Putting a price on lease break

Tenant's employer offers landlord compensation, but concerns remain

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted May. 20, 2010

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Tenant's employer offers landlord compensation, but concerns remain

Robert Griswold
Inman News

Q: I have a tenant who signed a two-year lease and now needs to move as part of a job relocation. He has 14 months left on his lease. The tenant's employer contacted me and is offering to pay a "reasonable" amount if I let the tenant break the lease.

Can a landlord legally accept any amount a tenant offers to break an apartment lease? If we reach an agreement, let's say three months' rent, can I rent it out sooner?

A: You could agree to unilaterally release your tenant from any further obligation under the lease for nothing, or you could insist on the remaining balance of all the lease payments to the end of the lease.

Of course, no one would pay up front the amount owed each month for the next 14 months, as a tenant would simply leave the unit vacant and send in the rent each month. A lease-breaking tenant would also expect the landlord to mitigate or minimize his damages by making a diligent effort to re-rent the unit.

So the reality is that you and your tenant's employer could reach a compromise, and possibly in the range of three months' rent as you suggest. The factor you want to keep in mind is how long it will take you to re-lease the unit and that the asking rent is at least at the level you would receive under the lease if the tenant weren't leaving.

Q: My son lives out of state and he has been having trouble paying his rent. He asked for my advice and sent me a copy of his rental agreement. The agreement calls for a $25 per day late charge and this seems rather high to me. Is this a reasonable late fee?

A: Late charges are very controversial and many state courts have ruled that excessive late fees will not be enforceable. More than a dozen states have laws specifically addressing restrictions on late charges. You can check with your local National Apartment Association affiliate or a tenant-landlord legal expert for any limitations that may apply to your son's lease.

Unless there is a specific limitation, I would assume that the lease or rental agreement signed by your son has a provision for the $25 per day late charge and thus it may be enforceable under contract law.

However, my experience is that late charges that are unreasonable or exceed 10 percent of the monthly rent will likely be reduced if this issue were to end up in court. Of course, it is best to avoid going to court for both the tenant and the landlord.

I personally recommend a three-day grace period and a $5 per day late charge thereafter, up to a maximum of $50. The idea then is that if the tenant still has not paid, his or her file has gone to the eviction attorney and there will be additional legal fees incurred.

From the landlord's point of view, the late charge should be high enough that the tenant prioritizes the payment of the rent.

Landlords are not interested in "making money" on late fees, as they simply need to have all of the rent collected when due so they can pay their own mortgage and property payroll and operating expenses -- and thus a tenant who fails to pay rent on time creates a cash-flow problem for the landlord.

The question revolves around what is reasonable. And the challenge is in finding a middle ground between a late charge that is too low to give a tenant an incentive to pay on time and one that is considered punitive or excessive in which the "punishment" exceeds the damages to the landlord caused by the late payment. The issue can be very subjective.

This column on issues confronting tenants and landlords is written by property manager Robert Griswold, author of "Property Management for Dummies" and "Property Management Kit for Dummies" and co-author of "Real Estate Investing for Dummies."

E-mail your questions to Rental Q&A at rgriswold.inman@retodayradio.com. Questions should be brief and cannot be answered individually.

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