by Janet Portman, Inman News
Q: The rental market in my city is tight, and it’s common for applicants to offer many months’ prepaid rent as an incentive for landlords to rent to them.
I accepted six months’ rent from a couple who signed a year’s lease, then left after a few months. The damage they left behind was more than the security deposit could cover.
Can I use the balance of the prepaid rent to make up the difference? —Judd T.
A: Sorry to begin on a note of disappointment, but I sure wish you had told us that your lease specifically states that prepaid rent may be applied to rent and to any other sums due under the lease. If the lease had included a provision like this, then you would be able to use the prepaid rent to cover damage caused by the tenants.
Because the lease makes the tenants financially responsible for damage, the cost to repair that damage becomes a “sum due under the lease.”
But we’ll have to assume that you didn’t specify how the prepaid rent could be used — in other words, that the lease simply described it as prepaid rent. The law is clear that you can use that money for rent.
Even if your state requires landlords to use reasonable efforts to re-rent when tenants break their leases, you are within your rights to keep the unit vacant through the last month for which the rent was prepaid and use that money to pay yourself rent.
But consistent with your duty to re-rent, you will need to begin looking for a replacement tenant to take over as of the day the prepaid rent runs out. If you can’t rent it by that date, your tenants owe you for the additional time it stays vacant, up to the end of their original lease term.
Of course, you’ll have to find them — and sue them — to recover the rent you lost beyond the amount they paid in advance, as well as for the damage that the deposit didn’t cover.
Rather than letting the place sit empty, it might make more sense to try to find a new tenant right away. After all, few landlords like to leave properties vacant, for very commonsense reasons. If, as you say, the market is hot, you might get a renter quickly, leaving you with only a month or two of vacancy. You can use the prepaid rent to cover these vacant months.
If a new tenant moves in during a time period that’s covered by the prepaid rent, you don’t get a windfall: Collecting double rent is not permitted in a “reasonable efforts to re-rent” state. So now we have to answer the harder part of your question: Can you use that extra prepaid rent not as rent, but as a source of money to pay for damage caused by the tenant?
You’re asking whether, in legal terms, you can apply a set-off, using the tenants’ rent money to pay for repairing the damage they caused.
A set-off involves settling accounts between two parties, each of which owes the other money. The right of set-off is often captured in statutes, allowing banks, for example, to set off a general deposit against a depositor’s matured debt or take money from your savings account to pay overdrawn amounts on your checking account.
The right to set off may also be expressly included in the contract between the parties — my wishful thinking at the start of this column was that you had such a provision in your lease.
But luckily for you, there’s another right of set-off, contained in good old English (and American) common law.
As long ago as 1841, the Supreme Court described a set-off as a person’s right “to apply the unappropriated moneys of his debtor, in his hands, in extinguishment of the debts due to him.” (See: Gratiot v. United States, 40 U.S. 336, 370; 1841.)
Importantly, you can’t use this money as a source of funds to pay future debts; you must use it now when the debt is already owed and the amount of the debt is certain.
There are certainly lawyers who would argue against using a set-off, pointing out that it’s safer from a legal perspective to return the rent and then sue in small claims court for the cost of repairs that exceeded the security deposit. But let’s step into the real world for a moment: Suppose you use the prepaid rent, or some of it, to cover the uncompensated damage costs.
If your tenants want that money back, they will have to file a lawsuit in small claims court. If they sue you for improper use of their prepaid rent, you can countersue for the costs of repairing the damage they caused — and everyone will have as much money at the end of the lawsuit as they did at the beginning.
In short, if the tenants object to your use of their prepaid rent, they can force the small claims court lawsuit that you may choose now if you wish. Most landlords will use the money as needed (returning any balance to the tenants) and wait to see whether they’re hauled into court.
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 firstname.lastname@example.org.
Copyright 2010 Janet Portman
See Janet Portmans feature, Rules for Showing Leased Properties.
American Apartment Owners Association offers discounts on products and services for landlords related to your rental housing investment, including rental forms, tenant debt collection, tenant background checks, insurance and financing. Find out more at www.joinaaoa.org.