What happens when a tenant breaks their lease? Tenants sometimes do not understand that they are in a contract for a set period of time. Deciding to move out in month 10 of a 12 month lease does not mean the tenant is no longer in a contract to make payments and provide care for the home they leased. Unfortunately, it is a rare tenant who understands their legal obligation and who does everything possible to cooperate to meet these obligations while vacating the home.
Sometimes, the suddenly empty property is left in wonderful, ready-to-rent, condition. This is the best thing a tenant who breaks their lease can do. The quicker a new tenant can be found, the more limited are the financial damages where a court will find them liable. Many times, the sad truth is the need to break the lease is connected to other bad events in the tenants life. Walking away from the home brings out the worst in their character as they destroy, or at minimum, leave the home a wreck. There also is a total disconnect as to the cost involved in leaving lots of personal property that must be removed.
The following summarizes the steps when a tenant breaks their lease and vacates the rental.
Often, the first clue that a tenant has broken their lease is when posting a "pay or quit" notice for their delinquent rent. If the blinds are all closed it may be difficult to assess if the home is vacant. Unusual amounts of outside trash are a clue. Sometimes the electric meter is not turning. There are a number of tricks to try to determine this but it is unlawful to just use a key and enter to check things out. Clues must be put together in order to make a determination the home has been vacated. A posting that remains on the door over several days is a sign that the tenant has left.
Control of the property means to make sure it is secure. Legally, locks can't be initially changed as the tenant still has a lease. In many states (Indiana) anything left inside the property that has value, needs to be identified and the tenant provided an opportunity to return to remove. There are a number of steps to take regarding personal property. Disposing of it will delay the process of taking control and beginning to move to step two.
Every effort must be made to locate the tenant and advise them they are still obligated to a lease and are expected to make payments. If this is something they cared about they would have contacted the owner or landlord before abandoning the property. There still needs to be a record that this obligation was reinforced to the tenant.
Legally, an owner can attempt to collect damages for the property and lost income. So, the cost to control the property, make it rent-ready, and to re-let the home; plus rent lost will be compiled into a statement that will be offset by the security deposit. In court, if the home has been re-let, the lost rent part of the equation will be reduced as judges are not going to reward for lost lease income if actually the home is earning income again (even if it is a new tenant).
The trick with the legal part of obtaining a judgement is finding the tenant to serve them. This is why thorough background screening is so important as it provides a number of different check points to locate a former tenant. I am often quite surprised, when we take over accounts from another management company, at the lack of information that can be used in any kind of legal action. It is one of the most important items in the leasing process and not doing it well up front, could mean thousands lost later.
Of course, obtaining a judgement does not equate to receiving funds. It is a good start and a great attorney will have the ability to apply pressure to collect on the judgement to help to complete the obligations under the lease. This post concludes with an example of a true case and how the collection process played out.
After disposing of all the personal property, getting the home ready to be marketed for lease is the top priority. Changing the locks is advised. With a little luck, a quick turn will significantly reduce the costs of the broken lease and might affect the amount of time and effort that will go into the legal steps.
Hopefully you have never experienced a tenant breaking a lease. Unfortunately, if you have rented for much time, it can happen to you.
The sad truth of this case is how little money may ultimately be collected when a tenant leaves early.
Last year, one of our properties under management was vacated 6 months prior to the lease expiration. Upon discovery, it was also determined that the home had sustained damages of several thousand dollars. A complete analysis of the damages, plus rent not collected, totaled a loss of $24,500.
In working with the owner we hired our local attorney to file suit against the former tenants. Along with personal details obtained on their application, we were able to verify one of the tenants employment had not changed. This provided enough to file suit and have them served. We also immediately began to repair the property and attempt to re-lease it. In this particular situation, the attorney advised us that the actual dollars to ask for in a suit would be adjusted based on when the property was re-leased and if there was any loss of rent by accepting a lower lease. We also could add to the damages a tenant finder fee if we were able to re-lease prior to the court hearing. Finally, the amount of damages provided the owner the option of moving the case from a local small claims court to a Superior court where the legal costs are more, and the court timelines are longer. Owners have to decide if the probability of collecting a judgment with the former tenants is worth the cost and time of processing the case in a court above a small claims level.
We were successful in re-leasing the home within 60 days at a slightly lower rate. The owner did not receive rent for a period of 90 days due to the lack of collection in the first month that alerted us to the vacate. When the final calculations were completed, we believed the owner was due $8500 in lost rent and repairs. The faster the property is re-leased the more the potential loss is managed ($24,500 versus $8500). The owner had opted to go to small claims court and cap their losses. That turned out to be a good decision.
There was no trouble obtaining a judgement for $8000 (the Small Claims limit). The before and after pictures, combined with our contractors bills with a very comprehensive lease quickly satisfied the Judge. The tenant showed up in court and tried to argue that a small non-maintenance item had not been addressed timely therefore negating the lease. Fortunately, an argument like this holds no weight unless you somehow have a lease that states you can break it if you are unhappy.
Now comes the fun part. How do you collect a judgement for $8000? Most collection agencies take a fee of 30-40%. The agency pursued collection at a fee of 33%. An option the owner may have is whether to try to settle the judgement in a lump sum payment or allow for a collection period. People with judgements, usually have more than one. It is often only a matter of time before they visit bankruptcy court and have the judgements dismissed under a Chapter 7 bankruptcy. Therefore, I encourage owners, to accept a lump sum settlement and move forward.
These owners ended up accepting a settlement of about 50% of the judgement. Somehow, the tenants had this amount of cash and paid the judgement. After the agency collected 30%, the owner received about $2500 on a $8500 loss.
The former tenants were screened thoroughly. I reviewed their applications and there were no clues to expect this outcome. Turns out they had personal problems that made living in the same home impossible. Divorce can't be planned for and it does not show up on applications. Health problems are the other risk that can't be screened. We do not have, nor are we allowed to ask, a screening question for "how secure is your marriage", or "do you have any impending health problems". These situations just have to be mitigated when they occur to produce the best possible outcomes. Unfortunately, these situations often involve a loss for the owner. If a tenant breaks their lease, and you end up with 30 cents on the dollar of recovery, this case illustrates that may be a pretty good recovery. It does not mean it will taste any better but this example provides a sample path to some recovery.
Ready to rent your home or property? Let's schedule a time to talk. The experts at WILMOTH Group have more than 25 years of experience in property management in the Indianapolis area.