When signing a lease for a rental property, most people never dream of needing to end their lease early– and as a landlord, you rarely plan for it.
However, a myriad of life events can cause someone to need to break their lease.
Most landlords and property managers have specific language in the lease regarding what happens if a tenant chooses to break their lease.
So, what are your options? Can you keep all or part of a tenant's security deposit for breaking their lease?
And, if so, what should you include in your lease to protect yourself and ensure you can recoup your losses by keeping part of the tenant's security deposit (assuming local laws permit it)?
Let's talk about all that now.
How does a security deposit work?
A security deposit is a sum of money paid at the beginning of a lease that is held aside in security, sometimes in an escrow account, for the entirety of the lease.
Typically, security deposit funds are used to make any significant repairs that may be needed at the end of a lease.
If there are no significant repairs needed when a tenant moves out, the security deposit is usually refunded.
Laws that determine what a security deposit can be used for vary from state to state. In many states, security deposits can also be used to cover unpaid rent, unpaid utilities, or lease violation fees.
How does a lease agreement work?
Put simply, a lease or rental agreement is a contractual agreement between two entities.
In the case of a rental agreement, it’s a contract between the landlord or property owner and the tenant. Leases are legally binding documents.
What this means is as soon as someone signs a lease with you, they are held to all terms of that lease, including those clauses referring to breaking the lease and the use of security deposit funds.
It’s very important for landlords and property managers to ensure their lease or rental agreement details all possible situations and scenarios, including the penalty for a lease break.
Why is having a tenant break a lease early bad?
When a tenant breaks a lease on a rental property, it puts a landlord in a tough position from a financial standpoint.
When property managers perform financial projections, they attempt to estimate the property’s annual income based on its current leases.
When one or more leases abruptly end, it can throw off rental income in a major way.
Not to mention, it takes money to turn over a unit before it can be rented to a new tenant.
Typically, a property manager will schedule end-of-lease inspections one to two months prior to a tenant's lease end date. This way, they have time and money to order the supplies needed to clean and ready the apartment.
When a rental agreement is broken, the ability to prep and budget for the process of turning a vacant rental unit goes out the window.
The property manager or landlord will need to inspect the unit, fix any damages, clean it, and pay agents or brokers to show it.
In the case of a lease break, this all has to be done on extremely short notice, which can make it pricier to perform.
Then, the apartment will take an average of one to four months, depending on the market, to re-rent.
During this time, the landlord's cash flow is hindered, and they are also pouring money into resources to re-rent it, such as paying for agents and marketing tools.
This is why the ability to keep part of the security deposit is useful, as it helps recoup some of those losses.
But is a landlord actually allowed to keep security deposit funds for breaking a lease?
Can a landlord keep a security deposit for breaking a lease?
The short answer is yes, you can keep security deposit funds if a tenant breaks their lease so long as this penalty is detailed in the lease clause.
A lease termination clause can be found in nearly every lease agreement, but the content and wording may vary.
The clause will typically outline the following information:
- Mandatory notice period: The clause should outline exactly how many days of notice a tenant needs to give if they will be breaking their lease.
- Financial obligation: Typically, the tenant is still financially obligated to the unit in one way or another. The financial responsibility for breaking a lease (i.e. unpaid rent or unpaid utilities) can vary. Often, this can mean the tenant needs to pay their rent until the unit is re-rented, or pay a one-time flat fee of a predetermined amount to break the lease.
- Security deposits: Lease break clauses may include stipulations about a security deposit. Landlords can add lease break clauses that allow them to keep a portion or all of the security deposit in the case of a lease break. As we talked about earlier, deducting security deposit funds is a great way to recoup the substantial losses that can come when a tenant breaks their lease. Security deposit funds can also be kept for other reasons such as unpaid rent as well.
As long as the penalties found in the lease break clause follow all state and local housing laws, a number of penalties can legally be given for a lease break, including a loss of the tenant's security deposit.
At the end of the day, breaking a lease is defaulting on a legally binding document, and penalties should be expected.
Landlords can keep a portion or all of the security deposit in the case of a lease break.
Whether or not they actually do this depends on their lease break clause. Landlords can only legally do what is outlined in the lease break clause.
Can there be other penalties for breaking a lease?
The early termination of a lease can wreak havoc for a landlord.
Because of this, there are several penalties landlords can employ when someone needs to break a lease besides taking part of the security deposit for early termination fees.
What you can expect for lease break penalties can all be found in your lease, under the lease break section.
There is usually a specific and detailed clause about what penalties a tenant may incur if they break a lease.
Some common lease break fees and penalties include:
- Paying a determined fee, such as a fee of 3 months' rent, to be released from the lease before the rental agreement period is up.
- Requiring a specific notice period (which can result in further fees if adequate notice is not given).
- A “rent until re-rented” clause, which typically states a tenant must vacate by their specified date, but continue to pay rent until a new renter is found for the unit.
Are there scenarios where you're not allowed to take security deposit funds for breaking a lease?
There are a few specific scenarios where a tenant may be relinquished from any penalties, including a forfeit of their security deposit, in the lease break clause.
Security deposit funds must be handled differently in each state, which can complicate things.
You’ll need to look at your state’s specific laws to find out how its specific security deposit laws may affect things.
Beyond this, some common scenarios that may make a tenant eligible to end their lease early with no termination stipulations or penalties include:
- The tenant is a victim of domestic violence or sexual abuse. In many states, a tenant who is being subjected to abuse is able to terminate their lease without penalty. States often require the tenant to give proof to the landlord and still observe the required early termination clause notice period.
- The unit is unlivable. Most states require landlords to provide safe and adequate housing for tenants. If the unit is unlivable, the lease is null and void, so many states will allow for a penalty-free lease break. A tenant would need to have consistent proof that the unit is unlivable (and that they have notified the landlord of these conditions and nothing has been done to remedy it) to move forward with this kind of lease break.
- The tenant has to move for active military duty. This is a valid reason to break a lease under federal law. As long as the tenant provides proof their move is due to active military duty, the lease break fees are waived.
Although extenuating circumstances like losing a loved one, a loss of employment, or divorce are common reasons for someone to break a lease, they are not typically protected by law.
Though a tenant in a particularly hard spot can always try to negotiate the lease break penalties with the landlord, they will not be protected against them by law.
Protect your rental property with an iron-clad lease
Breaking a lease is a stressful and unexpected scenario for landlords and the property management company managing the property.
Fortunately, lease break clauses are added to most leases to protect the landlord from costly abrupt lease breaks. And, in many cases, you can claim teh tenant's deposit funds to recoup part of your loss.
Penalties for an early lease termination can vary, but one of the easiest ways for landlords to recoup their losses is a partial or full claim of the security deposit.
A forfeit of the security deposit is legal and justified as long as it is written into the lease break clause.
There are also other penalties that can be legally written into the lease break clause, like other fees or a mandatory notice period.
However, it's important to review your lease clauses and state and local laws to make sure you're covering yourself from all angles.
When a tenant breaks a lease, the legal agreement between the tenant and landlord is broken, which can lead to any number of repercussions beyond just withholding security deposit funds.
It’s important for landlords to keep a specific lease break policy to protect themselves financially.
To learn more about security deposit laws in your state, check out our complete set of resources for all 50 states: Real Estate Rental Laws in the US.