security deposits and broken leases

When a tenant needs to break a lease, many landlords are not quite sure what to do when it comes to the security deposit covering any future rent and potential damages. In this episode of Night School, we’ll examine the best way for landlords to handle security deposits and broken leases so that they aren’t left in dire financial straits.

Transcription of “Security Deposits and Broken Leases”

Stephen: …you know a renter comes to you and they’re being reasonable and they say, “Hey I want to get out of my lease early.” If you’re willing to do that and say, “Yeah, let’s, you know, you can do it. I’ll agree to let you leave, you have to pay the July’s rent, then you should be getting your security deposit back.”
Jeff: Welcome to Landlord University Night School, I’m Jeff Pearson, I’m here with my co-host Stephen White. Hello Stephen, how are you doing this evening?
Stephen: Good Jeff, we’ve got a great episode today because it’s another episode that was inspired by a listener who reached out to us and had very specific question. We went through, we answered his question and decided hey, this would be a good topic for a podcast. So we’re going to be talking about security deposits and broken leases and it kind of ties in with a previous episode that we’ve done just recently on when is it okay for a tenant to break a lease. So I think Matthew, who wrote to us, I believe Matthew’s from Indiana and he wanted to basically paint a very specific case scenario, so we’ll go over that about basically how to deal with somebody who’s breaking their lease and what the right way to deal with their security deposit is.
Jeff: Sounds good.
Stephen: But just again I wanted to point out, if you do have a question for us or a comment on the podcast, on the show, like Matthew here, reach out to us. You can email us at landlordu@rent-prep, again it’s landlordu@rent-prep and ask us your questions, fire away. I’ll always make sure that we respond, we answer them and who knows, it may turn into another episode.
Jeff: Exactly.
Stephen: So Matthew asks specifically in the case scenario that he painted here, he said he had, or somebody’s got a, basically a year’s rent, or a year’s lease and they want to leave six months early. They pay Junes rent and they move out on June 30th. He wants to know if he can keep their security deposit for the time that it’s going to take to find a replacement tenant or is the security deposit for damage to the unit only. Then he also wants to know how does this traditionally work or typically work for a professionally run apartment complex. So we’re assuming that Matthew is an independent landlord and he just wants to kind of get a good gauge for you know, what everyone else in the industry is doing and I was glad that, you know, to answer it and help him out with that. We certainly work with a lot of apartment complexes and professional, you know, rental units that are doing this on a much larger scale so I do have a good feeling as far as what they’re doing, so happy to help Matthew out with that.
Jeff: Absolutely, and you know our goal here is to help Matthew and others like him have professionally run rental units.
Stephen: Yeah, absolutely.
Jeff: You’re not getting paid other than the rent you’re getting, but if you operate at that professional business level it’s going to make all the difference in the world. Everybody hears us talk about that all the time.
Stephen: Right, right. So, the answer that we had basically given to Matthew was, you know, in his scenario where the tenant pays for June, leaves on the last day of June, again, just to specify, his state was Indiana. Just to make sure I was in line with the state laws, I went ahead, I went to Nolo,, which is a great resource for landlords and looked up what Indiana state laws were regarding broken leases, security deposits and based the answer, you know, a lot on what they’re doing and then give him some personal experience that I’ve had too.
So in his scenario, he wanted to know, can he keep the security deposit, use it towards rent. My answer to him was, “As per state law a landlord must make reasonable efforts to re-rent the unit and can’t charge the remainder of the lease agreement.” So obviously, he understands, I’m sure, that he’s not going to be getting six months of rent from this person. In most cases, 95% I would say, of the professionally run apartment complexes that we work with, they charge, and if they’re willing to let that person go and make an agreement with them, then they charge a month’s rent, that’s their time to prepare, show the apartment, re-rent the unit.
So a month’s rent is usually, I would say 95% of the time sort of the standard as far as what you would charge in a broken lease scenario. The important thing I think is to keep the security deposit completely separate, as much as possible, in this type of scenario. What you don’t want to do is agree preemptively that their security deposit is going to count towards that July rent in this case because if you end up going in there and there’s damages and the damages are going to exceed the amount that you have remaining on your security deposit, you just shot yourself in the foot and let them walk away without paying that July rent anyhow.
Jeff: Exactly, we just recorded an episode in the news talking about the state of Missouri wanting to lift the limit on security deposits and there’s this whole thing about having enough money to cover the damages. It just doesn’t make sense to put yourself in a situation where you might be exposed to having a lot of damage that you have to pay for when you’ve agreed to let that be your rent.
