Lease termination fees are a gray area in property management. Not all fees are legal, even if the tenant agreed to it in the lease. States handle this issue differently, so there’s no universally correct policy. And the reason the tenant is leaving can impact the right to collect a termination fee.
Here are a few points to consider when collecting an early termination fee:
1. What the lease says is not the final word. It’s important to note that, even if the tenant agrees to a specific early termination provision, the local rental law generally will prevail over the language of the lease agreement. That means the provision may not be enforceable in court.
2. A typical early termination clause will require two months’ rent. Setting this figure in advance in the lease may be viewed as a liquidated damages clause. For the clause to be enforceable, there must be a reasonable relationship between the landlord’s losses and the amount the tenant must pay.
So, if the landlord has difficulty re-leasing the property, the clause may be enforceable. If, on the other hand, the market is hot and the landlord finds a new tenant within a week, that may not sit well with a judge should the tenant sue for a refund.
3. A better solution to a liquidated damages clause may be to add an option in the event the property is re-leased right away: Early termination fee is the lesser of two months’ rent or prorated rent until a new tenant is secured.
4. Landlords have a duty to mitigate losses if a tenant leaves early. That requires using best efforts to secure a new tenant and reduce the amount of liability owed by the previous tenant.
5. The more tenants who have signed leases with an unenforceable provision, the higher the potential damages a landlord may face for collecting illegal fees. Don’t become overconfident when tenants give in and pay an excessive termination fee. Those tenants may still have time to complain. In the age of social media, it is quite easy for lawyers to assemble past and current tenants to join in a lawsuit to recover excessive early termination fees.
6. The reason the tenant is leaving may have an impact on the landlord’s ability to charge an early termination fee. For instance, during this period of pandemic, early termination fees may be prohibited by emergency orders. Victims of domestic abuse generally are exempt.
As a practical matter, it may make sense to nix the early termination clause altogether and work directly with individual tenants to tailor a solution. Some may need to leave because they don’t have any money. Then, the toughest termination fee in the business won’t do any good. It may be more cost-effective to release a tenant who is asking for help and focus energy on finding a new one.
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Disclaimer: The information provided in this post is not intended to be construed as legal advice, nor should it be considered a substitute for obtaining individual legal counsel or consulting your local, state, federal or provincial tenancy laws.