Broken Leases – How Much Do Tenants Owe?

2013-10-05

Broken Leases – How Much Do Tenants Owe?

The better this is defined in your lease, the better your chances of actually collecting something!

PaperworkSo, here’s a scenario for you: a new tenant signs a lease and gives every indication that they’re about to move in…and then something comes up and they have to turn around and leave. They ask you to return their deposit. What are your options?

Situations like this are awful for a landlord — not only are you not going to have a tenant, but all of the effort you put into the background checks and other tenant research are wasted.  On the other hand, the chances are pretty good that if someone is pulling this kind of stunt on you, they’re not the kind of person you’d want as a client in the first place (There are always those perfectly good people who legitimately get pulled away by family emergencies, but they seem to be few and far between compared to the other type.)

There are two issues to address here: what you can do about broken leases like this one, and how to prevent this situation in the future.

Dealing with a Lease-Breaker, Legally Speaking
In the state of Michigan, if someone breaks a lease, you are under an immediate legal obligation to find a new renter as quickly as possible.  This doesn’t mean you have to loosen your tenancy standards, but it does mean that if a tenant passes their various background checks and other investigations, you are obligated to take them in without delay.  The reason for this strange law is that the lease-breaker is obligated to pay for a prorated portion of the agreed-upon lease amount equal to the time that you aren’t able to rent the property.

In the original example, if the lease-breaker never moves in, but has signed the lease, you should still be advertising, so it shouldn’t take terribly long to get a new tenant in there — but if it takes two weeks, they still owe you for those two weeks.  If someone breaks their lease without telling you after several months of quiet tenancy, it can take you a while to even realize they’re gone, much less start advertising and get a new tenant in there — all of which they’re liable for.

Early Termination Agreements
If you plan on being a landlord for awhile, you’re bound to encounter a situation where a tenant loses a job, gets sick, etc. and can’t pay the rent going forward.  It can happen with the best of tenants.  So, why not be prepared ahead of time?  Get with your attorney and have an Early Termination Agreement created along with an Early Termination Release.  The Agreement should layout your terms to let someone out of their lease early — they have to keep paying rent, allow showings, keep the place neat & clean for showings, etc.  The Release is the legal document allowing them out of the lease with no further repercussions.

A Special Note about Early Termination Fees
Because of the above law, Michigan has a history of being fairly strict about early termination fees — if the fee written into your contract is greater than what it would reasonably cost for you to acquire a new tenant, the courts are likely to force you to waive it.  It’s still a good idea to write one into the lease, just don’t get greedy with it.  Cover your expenses, and move on grateful that you don’t have to deal with that tenant anymore.

Avoiding Lease-Breakers In The Future
You’ll never be entirely able to avoid this situation — as mentioned, sometimes perfectly good people have emergencies, and there’s not a lot that can be done. But in general, if you screen your tenants thoroughly and you ask each tenant why they want to live in this particular neighborhood (and get a good reason), you’ve done what you can. People who have a specific reason to want to be in the area are much less likely to break a lease than people who are there because it’s convenient.

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