All Forum Posts by: Sarah Lewis

Keep in mind that there's debate even among the landlords on this forum whether or not such a clause is even legal:

http://www.biggerpockets.com/forums/52/topics/1554...

It may or may not, depending on your state, be legal and therefore enforceable.

Could you please give me a copy of your early termination fee addendum. Since we're both California landlords and your attorney approved it, I want to see if its different from some of the other non-California early termination fee forms I've found on the internet. 

And, are you offering the tenant the choice to choose between an early termination fee or mitigation of damages? For the tenant, it would seem that their best move for them would be to always choose mitigation over a early termination fee. Or, are you only offering your rental on the condition that they agree to this early termination fee?

I'm looking for some protection against a tenant who will break a lease, especially during the winter months when it might take more than one month to find a replacement tenant. A early termination fee in the lease, where the tenant has to pay a significant fee to break that lease, seems like that might work. 

But, I'm concerned about how legal such a clause would be and whether or not it would hold up in court if the tenant contested it. Just because a tenant agrees to an illegal contract does that make the contract legal or enforceable. Has anybody gone to court over the issue of an early termination fee and how did the judge rule on that matter?

Unless there's a specific statue in the law, wouldn't the landlord's duty to mitigate damages and the prohibition against double-dipping trump any such early termination fees?

I usually turn to Nolo in such matters because I find it both comprehensive and understandable at the same time. Nolo, however, doesn't mention using a early termination fee so I don't know if its silent on this matter because it doesn't believe such a clause would be legal or if there wasn't enough room to write about it.

When I googled this question, I did find this one thread where they were debating this very issue:

http://www.city-data.com/forum/renting/2119312-lea...

 I was seeking to charge more than one month's rent for the security deposit as a way to deterrent against the tenant breaking the lease. A break lease clause could serve the same function, but its my understanding that such a clause would not be considered legal in California. 

But, you're right back where you started if they only sign a year lease or renew that lease, where you have a vacany during Nov or Dec. You can't really bring the rent back up cause it'll still be Nov or Dec and you need to reduce your rent at that time of the year to find better tenants. 

But, I would argue that a Nov/Dec vacancy makes it an unreasonable rental market. As you have to agree, there's simply a lot less lookers in those two months compared to the rest of the year if you price it the same.

To get a place rented out, let's say you need to show the place to 6 applicants to get one interested enough to fill an application out. And, you might need to screen 5 applications before you find the a tenant who passes your screening criteria. So, it takes 30 applicants to find a qualified tenant.

During the rest of the year, it might only take two or three weeks to show it to 30 applicants. In Nov and Dec, however, you're dealing with a lot less people looking for a place, bad weather, holidays, etc.. With less lookers, you're not going to have enough lookers to show it to 30 applicants.

In other words, you'll have to charge much less in rent if its listed in November and December than at any other time of the year.

I had a property that went up for rent in November but it  didn't get rented till January. I had a sign in the yard, and I posted it on Craigslist with photos. And, my rent was actually slightly below the competition and comps. For example, I knew that a comp had been vacant for three weeks at X price. So, I priced my place fifty dollars below that even though my place was better because it had newer, better updates.

Pricing it right in November and December meant that I should have slashed the rent hundreds of dollars from what my comps had been asking just a couple of months before. And, then in January, the inquires spiked up and I got it rented even though the price was the same.

But, keep in mind that if you slash the rent to get it rented in Nov and Dec, then that will also make it harder to increase the rent back to market prices after Nov and Dec passed. If you increase the rent hundreds of dollars because you had to slash it by hundreds of dollars, the renter will think that increase is excessive even if its the market price.

Should I start charging two months rent, the maximum legal amount in California, for the security deposit before a tenant moves in? Or, will that be too much and scare off potential tenants?

Previously, I've always asked for a month's rent or even less for the security deposit. With my current security deposit, its about five hundred dollars less than the month's rent. 

But, after a situation where a tenant threatened to break the lease, I realized how ineffective that smaller security deposit was- it wouldn't have been enough if the place had been vacant for a month or longer despite a reasonable attempt to find a replacement tenant. And, that's assuming that the tenant hadn't caused any damages beyond normal wear and tear.

So, the only way I would have recovered the rest of the amount a tenant owed would have been to go after them in small claims court. Even though there would have been no lawyer fees because lawyers are barred from small claims court in California, it seems a lot of landlords here aren't proponents of going after the tenant in that system because of the court costs and the time and hassle it would take to pursue that money. 

By charging two months rent for the security deposit, you're flipping those courts costs and time from the landlord to the tenant. Now, its the tenant who has to go through all that hassle and work if they want to recover that money. Instead of the landlord deciding its not worth the cost and money to pursue the matter, its now the tenant who has to decide whether or not they want to spend that time and money to pursue the landlord.

 Let's say the rent was $2000 per month and the security deposit was $1800. The tenant breaks the lease, and the place was vacant for 1.5 months despite reasonable attempts to find a replacement tenant. In this scenario, the tenant breaking the lease costs the landlord $3000 but the security deposit would have covered only part, $1800, of that loss. To recover the rest of the $1200 in losses, the landlord would have to decide whether or not to go to small claims court to recover that amount. And, a lot of landlords decide its not worth it to pursue that money and therefore take a $1200 loss.

But, what if the rent was still $2000 and the security deposit was now $4000? The tenant breaks the lease, and the place was vacant for 1.5 months despite reasonable attempts to find a replacement tenant. In this scenario, however, the tenant breaking the lease costs still costs the landlord $3000 in losses but now the security deposit is large enough to cover that amount. You'd keep $3000 of that security deposit and return $1000 of it to the tenant. If the tenant is unhappy about that amount, its the tenant who has to decide whether or not to go to small claims court to recover more of their security deposit back. And, a lot of tenants will decide its not worth it to pursue that matter in court.

Even if you win in court, it seems like landlords have a hard time winning a judgement beyond the initial security deposit. In that case, shouldn't landlords ask for the highest amount for the security deposit that they can legally ask for?

Finally, a two month security deposit seems like it could be another screening tool. If a applicant has enough money to pay two months rent for the security deposit, then that person is probably a better applicant than somebody who can only afford to pay a month's rent for the security deposit.

What can go wrong if you ask for the legally maximum amount for the security deposit before the tenant moves in?

 But, I've tried to rent this place before in November and it didn't get rented till next year in January. 

Looking back, I don't recall making any glaring mistakes- I posted in on Craigslist with photos; the rent was, if anything, slightly below what comps were charging; posted a sign outside; even posted it the newspaper too to cover my bases; repainted it; etc...

There were one or two applicants I could have rented to but there were red flags with their application. And, so I kept the place vacant rather than rent to the wrong tenant. 

It was the same thing with the replacement tenant that the current tenant found, where there were suspicious red flags about that replacement tenant. Will the judge force me to accept a sub-standard replacement tenant?

Plus, there are some updates I am planning to this property. But, if the tenant moves out in late October, then I don't have any leeway or time to do those updates.

I found out this month that the tenants want to move out next October because one of the tenants is a grad student and their program will end in late October next year. They're 'negotiating' to have the lease end on a specific date in October, let's say the 26th, because that's when that program will be finished.

But, even if I had known their reason for wanting to have a longer lease when they first broached this topic, I still think I would have rejected that offer. 

To me, even if I was in their situation, I wouldn't have thought having the lease end on a exact date next October would be a must-have when they had other options. They didn't have to renew and could have found another place to rent that would accept those lease terms. Or, they could have honored their current lease and moved out next year to another rental on a month-to-month lease until their school program was completed.