Breaking a lease

I've written about how to write a lease. I've discussed some of the wild notions associated with leases and breaking them. So I suppose I shouldn't have been surprised when I recently discovered that one of the biggest ways people find my blog is by searching an engine with some variation of the terms "breaking lease". So since I don't have a large quantity of time to blog today, I thought to pontificate upon the terms of a lease and it's legal ramifications.

It seems (based upon the search terms) that there is a lot of confusion on how leases work. Most people seem to have the misconception that leases are covered by general law, and the courts have mandated certain terms and conditions, as well as penalties. In fact, many people who find their way to my blog are curious about the penalty associated with breaking a lease.

What is a lease?

While there are some laws that cover aspects of the landlord/tenant relationship (almost exclusively at the state level) those laws are usually aimed more towards the safety of the tenant, discrimination and eviction procedures. The lease itself is barely mentioned, for example Virginia laws mostly just remark that a signed lease must be provided to the tenant and it can't be changed without every one's consent.

Leases themselves are managed under a branch of law called Contractual Law. A contract, simply put, is an agreement between two people to exchange something, usually exchanging money for some sort of good or service. A great example of this is a mortgage agreement. When you get a mortgage (or any sort of loan) you sign a contract that pretty much states that the bank will give you a large sum of money right now, and you are to pay back an even larger sum, but over a long period of time.

The terms of the lease are strictly between the two parties. For example you could sign a contract to pay Uncle Joe $20,000 to paint your Honda Accord. It might not be a very fair contract (unless Uncle Joe is world-renowned), but if you sign it you've agreed to it. Any goods and services can be exchanged, best shown by this couple's prenuptial agreement in which she must cook 3 breakfasts a week and he must take her to London for her 60th birthday "keeping in mind that London is an expensive city, period".

OK, but what happens when a lease is broken?

Technically speaking a lease cannot be broken. Since a lease is a binding contract, you must fulfill your end of the bargain, regardless of whether you are a tenant or a landlord. If you go to court with a reasonable rental agreement, the judge will almost certain rule that the terms of the lease be enforced.

Most leases have a buy-out clause built into them that allows one party of the other to prematurely end the lease by following a series of steps. These steps most often include paying some sort of premium to the other party, but could also include producing special paperwork (such as a tenant providing an offer letter from a company more than 50 miles distant). This buy-out clause is what we refer to when we speak about "breaking a lease", but it's a perfectly legal method to end that lease early.

It's important to note that lease do not have to have buy-out clauses built into them. If there isn't a buy-out clause in the lease, and the other party is not willing to negotiate then you must fulfill your end of the bargain. Let's pretend that you own a house and rent it out to a nice family who signed a 24 month lease. Two months later you receive an unsolicited purchase offer for a large sum of money. You review your lease and discover that while the tenants can buy their way out, there's no such provision for you. The family is perfectly happy with the home and has no intentions of moving. Depending on the circumstances of the case, it's very likely that the family can force you to legally abide by the terms of your agreement, and not sell.

Whether you are a landlord or a tenant, it's very important to carefully review a rental agreement and understand how the buyout clause is defined. In Biff and I's lease we have chosen to set the buy-out clause (labeled as Early Termination) as follows:

Tenant may choose to terminate the Agreement before the natural expiration of the Agreement. To exercise this option, Tenant must submit his intentions, in writing, to Landlord at least thirty (30) days before termination and must pay a penalty equal to a single monthly installment in addition to their final months rent. In paying this penalty, the Agreement will be terminated and the Landlord will not hold the Tenant accountable for any of the monthly installments remaining in the term of this Agreement.

Basically in crafting this agreement, Biff and I have guaranteed ourselves 60 days to find a replacement tenant (30 days notice, plus an extra payment with covers another 30 days). This is good for both parties in that it allows a tenant to leave without too much trouble, and it gives us plenty of time to find a replacement. Of course, in keeping with what was mentioned directly above, we've also included a way by which we can terminate early as well.

