What Homeowners Should Expect When a Resident Gives Notice Prior to Satisfying the Lease Term

People need to break their lease for all types of reasons, most of which are simply an everyday aspect of life. In recent times, lease breaks have often benefited owners more than the original situation, but those results will likely be tempered now that it appears rents have mostly plateaued.

If you are being notified that your tenant “will” break their lease, the process will likely be quite smooth. If the tenant “has” broken the lease, these are dicier, but we still tend to get great results. In either case it’s smart to prepare for a potential break in income even though tenants are required to avoid that. The largest complication for owner and tenant when breaking a lease are seasonal issues. If your tenant rented in warmer months, and must break their lease in colder months, we will likely have to accept a slightly lower rate than what you were receiving. The tenant who is leaving will have to make up the difference for the remaining time on ‘their” lease. We give an example below. However, keep in mind we are extending the occupancy of your property most likely with no vacancy, and very minimal turn over costs. When good tenants break their lease, we typically receive exceptional cooperation in getting the home rerented, and spruced up.

Important points

1. Major changes are a fact of life, and a lease break is not a sign of major trouble, or a bad tenant

2. In most cases we receive exceptional cooperation from the tenant, and owners are made completely whole or close to it, and even sometimes benefit

3. We will not treat cooperative tenants aggressively simply for breaking their lease. However, if they are uncooperative, few will be more aggressive than we are

4. Tenants are required to keep rent current until a replacement is secured, and most do. However, you should prepare for a potential break in income as the chances do rise considerably, especially on short or no notice

5. The procedure for handling a lease break is quite clear in NC law for the most part. The one big exception is when an owner opts not to rerent, either to sell, move back in, or any personal use

We’ll begin with the simple concept of rerenting a property. In NC, by law a landlord / manager is required to make every effort to limit the tenant’s loss. This means repairs must be done quickly, marketing must be thorough and timely, and reasonable replacements must be accepted.

This does not mean that we must take a subpar tenant, we typically expect equal or better quality. For our part, rerentals are handled exactly as they would be if the tenant had satisfied their lease. We move quickly, try to keep repair / turnover costs down, and make tenant quality our #1 priority. With lease breaks as with every aspect of our business, we follow a variation of the golden rule and treat others as they have treated us. If the tenant has been spectacular, our intention is to maintain that relationship. If they have caused problems, they will rarely receive the benefit of the doubt. However that still has little effect on our performance as we take pride in consistent, exceptional results.

As we mentioned, most rerentals go quite smoothly, but to outline the tougher situations, here is an example we use with tenants.

The mechanics & accounting of a lease break

Deposit total

• repair costs

• marketing expenses

• any vacancy or difference in rental rate
  = total refund, or balance due

Vacancy and differences in rental rate

When you sign a lease, you commit to pay the landlord a specific amount of money. For example, if your rate is $1000 per month, and you sign a 12 month lease, you have committed to paying $12,000. If you break your lease, you will have paid a portion of that commitment, and the rerental will make up most of the difference. A simple rule of thumb is that rent must be kept current and in good standing up until the day the new tenant moves in. NEVER stop paying your rent until your manager has clearly notified you that is okay.

(your total rent payments) + (new tenant’s rental rate multiplied by number of months left on “your” lease) = Total you committed to pay owner. If not, you will need to make up the difference.

You plan to leave after 9 months, meaning you will pay $9000 out of $12,000 you committed to, and you hope a rerental will cover the balance. Seasonal issues can complicate the process. Typically rents are higher in warmer months, and leaving in colder months will likely lead to either lengthy vacancy which you will be liable for, or the need to take a slightly lower rate.

If you are required to leave on the 31st, and your replacement isn’t moving until the 15th, you will need to pay that half a month on time as you normally would. We mentioned above that being flexible on your move out date can save you the cost of paying rent on a vacant property if you move out just before your replacement moves in.

Amount of time left on your lease = 2.5 months
For this example you will be paying 9.5 months of rent, despite only staying 9 = $9500, balance due = $2500

Assume the new renter will only pay $900 per month. You will only be liable for the difference for the remainder of your lease, not theirs. Since you would have 2.5 months left, and they contribute $900 a month, they will add $2250 to your total paid.

