Lease break – what happens?

So, you’ve leased your property out, you have a fixed term tenancy agreement and it’s happy days!  Then, half way through the lease, the tenant advises they have to break the lease, they return the keys and vacate the property, what now?

Well, the standard process for most agencies is to advise tenants of the lease break costs (tenants are obligated to pay for advertising and a pro-rata letting fee, this means if a landlord pays 1 weeks rent for a letting fee, and there’s 6 months left on a lease, the tenant only has to pay half a weeks letting fee in compensation).

From there, an agent does everything in their power to ‘minimise the tenant’s loss’.  This does not mean that the agent is working for the tenant by any means – they’re actually working for the landlord to minimise their risk.  Under the legislation, the landlord has an obligation to minimise loss to the tenant, and if you can not prove that you’re doing everything in your power to re-lease the property, then you risk not being able to claim rent from the tenant!

Once a new tenant is found, then the rent is calculated up until the new tenant moves in and this is what the old tenant owes.  Done and dusted.  If only it was always that simple…

A recent VCAT case has occurred where a tenant broke the lease, vacated the property and returned the keys.  After the property was vacant for 10 days, the tenant made an application to VCAT for his bond to be returned (knowing that agents only have 10 days to process bond refunds or make an application).

What do you think the outcome was?  There was a lease in place, the tenant broke this contract, surely the owner is entitled to hold onto the bond until a new tenant is found?  No, afraid not.  VCAT awarded the bond in full to the tenant, siting that the bond should not be used to cover rent and that the owner must apply for compensation after it is leased from the tenant!  When there is no bond, when applying for compensation, if the tenant doesn’t pay, you’re stuck with a pretty piece of paper from VCAT telling you the tenant should pay…

How infuriating!

How do you work around this?  Well, being proactive always helps.  Knowing the legislation is also a great benefit.

  • Don’t get the tenants to return the keys, once the keys are returned the tenant has returned possession and this limits your ability to claim further rent.  When they have possession, they have to pay rent.
  • Try your best to lease it out quickly, even if you have to drop the rent by $5pw. This puts the landlord in the best light and in a more powerful position when claiming from the tenant.  Better off taking a $260 hit for a 12 month lease rather than loosing weeks worth of rent by not being able to claim it from the tenant!
  • Negotiate, negotiate, negotiate!  Once instance we dealt with we had the lease break tenant pay weekly instead of monthly, it was more manageable from their end and, it gave the tenant hope that we were about to lease it (which we did).

Do you have any lease break questions or stories?  Let me know.

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