What Landlords Should Do When a Tenant Breaks a Lease

As landlords, we want some amount of tenant stability. (After all, tenant turnover is a cash flow killer.) Very rarely will we sign a lease for a term of less than one year or allow breaking a lease without an excellent reason. We want the comfort of knowing we don’t need to worry about that particular unit.

Sometimes, however, tenants want to break their lease—or move out before the term expires. The reasons for early termination are quite varied, ranging from “I just don’t like it here anymore” to “I lost my job.” Sometimes, we explain the hard reality of the lease: Our tenants signed a contract which we expect them to uphold. No, we can’t force them to stay, but there will be penalties if they do not get the OK from us to break their lease.

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. (And isn’t always allowable per state laws.)
Say yes, with the consequence of a lease-breaking fee or upfront rent payments for the remainder of its term, which were hopefully already mentioned in the original lease.

Both of these scenarios result in a less-than-ideal outcome for your rental property. Either your tenant is frustrated they can’t move out or you are left with a vacant property.

What to Do When a Tenant Breaks the Lease

Before making your decision, review your state and municipality’s landlord-tenant laws. Lease-breaking laws vary, but many areas require you to mitigate damages—or find a new tenant. You typically can’t collect double rent. If your first tenant’s lease ran through May, but they left in February, you can’t demand rent for April and May if another tenant is occupying the property.

So here’s what to do if a tenant wants to ditch:

Stick by the lease. You included strong restrictions on breaking a lease in your rental agreement, right? Your early termination clause should outline potential fees you’re entitled to if your tenant leaves, such as the remaining rent during the lease term or a flat fee of a month’s rent or more.
Find a new tenant. If your area requires you to mitigate damages, start hunting for a new renter immediately. Not only does this meet mitigation requirements, but it also helps your bottom line (and your anxiety). The faster you find someone new, the less you need to worry. One thing to keep in mind: If you can’t find a replacement tenant willing to pay the full original rent, you can charge the lease-breaker for the difference. So if your first tenant’s rent was $1,500, but the market now only bears $1,250, you can demand $250 per remaining month of the lease from your original renter.

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5 Legitimate Reasons to Allow Breaking a Lease

Tenants dealing with hardships might be a different matter. Job loss, for example, may be a good reason to permit breaking a lease.

In fact, sometimes you have to allow your tenant to break a lease agreement without consequence. Legal reasons to leave include active military duty as protected under the Servicemembers Civil Relief Act (SCRA) and victims of domestic violence, 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.

How and when you decide to allow your tenants to break their leases will be up to the laws and your own personal opinions and business practices—but here are five times you might consider softening your policies.

1. Military orders

Active duty and reserve military service personnel, such as the national guard, can be transferred or activated very quickly. If they have to go, there is really nothing you can do, as federal (and often state and local) laws allow these tenants to break any lease. In fact, you might even be required to hold their property for them so it will be there when they return. Be sure you understand the potential ins and outs of these laws.

2. Job transfers

A job transfer is not the tenant’s fault, and it can often be a good thing for their family. Many times they have very little control over where the new job is located, so there is no reason trying to enforce your contract. It is very unlikely that any sitting judge would actually allow you to do so anyway.

As a cautionary measure, it is wise to place a clause in your lease that allows for the lease to be broken due to a job transfer so long as the transfer is more than 50 or so miles away. After all, you don’t want them to move if they are just transferring to another local branch.

3. Job loss

If a tenant loses their job and generally has no prospects of finding replacement income in the near future, it may be best to let them move on. You can’t wring blood from a stone. If a tenant has no income, your relationship will become more and more strained as resources dry up. Best to sever the relationship early, get your property back, and move on.

4. Extraordinary circumstances

Unfortunately, bad things happen to good tenants. We have had tenants get divorced or diagnosed with cancer or suffer some other type of misfortune. These types of circumstances can cause radical shifts in income and life outlook. Suddenly, rent is not a big deal if you are fighting for your life or trying to survive a bitter breakup. It is best to have a bit of sympathy here and let folks move on.

5. Ultra-irritating tenants

Some tenants are a pain in the neck. They seemed like a good fit during the application process, but once they move in, nothing is ever right. Nothing can be fixed, they constantly complain constantly, and they are late with rent. Enough is enough.

When is that point reached? It is hard to say, but sometimes it is best to just say something like, “I do not think this is the home you are looking for, as I cannot seem to meet your needs. I will be happy to let you out of your lease so you can find something that better fits your needs.” They will either move and you will be rid of the problem, or they will tone themselves down. Either way, hopefully your problem is solved.

Another Option: Tenant Lease Assignments

You might consider allowing tenants to reassign their lease in exchange for waiving the fees for lease termination. That means they transfer the rental lease and rental obligation to another tenant. The old tenant will no longer be responsible for paying rent.

This can be a fabulous option for real estate investors: A lease assignment means zero vacancy and no turnover time. You don’t have to 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 you may want to add it to yours. That provides an easy-to-follow process 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 an apartment lease assignment. “Reasonable efforts” mean working 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, such as a minimum credit score, for every random family member the tenant finds. Remember to run a background 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 subletter. 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.

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.

What About the Security Deposit?

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 an 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.

Whatever you decide, keep the lines of communication open and try to maintain a good rapport. Let them know that they can come to you if they need to discuss any situation. Don’t get angry. Keep everything professional and business-like. After all, sometimes breaking a lease is good for both sides.

Do you use lease assignments? Why or why not?

Comment below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.