Stephen: And you know, right before we jumped on the recording Jeff, you made a couple of really great points about how to really handle the situation the best way possible and I agreed with everything you said which is always going to be based on good communication. If you have a situation where the renter comes to you and they’re being reasonable and they say, “Hey I want to get out of my lease early.” Whether, regardless of what the reason is, if you’re willing to do that and say, “Yeah, let’s, you can do it.”
Go in there, check the place out, at least do a pretty basic inspection to make sure that there’s not a ton of damage done to it and explain to them that, you know, you’re not going to charge even maybe what your legal limit in the state that you’re in, could be more than a month’s worth of rent. But just say, you know, usually we have, we need a month to prepare. If the unit’s in good shape, let me come in there, check it out, I’ll agree, you have to pay the July’s rent and if it’s in the same condition as when I inspected it then you should be getting your security deposit back, is how I would explain it.
Jeff: Exactly, so ultimately going in there and doing a cursory inspection, obviously you have to follow the laws, give them their proper notification, usually at least 24 hours but when they come to you and say I’d like to, I need to break my lease for whatever reason, explain to them, this puts a bit of a burden on me but I want to do everything I can to make sure that this goes smoothly and one of the things that I’m going to need to do is I need to begin to show this property so that I can have somebody rent it as soon as possible so that I’m not looking at this loss of income, and so what I’d like to do is do an inspection and make sure that things are in reasonably good shape.
With that inspection if you agree in writing to return it to me in this same condition, then you can expect to get most or all of your security deposit back and I will absolve you of your lease requirement. So then you go and you do that inspection, you make sure that everything is the way that it needs to be, if there are repairs then you work with them on getting those repairs done but you have it, an agreement in writing with them that they’re going to let you show the unit as well as that they’re going to move out and leave it in that same basic condition.
And just like our normal cash for keys, you could let them know, if I’m able to get this rented and only lose this small portion of rent, maybe I’ll kick back an extra couple hundred dollars in addition to returning your security deposit minus whatever repairs there are, I’ll kick back a couple of hundred dollars just for us being able to work together to make this smooth and for you allowing us to show this while you’re leaving. Whatever you can do to make it work best for you and to be assured that when they leave it’s in good condition, that’s what you’re really shooting for.
Stephen: Right, yeah, I think that concept of having good communication, you don’t want to run into a scenario where somebody feels like they’re coming to you in a reasonable way saying, “Hey I need to get out,” you give them a hard time, now they have incentive to, you know, take recourse on you and damage the property. So, I think, you know, if you run into a situation where the person wants to break the lease, you almost have to assume they’re gone anyway and at that point it’s minimizing your risk and trying to find the best way possible so that they’re not going to do any damage and everybody is sort of happy as they lease. Of course, you never want somebody to walk away early but as we know, collecting past due rent is difficult, near impossible and if they end up moving out or leaving in the middle of the night, you’re going to be stuck.
Jeff: That’s right, and on their way out they kick a whole in the wall and they break the key off in the lock, you know just those final little acts that will just cost you money and frustration whereas working with them a little bit, we’ve talked about it many times. So the bottom line with security deposits and broken leases, as you said, keep those security deposits separate, keep them for damages to the unit whenever possible and certainly make sure, if you’re going to consider using that for rent and things like that, pay attention to your state laws, check out to be sure that you know what the laws are regarding security deposits. I know in California these days you have to have a separate bank account for that, so, pay attention to those things because they can get very specific in different states.
Stephen: Absolutely, and it’s constantly changing so be sure that you are reading the most, and Nolo’s pretty good about keeping the updates on there but make sure you’re reading the most up to date things and just as you said, we were just covering a story, you know, in Missouri they’re talking about lifting security deposit restrictions so these things are constantly changing and in your state it’s a good chance that it’s changed since the last time you looked even, so never a bad idea to check that stuff out, stay on top of it and make sure you’re doing it to the letter of the law.
You don’t want to get into a, you know, as we know security deposit issues are the number one issue showing up in landlord tenant court, so you know, knowing that ahead of time you don’t want to walk into a problem with the security deposit because you know it’s, you know, from the renter’s perspective they feel like that’s their money, so they’re going to push back, they’re not going to just let it go a lot of times, they’re going to fight it, they’re going to try and get that money back, so it’s not something that everyone’s just going to forget about. So do everything that you can to make sure that you’re abiding by all the laws and you’re less likely to lose in court.
Jeff: Well perfect Steve, I think that wraps up another episode of Night School, I look forward to talking with you tomorrow evening.
Stephen: Great, thanks Jeff.