$9500 (your contribution to date) + $2250 (rerental contribution) = $11750

This means since you committed to pay $12,000 you will need to cover the additional $250

To tie this example together in one large equation:

$12,000 lease commitment

• $500 marketing fee

• $100 touch up paint

• $9000 rent paid while occupied

• $500 rent paid while vacant

• $2250 contributed from new tenant
  = $850 final balance due

A couple notes on marketing…

When we list a rental, we always start a little on the high side, then systematically reduce. This method has served us well, and we recommend keeping with what works on rerentals as well. In almost all cases, if the current tenant is paying $1000, we will begin marketing at $1100 at least. We will then reduce $50 every 7 days or so (seasonal issues and holidays have an effect). So don’t feel as though we’re taking advantage of you if we begin at a higher rate, this is how we always get best results. Many tenants ask about incentives as well. In most cases we advise against them, but it is certainly your option to offer one. We have found however that you normally end up reducing the price regardless, plus you’re committed to paying an incentive. Our advice is to keep with systematic reductions until it’s rented, and apply any incentive funds to the difference in rate, or cost of vacancy.

Important points

1. While the former tenant will be required to pay the difference for the remainder of their lease, any time left on the new lease after that could be at a lower rate. This is a common winter issue, and we could consider a shorter term lease if it’s significant. Here is an article on strategies we use for seasonal issues: Understanding the Seasonal Dynamics of Rental Housing Markets

2. We often get a higher rerental rate, and this is not refunded to the past tenant, so the inverse would be that you may have to deal with a slightly lower rate after they cover the remainder of their lease. You also tend to get the benefit of a lease extension with no vacancy and much less turnover cost.

Important information for owners who choose not to rerent their property through MoveZen.

Owners choose not to rerent their property for various reasons, but before you make this decision be sure you understand the complications that arise both with state law, and our company values. The lease states that tenants are responsible for rent up until the owner either rerents it, or converts it to personal use. Listing for sale is converting to personal use (moving in would be as well). We’ve actually had owners attempt to delay listing in hopes of collecting vacant rent at the tenant’s expense. This is both unfair, and risky. Even the best of tenants will reach a breaking point eventually, and often that results in a court battle. Should it come to light that per NC law every effort to release the tenant from their obligation wasn’t made, you could be liable for a large refund, and possibly even damages.

Per policy we move quickly to alleviate liability for tenants in good standing, we follow the golden rule by treating them as they have treated us, and we get excellent results in most cases. For this reason, when the deposit charge process is taken out of our hands it sometimes creates a moral dilemma.

When owners choose to handle “tenant deposit charge” repairs themselves, and use their own contractors, that effectively takes control and knowledge of the situation from us. Despite this, some owners hope to have their cake and eat it too by taking control of simple repairs or rerentals, while expecting us to aggressively enforce the lease in court, or basically do the dirty work. This is fine if the tenant has seriously disrespected the owner or property, but as we mention that is quite rare. For us to appear in court and aggressively pursue a tenant, we require strong legal & moral validation, and we are not afraid to stand our ground on this. If you intend to handle repairs yourself, as well as have us pursue the tenant legally, we require a significant level of communication and execution. You always have the right to pursue them yourself, and that’s the reasonable approach since you would have handled the repairs in question.

The best course in these situations is simply use the deposit to handle minor repairs, and keep the remainder to cover the vacancy. This is typically the course we take. Court is by no means a panacea, and you actually risk losing large court costs and even the deposit if you don’t have a strong case. Every judge is different, some quite friendly to tenants, and this is one area where NC law is vague, so it is always a gamble. If repairs are extensive however, that is a different situation. You still typically want to avoid court, so it makes more sense to apply the deposit to the vacancy, then tally up the repairs and negotiate payment of a significant portion using the threat of court as leverage.

Re-rent or move in vs sale

One major caveat to our preference for handling repairs “charged to tenant deposits” are situations where the owner wants high-quality repairs either to sell, or for personal use. We are rental managers, and intentionally keep the cost and quality of all aesthetic repairs as low as possible (relative to the rate) in order to maximize return on investment. For the sales market in particular however, that method is often not what we would recommend. You typically want to opt for a much higher quality strategy since the returns are significantly magnified. If however, you want to go the discount route, we can deliver a great value. Either way we encourage you to read this article we created specifically for this issue: