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Property Management Blog

What if my tenant wants to break their lease?

Imagine this: You're a landlord, it’s Saturday afternoon, you’re spending time with your family, and you just received the dreaded call. Your tenant wants to break their lease.

A range of emotions come over you – Surprise, anxiety, frustration, and maybe even empathy... As a landlord, these emotions can hit hard when you least expect them. What do you do? How should you handle it?"

Stay tuned as we dive into how to manage the situation effectively. You’re not alone in this journey. We walk through this situation several times a year.

We’re going to look at three things:

  1. How to handle the situation if you’re already in it.
  2. Thoughts on structuring your lease for the future.
  3. How our company specifically handles this for our market in Oxford.

Before we dive in, it’s important to remember our focus: We'll keep our involvement professional and not entangle ourselves in others’ personal or emotional issues. When you make this personal, you put a lot of stress on yourself and you make expensive mistakes.

How you handle the situation should be a fairly straight forward decision based on the contract and the law.

You’re expected to uphold it and so should they.

What if you’re already in this situation? How do you handle it?

There are three questions we need to ask when you hear the news that your tenant wants to break their lease:

  1. Why do they want to terminate the lease?

  2. Are there any Federal, State, or Local laws that are applicable?

  3. What does the lease say?

  4. Why do they want to terminate the lease?

    • Do they just want a new place to live?
    • Is there a job change?
    • Are they active duty military?
    • Have you not maintained the home in a habitable condition?

All of these things will dictate how or if the lease is terminated.

  • Are there any Federal, State, or Local laws that are applicable?

    For example your tenant is active duty miliary. The Servicemembers Civil Relief Act (SCRA), is a Federal Law that allows active duty military to terminate their lease with no penalties IF:

  • Another example of a law in the state of Mississippi, is if the landlord fails to make necessary repairs and maintain the property in habitable condition or there are serious health hazards or safety concerns that the landlord neglects, the tenant may be able to terminate the lease with no penalties.

    Also in Mississippi, there may be other reasons such as death or domestic abuse that allow for termination of the lease.

  • What does the lease say?

    If you’re already in a situation where your tenant wants to break their lease, your option is to follow your contract. Hopefully you have a well written contract that’s tailored toward your market and protects you as an owner.

    A strong contract puts you in the driver’s seat in this situation. If your contract is not well written, you can try to negotiate different terms with the tenant, but you’re no longer in control at that point.

    Regardless of your contract, remember what I said at the beginning:

    We’re not going to get sucked into someone else’s personal and emotional problems.

    For any questions, we’re always going to refer back to the document and enforce it.

Structuring your lease

Generally, there are two approaches to managing situations when a tenant needs to break their lease.

Does the contract allow for the lease to be terminated with a fee or does it require fulfilling the full term of the lease, whether by the current tenant or a replacement?

What’s the difference?

Lease Termination Fee: A fee paid to relieve the tenant of any additional rent obligations. The tenant pays the fee and they’re done, regardless of whether the owner has the property re-leased or not.

This type of arrangement can be risky, but rewarding for the property owner.

For example, if the tenant pays a lease termination fee of two months, but the owner re-rents the property and it’s occupied within 15 days, the owner collected an extra 1.5 months rent and was rewarded for the risk they took on. But, they would also have to make sure any other potential costs are covered in that amount. Not just vacancy.

Contract Fulfillment: The other option is that the tenant is required to fulfill the full term of the lease, whether the rent is paid by them or a replacement.

This is straightforward, but you do have a couple of options of how to handle this.

  1. You can sublet the property, which means the original resident is still on the hook for any missed rent payments and or damages through the end of the original term.

    This could complicate things depending on the resident moving out and the new prospect.

  2. The second option would be to draft the new contract with the new tenant and then amend the original contract to simultaneously end.

    In my experience, this is the most common method of the two.

Even if the full term of the lease is fulfilled, that doesn’t mean the tenant doesn’t have to pay any fees. They’ll still be responsible for any costs incurred to get them out of the lease.

Now that we’ve discussed two different options, a termination fee or fulfillment of the contract by another party, let’s talk about factors to consider when determining the option that best fits your business.

One factor to consider is Potential Vacancy.

If you’re going let them out of the lease, how long do you think it will take to get someone in the property?

Are you in an area where you can fill vacancies quickly year round, so one month would be plenty of time?

If that’s the case, charging a two month lease break fee could be very advantageous for you.

Or are you in a very cyclical area, where depending on the time of year, it could take several months to fill a vacancy?

Your risk tolerance is going to play a major role in the strategy you choose here.

Potential Fees are another factor you’ll need to consider when drafting your lease.

Do you have to pay a leasing fee?

There are lots of things that will have to be done when marketing a property. Someone will need to:

  • Take photos and virtual tours
  • Advertise the property (and cover the costs associated with it)
  • Handle all the phone calls, emails, and texts from potential residents
  • Show the property
  • Screen applicants
  • Prep the lease, manage the admin work
  • Collect the security deposit
  • Make sure the lease is signed and all the documentation is complete

There are several hours of work that must be done and someone will have to be compensated.

Do you have to pay turnover fees?

  • Do you have to pay someone to inspect the property?
  • Do you have to pay someone to manage the turnover?
  • Do you have to pay to rekey the locks?

When drafting the early termination section of your lease, you must take all these costs into consideration.

How Cissell Management handles an early lease termination

Now, let’s quickly look at how my company, Cissell Management, handles an early lease termination for our market in Oxford, MS.

First, our company’s philosophy on managing property, will impact how we handle this. Our goal is for our clients to have a long-term stable investment and we write our agreements to reflect that.

How does that impact early termination in our lease?

Our tenants do not have an option to break the lease by paying a fee. Could this work out in our property owner’s favor? Yes, but if it doesn’t, it could go poorly.

Oxford’s market is very cyclical. We have very few people moving in, out, and around Oxford outside of a few key times of the year, with August 1 being the highest demand. If a property goes vacant during the wrong time of year, you’ll likely have 2 - 4 months vacant and have to reduce your rent several hundred dollars a month. You’ll possibly be in that cycle for 12-18 months until you can get back to an August through July cycle at current market rates. I’ve seen property owners cost themselves over $11,000 because they allowed a property to go vacant during the wrong time of year.

We do require our tenants to pay a leasing and marketing administrative fee that covers our costs. This must be paid before we start advertising the property for rent and we do not allow their security deposit to go toward this fee. We also require they pay the rent and utilities up to the day the new tenant moves in the property. The owner should have no vacancy costs because the tenant decides to move early.

That’s it. We’ve looked at three important things.

  1. How to handle the situation if you’re already in it.
    1. Remember, it’s not personal, don’t let them drag you into their emotional circumstances.
    2. Refer to the document
  2. How to structure your lease for the future to put you in the best position if this happens
    1. Make sure you do this now and don’t wait until you get into a bad situation
  3. How our company specifically handles this for our market in Oxford.

Dealing with a lease break can be stressful, but with the right planning and understanding, you can navigate these waters smoothly. Remember, keeping a professional stance and not getting entangled in personal issues can save you from costly mistakes.