If residents always paid their rent on time and stayed through their lease term, you wouldn’t have to worry about lease break damages. Unfortunately, some residents break their leases by failing to pay rent, or by moving out prior to the end of the lease term. When residents break leases you incur damages. Landlords charge and attempt to collect a wide range and combination of damages. Some damages are obvious and are legally recoverable. Some damages are either not legally recoverable, are barred or reduced by your lease, or other facts. So exactly what can you charge a resident for breaking their lease?
Leases are contracts. To a large extent, your right to charge a resident is governed by your lease. Additionally, your rights to charge residents for breaking a lease are also governed by well-established legal principles and contract law developed over centuries. Over the course of landlord tenant history, generally a landlord could recover one of two types of damages when the resident broke a lease. A landlord could recover restitution. Restitution restores you to the position you were in before the lease was entered. While appropriate in some lease situations, particularly in cases of fraud, restitution damages are usually not applicable to lease break situations. Rather far more common and well established as a measure of damages are benefit-of-the-bargain damages. In addition to benefit-of-the-bargain damages, more recently landlords are increasingly using lease break fees or liquated damages.
The purpose of benefit-of-the-bargain damages is to place you (the injured party) in the position you would have been in had the resident fully performed the lease. Benefit-of-the-bargain damages are commonly referred to as future rent. You are entitled to receive, as damages, all of the rent you would have received if the resident hadn’t broken the lease. The same position doesn’t mean a better position. You are not entitled to more than you would have received under the lease if the resident had stayed and paid all rent as originally agreed. Thus, you cannot charge both future rent and a lease break fee. If the resident had performed, you would not be entitled to a lease break fee.
Contractual damages may also include provable out-of-pocket expenses that you incurred because a resident breached. However, all damages must flow from or be proximately caused by the resident’s breach. In other words, but for the resident’s breach you would not have incurred the expense. Courts have wide latitude in determining whether a resident’s breach was the proximate cause of any item of damages. Judges can and will impose their views and opinions, based on what they perceive to be fair and just, regardless of your lease. Thus, if a resident has lived in a unit for six years and destroys the carpet, most judges will deny a claim for carpet replacement damages. Yes, the resident destroyed the carpet. However, in the judge’s opinion the carpets age (six years) was the proximate cause of why it had to be replaced.
You are always free to charge a resident what you want. However, the courts are unreceptive and even hostile to overreaching. If the result of you being awarded every charge puts you in a better financial position than if the resident had fully performed the lease, the judge will quickly conclude you are attempting to collect a windfall at the resident’s expense. Judges will also conclude that you are overreaching when you attempt to pass onto the resident any expense you would have incurred as normal maintenance regardless of the resident’s actions. In other words, with the passage of time units need to be painted and carpet needs to be replaced.
Once a judge concludes you are attempting to overreach at the resident’s expense, your ability to collect any damages is in jeopardy. From the judge’s perspective your credibility has taken a major hit. The judge will heavily scrutinize every charge, and may even proactively look for reasons to justify why you shouldn’t recover. For these reasons you should always carefully evaluate and determine whether your charges viewed in combination result in you receiving more than you would have received if the resident had not breached. Similarly, you should also ask yourself whether or not you would have incurred the expense regardless of the resident’s actions.
Nobody would stand by and watch a fire burn if they could put it out. Similarly, you have a legal duty to avoid or lessen the amount owed by a resident when possible. Your duty to mitigate damages under Colorado law is a fundamental principle of both contract law and landlord tenant law. Mitigating damages means repairing and preparing a property for re-rental as soon as possible after the residents vacate, as well as advertising and renting the property at the earliest possible opportunity. Because your efforts to mitigate will be in issue in court, you should always document and keep records of your efforts to re-rent the unit.
Sometimes we encounter a manager or landlord who is attempting to recover punitive damages. Punitive damages, or damages meant to punish and deter certain types of behavior, cannot be recovered when a resident breaks their lease. Your lease should not contain the words penalty, forfeiture, fine, punitive, or similar words that would indicate an attempt to punish a resident for breaking their lease. If a judge sees this prohibited language in a lease, the judge will conclude you are overreaching and you will suffer the typical results when a judge reaches this conclusion.
As noted above, lease break fees are now commonly used in leases instead of future rent clauses. Lease break fees are based on the legal concept of liquidated damages. Liquidated damage clauses in contracts are enforceable. Penalty provisions are not enforceable. Historically, liquidated damage provisions resulted from contract situations where damages were difficult, if not impossible, to determine exactly. Thus, the contracting parties agreed in advance to the amount of damages. This is the purpose of a lease break fee. You and the resident agree what your damages will be in advance, i.e. the amount of the lease break fee.
