Breaking the lease early – options for property managers

16 Apr 2014

The Residential Tenancies Act 2010 (the Act) provides options for property managers as to how they intend to handle the circumstances of a tenant who wishes to break their lease. The only difficulty is that you cannot wait for the tenant to break the lease before you choose the method, you need to make the decision and have agreement with the tenant before the lease is entered into.

The standard form of Residential Tenancy Agreement provides for an additional term, Clause 41. This clause is a “default” option, that is it is written into the standard agreement and if you dont delete it then the clause applies and the penalties payable by the tenant for breaking are fixed and enforceable.

Clause 41 provides for the payment of the following penalties depending on the circumstances.

If the fixed term of the lease is for 3 years or less then the penalty is 6 weeks rent if less than half of the term has expired or 4 weeks rent in any other case.

If the fixed term of the lease is more than 3 years then you can nominate the size of the penalty which is then written into the agreement.

If you decide to delete the break fee then you will have recourse to the traditional method whereby the tenant who is breaking the lease is required to pay the rent until a new tenant is found and meet a proportion of the advertising costs and the agent’s reletting fee. These costs can be apportioned in keeping with the unexpired portion of the lease. For example if the tenant is breaking in the first quarter of the agreement then they may be required to meet 75% of the costs of reletting.

In these circumstances Clause 36 of the Agreement applies the rules of law relating to the landlord’s responsibility to mitigate the loss to the tenant, that is “reasonable “action must be taken to contain the loss.

In the event, however, where you have not deleted Clause 41, that is you have adopted that method, then the mitigation of loss rules do not apply. The penalty is fixed, either 4 or 6 weeks, and irrespective of when a new tenant is found that is what the outgoing tenant has to pay. On some occasions you may find a replacement tenant within a few days and the penalty payable will represent a “profit” situation for the landlord. The costs of the reletting are then met by the landlord and are not passed on to the tenant.

Property managers should not make the decision on which method to adopt without consultation with their client, the landlord. You need to explain the two methods that are available and think through which method would better suit the circumstances and the type of property, having particular regard as to the likely time for reletting

If the break fee method is chosen then keep in mind that you should collect the break fee, either 4 or 6 weeks, separately from the bond, that is ask the tenant to pay the fee at the time of giving notice. The bond is only 4 weeks and if there are arrears and damages at the time the tenant vacates then the chance of you collecting the break fee will be remote, particularly if the tenant is going overseas so make early arrangements to secure payment.

Source: Geoff Hunter – EAC Compliance Officer

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