The Landlord may choose to terminate the Agreement before the natural expiration of the Agreement. To exercise this option, the Landlord must submit his intentions, in writing, to the Landlord at least forty-five days before the date of termination. The Tenant has the option of moving out at any time before the date of termination. The Tenant is responsible for paying all rents due up until the date he moves out. On the date of the move out the Landlord must refund an amount equal to one (1) monthly installment to the Tenant.

If Bill Gates moves to Virginia tomorrow and wants to buy one of our houses for $5 million, then we have a way by which the deal can be completed. Look at the wording again, this clause means that Biff and I can terminate the lease for any reason at all, and the tenants can't object as long as we follow the steps set forth in the lease (giving them 45 days notice and refunding a month's rent).

Alternatively, bear in mind that any contract can be changed at any time as long as all parties agree on the change. In the above example with the landlord reciving a large offer on his house, he could possibly offer money to his tenants. If they agree to it, and sign an agreement to that effect, the earlier lease is then nullified.

As a tenant that same laws apply. You can negotiate your way out of any lease as long as you can convince the landlord. Unfortunately it is typically impossible to neogtiate with a large management firm, in the same way that you usually can't barter with Walmart. However if you are dealing with a small landlord, he might be willingly to allow you out of the lease if you can sweeten the deal enough for him. One possibility could be offering to locate a replacement tenant that meets his criteria.

However, if either party refuses to negotiate, the lease remains.

So I'm taking the lease to court...

So if all else fails and you are trying to escape a lease (or enforce a lease) in civil court, there are several things you need to know about contract law. The first is that you must bring a copy of your lease signed by both parties. If you plan your argument based upon the terms of the lease (such as trying to get a deadbeat tenant to pay up) and you don't have a copy handy the judge will most likely throw out your case. The same goes for tenants, you must have your own signed copy of the lease to present to the judge.

Once the judge has a copy of the lease, it's most likely going to be enforced. If you are trying to escape the terms of the lease, there are a few common defense that are used:

• Lack of Capacity - One of the rules of a contract is that both parties must be capable of understanding and fulfilling their side of the contract. There are many ways to dispute capacity, some of the more common including mental illness, such as Alzheimer's, (proving a lack of understanding of the contract) and bankruptcy (proving a lack of ability to fulfill the contract). Special consideration can be awarded to people (either tenants or landlords) who can claim financial hardship.
• Unconscionability - Simply put this word means that one party used a superior bargaining position to force unfair conditions upon the other party. For example if a landlord rented his unit out to a couple who spoke little English and used their poor understanding to add tremendous fees and dues. Unconscionability is not a guarentee that a contract will be voided, and the court often has great leeway in how it deals with such claims; from voiding the contract to simply amending it.
• Illegality - A contract can be voided if it is ruled to be illegal. For example, Virginia state law clearly defines the maximum amounts that a landlord is allowed to collect for a security deposit. If a landlord collects too much, then that clause is illegal. As I mentioned in "Breaking Down a Lease", one illegal clause can potentially void an entire contract. The best way to prevent a complete dismissal is to add in a clause of Severability.

This is a fancy legal word that means if some part of this lease is invalid for some reason (like a judge throwing out a no-liability clause) the rest of the document is still considered valid, instead of the entire document just getting thrown out.

• Misrepresentation - The misrepresentation argument is used when one party has lied or stated falsehoods before the contract was signed. A tenant could use this argument if the landlord planned some major renovation work before signing a lease, but didn't disclose that fact to the tenants. Alternatively a landlord could use it if a tenant lied on their application, for example with regard to income or number of potential inhabitants.

You'll note that nowhere on this list is "convenience" or "it's not fair" (ok, "it's not fair" kinda made it on the list, in extreme circumstances). Signing a binding contract is a serious matter and shouldn't be taken lightly. I strongly urge all landlords to write their own leases by hand so that they fully understand every clause of it (even if you base your lease heavily off of a template), and I strongly urge all tenants to actually read a lease before signing it.

Never make a promise that you don't fully understand, and never sign a substantial contract (like a lease) without carefully reading it over. Too many horror stories (like the poor guy I wrote about whose lease had a buy-out clause of three months rent (at the very bottom of the article)) could have been avoided if people simply took the time to understand what they were getting themselves into.