The purpose of this article is to discuss what you can charge when a resident breaks. Thus, we will not address the business reasons for lease break fees, or the advantages and disadvantages of lease break fees versus future rent clauses. However, you should know that lease break fees are subject to challenge in court because the law regarding lease break fees has not been conclusively settled in Colorado. Lease break fees are generally subject to attack for the same reasons that any liquidated damage provision could be challenged. First, your damages if a resident breaches are easily calculated. Second, a lease break fee bears no measure as to your actual damages if a resident breaches. For these reasons, some judges will not enforce lease break fees. For an extended discussion of lease break fees, see The Lease Break Fee Future Rent Debate, Landlord News, March 2009.
Based on our discussion of damage principles, let’s examine what you can and cannot recover using several common landlord recovery scenarios as examples. Under a future rents lease, you can recover all unpaid future rent owed by the resident under the lease as long as your lease obligates the resident to pay future rent. In Colorado, you can only recover future rent if the resident has contracted to pay the future rent upon default. If your lease does not contractually obligate a resident to pay future rent upon default, your recovery of the unit either by surrender, abandonment, or eviction releases the resident from paying rent.
Even if your lease has a future rent clause, you can only charge and collect rent from a resident until the property is re-rented. You cannot charge a new resident and the old resident rent for the same period, because you would experience a windfall. Unpaid late fees may be added to the ledger through the date of move-out as well, but recovery of future late fees after the resident vacates is not allowed. Charging future late fees is a common mistake.
In addition to rent through re-rental, you can recover incidental costs expended to advertise and re-rent the property, including broker fees if these are normally incurred by you in the rental process, and these costs were proximately caused by the resident’s default. Larger communities that constantly advertise to fill vacancies often have a difficult time proving that they have expended costs advertising an individual unit above and beyond their regular advertising budget. A court may refuse to award requested advertising costs because they are considered a normal cost of doing business. These types of damages are commonly referred to as reletting fees or damages.
If your lease has a lease break fee, you can recover the amount of the lease break fee. However, lease break fees cannot be unlimited. The higher a lease break fee, the less likely it is to be paid by the resident and enforced in court. Lease break fees range from one to three months rent. A three-month lease break fee is not likely to be enforced in court. You cannot charge both a lease break fee and reletting related charges. You cannot recover future rent and a lease break fee. Remember, by having a lease break fee (liquidated damage provision), you and the resident agreed in advance what your damages would be if the resident breaks the lease.
Regardless of lease type (future rent or lease break fee), many leases require the resident to give notice prior to vacating, and obligate the resident to pay rent for failing to give notice. Thirty or sixty day notices are common lease requirements. The purpose of notice provisions is twofold. First, the notice gives you time to find a replacement resident before the current resident moves out. Second, the notice provision makes the current resident responsible for rent during the notice period if the resident leaves without notice. Sixty day required notice appears to be a growing trend. We do not endorse sixty-day notices primarily because judges think sixty days is unreasonable.
Can you recover damages for the resident’s failure to give notice required by the lease? Maybe. If the lease is well written, this certainly increases your chances that a judge will award you notice damages. The problem we see is that many notice provisions are not clear. For example, the notice provision isn’t clear whether notice has to be for the end of the month, or whether the resident is obligated to give notice during any month-to-month periods. We also consistently see notice provisions that are contradictory to either the future rent language or the lease break language, or that are drafted in a manner that results in the landlord receiving a windfall. Since it’s your lease, courts will deny recovery when notice provisions are unclear, contradictory, or result in a windfall.
Unfortunately, everyone is all too familiar with rent concessions. If a resident breaks their lease, can you charge back concessions? Again, the answer is maybe, for the same reasons that you may recover damages for a resident’s failure to give proper notice. All too frequently we see poorly worded concession language. The amount of the concession is difficult to determine. The language regarding the resident’s obligation to repay upon default is even worse. You made a bargain with the resident. You agreed to a rent discount in exchange for the resident paying on time and not breaking their lease. When a lease clearly sets forth this bargain, judges will routinely award repayment of concessions damages.
The key to avoiding recovery problems in court is to avoid charges that are either singularly or in combination penalties, windfalls, or ordinary costs of doing business. While there are many permissible recovery combinations, as discussed, there are also many impermissible combinations. Because there are so many different potential combinations driven by lease language, only a review of an individual lease can determine potential problems to recovery. You are always entitled to recover damages if the resident has physically damaged the unit. To maximize recovery, keep your charges reasonable, and don’t overreach. Being awarded $2,000 based on a reasonable ledger is preferable to asking for $5,000, and getting $1,000, or worse $0.