Should I make tenants pay a penalty for wanting to break the lease early?

Question

Hi everyone, I have recently been renting out my first house for the past year and a half. The tenants have been great and we have maintained good communication if anything needs fixed or addressed. However, they have approached me last week about the option of breaking out of their lease, which has another 5 months to go, in order to buy a house. Upon reviewing the lease, I don't have any sort of penalty for breaking the lease early other than they are responsible for continuing to pay rent until the house is rented out by someone else, which they are happy to do. This home has been below market rent and I figured I could use this as an opportunity to increase rent to similar homes in the area. Some have suggested that in the future, tenants who want to break the lease early will forfeit their security deposit. However I am concerned about that option as if tenants know they will not be receiving their deposit back, they have no reason to care what condition the property is in when they leave. I'm curious to know what solutions some of you use when coming across this situation. Thanks

Alan Asriants · Answer

Usually in these cases I try to work something out with the tenant.

I let them know that I wasn't anticipating a vacancy until the end of all of my leases (30-60 day notice before the end). So I have not accounted for the vacancy

So that it is fair for all parties, they can let you know when they are under contract and what day they are planning on closing. You will arrange showings to find a tenant to move in a few days after closing.

I had a case like this, and the previous tenant covered painting and cleaning the apartment for the new tenant making the place rent ready for the inconvineince.

Win-win.

They get to break the lease, and you have no expenses and vacancies

Josue Rosa · Answer

Hi Drew. Use this as an opportunity to get the property leased at or above market rent without any gap in rental income. The tenant leaves happy even if they're still paying while it potentially sits vacant. Assuming it's legal in your area, you might want to consider adding a clause to your lease agreements stating the consequences for breaking their lease. We've done property management at a high volume for years; highly qualified tenants with solid rental history tend to leave rental units in good to decent shape, regardless of their length of tenancy. See if a local investor group or property management company will share their lease agreements with you. Good luck!

Michael Smythe · Answer

You do NOT need to add anything to your lease about early termination.

What you currently have gives you the upper hand, so why would you limit yourself to a one-month penalty?

Negotiate with your tenants to either allow you to show the property while they are still in it, even better have them do the showings, and upon finding an ACCEPTABLE replacement tenant, you will let them out of their lease early.

If you "sell" this to them gently it's a great solution.

Of course, they may go into "denial mode" on you and insist they just want out of their lease and even falsely claim their lawyer told them you had to let them out, etc., just to get what they want. So, it can get ugly:(

Noah Laker · Answer

Our lease agreements (in California) always stipulate that there is a ONE MONTH RENT fee, in addition to 30 day notice required, in order to break the lease. So basically, you can move out any time if you pay double for the final 30 days.

(You can prorate the final month if they give notice in the middle of a month)

In this case, since they could *potentially* be on the hook for 5 months, maybe you can negotiate this 1 month thing. Get it in writing and take payment.

I am not a lawyer and this is not legal advice, just my two cents.

Joe Martella · Answer

I had the same thing happen with me.  I had a resident purchasing a house and as we all know, the timing really isn't the easiest.  The house was in great condition where it could be re-leased easily.  They were great and reasonable people.  I agreed to the early termination with no penalty, instead, I asked and they agreed to allow me to show the property the last 6 weeks of their residency so I can have it rented and not miss a month.  They agreed.

It worked out to my benefit because prospective tenants actually asked about me and they gave positive reviews.  In fact, I let them show the property to the prospective tenants while I stayed outside and answered any questions.  I had it rented immediately after they moved out, gave them their full security deposit at move out and wished them the best of luck.  They actually moved out a week earlier and I took a week to do a couple things and hand the keys over to the new residents.

Kristi Kandel · Answer

You have the upper hand. We have had 2 tenants just recently reach out in a vacation market and in the midwest on breaking leases.

1. for the vacation market we charged a 1 time fee of 1 month's rent (security deposit), allowed them to leave immediately, and we turned the unit into an STR.

2. for the midwest we told them we'd list their unit immediately (45 days prior to them buying their house from a family member at a HELL of a great price) and as soon as we had a qualified tenant we would terminate their lease so there wouldn't be a gap in rental income.

You have the upper hand but there's no reason to not try to work with them on a win-win solution.

Logan Ransley · Answer

I think that's a great idea! I'd start looking for new tenants and have your old ones cover the rent in the meantime.

Erin Church · Answer

First, get their timeline as this conversation may be a moot point. If they're just now batting around the idea of house hunting, it may be several months (or more) before they're ready to pull the trigger.

If the timeline is short, this sounds like a great opportunity as renting in 5 months will likely be tougher.

I do think that @Michael Smythe has a good point about having the upper hand legally. For me, that isn't my preference. I would rather have a good break lease fee and let them go. I feel like there's a better chance I'll get that than someone paying me rent 4 months after they moved out. There are also potential issues with it being vacant too long from an insurance perspective (they prefer 90 days or less in my experience); although, this is low on my list of concerns. If I'm going to rehab a unit to get top rents, it also gets a little dicey to "rehab on their time/dime" if they're paying rent. Again, I don't like to draw out tenant relationships once they've moved out of a property.

Once you have their timeline, maybe ask if they'd like to pay a break lease fee of a month (or whatever amount you decide) with 30 days notice. That lets them budget for their new house/mortgage, so I believe it would be attractive.  I'd make it clear that the security deposit doesn't count as the fee - that will be returned after assessing damages. In theory, this gives you a paid month to find a new tenant and/or do any rehab/updates you'd like. :)

Should I make tenants pay a penalty for wanting to break the lease early?

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