notice of early termination of the lease, does a landlord have the option to work with the tenant to settle the matter?
When a tenant needs to break the lease due to unexpected circumstances – as examples, employment transfer to a distant location, financial difficulty due to medical expenses, or employment termination – none of which allows the tenant to break the lease – the landlord and tenant are free to negotiate a termination that is acceptable to both parties.
A landlord can always voluntarily release a tenant from his lease obligations with a settlement negotiated between landlord and tenant. A negotiated settlement is usually of benefit to both the landlord and the tenant, as it avoids the unpleasantness of a broken lease and the potential costs of legal actions. Furthermore, there is never a certainty that a judgment can really be collected. Accordingly, in a normal rental market, the landlord may be ahead by collecting for a certain number of months’ rent and any damages and to find a new tenant as soon as possible. It is almost always advantageous for a tenant to negotiate a termination if the landlord is willing to be reasonable.
The negotiated settlement will usually mean that the departing tenant pays a certain amount of rent in advance that the landlord considers adequate to cover the period until a new tenant moves in; pays for any property damages; pays for the cost of again preparing the unit for showing to prospective replacements; and pays the costs of re-marketing the property. If the tenant breaks the lease without such a settlement agreement, the tenant would usually be legally liable for the rent for the entire rental term. This usually provides an incentive for the tenant to agree to a reasonable settlement.
Any settlement should always be done with a detailed written agreement that includes all terms of the settlement including a move-out inspection in order to minimize tenant misunderstanding or disagreement. Settlement options may include:
Tenant Buyout
The landlord’s lease agreement may have a buyout clause that allows a tenant to terminate his lease without financial penalties beyond the buyout fees and without risk of a lawsuit and/or damage to the tenant’s credit record.
Depending on the amount of the fee and other conditions of the buyout and market conditions, a landlord may be able to fill the vacancy without any significant loss of income. As a contingency, the buyout agreement can make the tenants responsible for the condition of property at the time of move-out which could reduce the landlord’s work for cleaning or repairs.
What might be considered a reasonable buyout fee to the landlord or the tenants could vary widely depending on the current rental market. It is usually best to calculate the buyout fee based on a conservative estimate of the actual costs of an early vacancy, remembering that there would be a vacancy at the end of a tenant’s lease anyway. Items to consider usually include costs of preparing the premises for the next tenant; lost rent during preparation down-time; marketing and advertising expenses; and lost rent during the marketing period until rent begins from a new tenant.
The buyout agreement should be a written, detailed document that covers all material issues and should:
- State that the document is the full and final agreement regarding the lease.
- State whether or not any part of the deposit will be applied against the buyout fee, whether or not any part will be refunded if the unit is immediately re-leased, or whether no credit for the deposit is to be given.
- Provide an accounting for any part of the security deposit not refunded within a specific time frame. The buyout agreement should cover this issue in a way that will eliminate the need for further action regarding deposit accounting.
Tenant Substitute Replacement
The tenant may offer to find a replacement tenant to rent the unit in an effort to facilitate negotiations or help reduce the time the unit will be vacant and therefore reduce his debt. It is the landlord’s decision to accept the tenants’ offer of help conditioned upon the replacement tenant qualifying under the standard rental practices, including application, screening, and selection procedures. The landlord would sign a new lease with the new tenant and a termination agreement with the old tenant to release him from his lease agreement.