If a tenant changes their mind about renting before the lease term even begins, you may be left confused, wondering what to do. When the lease has already been signed by both parties, the landlord and the tenant, it may not be possible to end the lease without breaking the terms.
Depending on the content of your lease agreement, there may be a clause that permits the landlord to collect fees for the early termination. Remember that, as a landlord, you have certain legal responsibilities and rights in this situation. It’s also important that you document absolutely everything — including a notice of the lease termination written by the tenant.
Breaking the Lease
Once that lease agreement has been signed, you and the tenant have entered a legally binding contract, whether the tenant has moved in or not. Unforeseen circumstances like a job transfer or family emergency can definitely affect a tenant’s decision. No matter the reason for the tenant’s change of heart, the situation should be treated as an early termination of the lease agreement. When your tenant notifies you of their decision, ask them to provide you with a 30-day written notice that states they are breaking the lease.
What happens afterward largely depends on how your lease is written. Most of the time, the tenant is bound to the lease for a year. However, if you have a month-to-month tenant, all your tenant has to do is give you a month’s notice. In this case, there is a lot less liability involved for the tenant. Your lease agreement may also contain a clause or provision, allowing the tenant to break the lease with certain conditions. This may include contractual break fees or other monetary items. The tenant is allowed to break the lease, then, at any time, as long as they follow the instructions listed in the lease agreement.
Keep in mind that most state laws require landlords to make a good faith exception and acquire a new tenant as soon as possible. This way the one breaking the lease does not need to pay the entire lease period’s rent as is often proposed in the agreement. The rent must be paid until a new tenant occupies the property by the current one. It does not matter if he or she is physically in the unit.
The Security Deposit
The security deposit, which is generally equal to two or three month’s rent, is designed for situations like early lease terminations — to compensate you in the event of unpaid rent. Since most landlords ask tenants to pay the security deposit when the lease is signed, you will already have money to cover the first few months’ of rent. Here are the two ways you can handle the security deposit in this situation:
- You keep the money and apply the security deposit toward rent owed until the property is rented again, and then send whatever is left over back to the tenant. The tenant does not need to pay rent unless the rent owed exceeds the total security deposit. This can be risky since it may be difficult to collect or sue for rent once the security deposit has been used up.
- You set the security deposit aside and the tenant pays rent each month until the property is rented again. Then, you send the deposit back in full, since there won’t be any damages to the unoccupied unit. This option is probably a safer bet, considering the tenant has an incentive to pay rent. Also, if the tenant fails to pay, you have the security deposit to deduct rent from, anyway.
Negotiations will be necessary when the lease agreement does not specify what to do in the case of an early lease termination. Month-to-month tenancies will also have some gray areas, and the outcome of the situation will depend mostly on how you and your tenant hash it out. Make sure to always remain professional and document all of your proceedings.
Right to Rescind
While still on the subject of the security deposit, it’s important to mention the “right to rescind.” The right to rescind is set forth in the Truth in Lending Act (TILA) under U.S. federal law. It’s a consumer protection law that allows a borrower to cancel a home equity or line of credit within three days of closing. Sometimes, tenants can become a bit difficult and may try to avoid paying rent when they break the lease. Tenants may employ the right to rescind in this case. Unfortunately for the tenant, the right to rescind has nothing to do with lease agreements or rental properties. So, if a tenant tries to claim they have the right to rescind, make sure to inform them that the right does not apply in this situation.
No matter how you choose to handle the early lease termination, you should familiarize yourself with the specific rights that landlords and tenants have. Most standard leases contain provisions that allow tenants to break leases with certain conditions. In the case of breaking a lease before the tenant moves in, tenants are usually required to notify the landlord of their decision and send a notice within a certain time after signing the agreement. If no such provisions exist, you have the choice of upholding the lease agreement as is and enforce all of its contractual obligations. This would leave the tenant with limited rights to break the lease and minimize financial responsibility.
As a landlord, you have the right to demand rent payments for the lease term, whether the tenant is living in the unit or not. If you have trouble negotiating with your tenant and coming to a consensus, you should seek legal guidance. There may be issues with the lease, a mistake may be made, or certain state laws may limit you. A lawyer will be able to identify the issues at hand and help you and the tenant break the lease with minimal consequences. They may also help you reduce or eliminate any extra fees.
Other Details to Consider
In addition to the information outlined above, there are a few key factors you should keep in mind if an early termination situation arises.
- When a tenant backs out of a lease, the agreement doesn’t disappear. Landlords are entitled to receiving rent payments for the lease term. However, not all landlords choose to collect. Depending on your circumstance, you should consider negotiating with your tenant and making a compromise. They may have valid reasons for breaking the lease and the issue can be resolved peacefully. Sometimes, tenants may even know of someone who could replace them quickly. Just make sure to talk to the tenant and work it out while mitigating the most risk that you can. The earlier you can communicate with your tenant, the better.
- Remember that just because someone does not live in the rental unit, it does not mean the agreement does not exist. The fact that your tenant does not physically reside in the unit does not take away their responsibility for paying rent. A lease is a legally binding contract, after all.
- You can alternatively solve this problem by coming up with a reversed “cash for keys” agreement. Cash for keys is a method used by landlords to evict tenants; you basically pay them to move out. This practice can be used in the opposite way, in which a tenant will pay the landlord to get out of their lease. This “buy-out” is usually in the amount of a month’s rent, giving the landlord ample time to find a new tenant.
At the end of the day, it’s all about communication. This situation can be a lesson in developing strong landlord-tenant relationships and resolving rental issues. Don’t forget to get everything in writing and keep track of all your actions.