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Rent it Right

by Janet Portman, Inman News

Hobo sackQ: My tenant of several months moved out, breaking his year’s lease with seven months left on it.

The lease has a termination-fee clause in which he agreed to pay 1 1/2 month’s rent if he moves out early. I took that money out of his security deposit. Because housing is tight here, I was able to re-rent within a week.

Do I have to return this fee? –Andre Z.

A: Termination fees, which compensate the landlord when a tenant leaves early, are increasingly popular, and some states are catching on and beginning to allow them.

Here’s how they work: The lease specifies that a certain amount will be due if the lease is broken, regardless of whether or when the landlord finds a new tenant.

This agreement changes the default rule that applies in most states: Normally, the landlord must make reasonable efforts to re-rent the unit; once it’s re-rented, the tenant’s obligation to pay rent for the balance of the lease term ends. This rule goes by the legal term “mitigation of damages,” which refers to the landlord’s duty to minimize the losses caused by the tenant’s actions. (Lest you think that this duty is unfair, it’s balanced by the tenant’s duty to pay for the entire term if the landlord is unable to find an acceptable new tenant.)

In theory, the default rule should benefit landlords and tenants equally. In a hot market, where new tenants are easy to find, neither landlord nor tenant suffers much (although the tenant still has to pay for the vacant time, however short). In soft markets, when even reasonable efforts produce no replacement tenant, the tenant remains on the hook for the balance of the rent.

Landlords complain, however, that in practice it is difficult if not impossible to recover many months of rent from a departed tenant, who may be hard to find and collect from. Judges, too, are often loath to rule that tenants, now living elsewhere and paying rent to another landlord, must effectively double their monthly living expenses.

Landlord trade groups have significant political clout in some states, and some of them have pressed for legislation that does away with the duty-to-mitigate rule. In states that allow termination fees, as long as the fee is explained clearly in the lease or in an attachment, a lease-breaking tenant will be responsible for paying it even if the unit is rented right away.

The landlord lobby claims that any tenant who does not like the fee can ask that it be omitted from the lease or find another rental. But in practice, especially if the market is tight, many tenants will not have the bargaining clout to get a termination-fee clause removed.

Interestingly, in Florida a tenant can reject the landlord’s offer of a termination-fee agreement and cannot be denied the rental based on this rejection alone.

As you can see, the state of the market and the desirability of the rental are key factors to consider before putting a termination-fee clause in your lease. If you think the market is hot and your rental could be easily filled following a tenant’s early departure, you’d want to include such a clause. You’d actually make some money on the deal.

In a sense it’s double rent, but both landlord and tenant have agreed, by signing the lease, that they will forego that argument in exchange for the certainty of knowing what lease-breaking is going to cost. On the other hand, if it’s a soft market your tenant could potentially be liable for many more months of rent beyond the amount of the fee. Limiting your damages to 1 1/2 month’s rent could leave you short when the rental sits vacant.

Janet Portman is an attorney and managing editor at Nolo. She specializes in landlord/tenant law and is co-author of “Every Landlord’s Legal Guide” and “Every Tenant’s Legal Guide.” She can be reached at [email protected]. Copyright 2009 Janet Portman

See Janet Portman’s feature Canceling Rental Will Cost Landlord.

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