The Property Management Shop

Youv’e Got to Ask Yourself One Question

by Marc Wilson

Q. Two months ago, I entered into a one-year lease with a tenant. Yesterday she called and said that she was vacating because she got engaged and was moving in with her fianc�. I told her that she would be responsible for the reasonable costs that I incur because of her early, unilateral termination of the lease. I warned her about lost rent, advertising costs and leasing commissions. It turns out that her father is an attorney. He faxed me a longwinded missive admonishing me for improper usage of his daughter's security deposit, bad faith, unfair business practices, etc. He is threatening to sue me if I don't return 100% of her security deposit. What should I do?

A. This one is easy—return her security deposit. Almost every property management issue comes down to one basic question: do I kiss ass or do I kick ass? There is no sense in going to war with an attorney who is advocating for his daughter. This guy is not going to be pragmatic or reasonable; he is the walking, talking definition of emotionally involved. Life is way too short for this fight.

I know how frustrating it is when a tenant terminates her rental agreement early. It is important for you to conduct your affairs in such a manner so as to maximize your ability to recoup your costs when a tenant breaks her lease. You should employ the following policies and procedures.

Always use the PPMA Residential Tenancy Agreement. The last paragraph on page four clearly states that "any attempt by tenant to terminate shall be deemed to be a breach and owner shall be entitled to recover leasing commissions and advertising expenses."
Use a separate paragraph and addendum that reiterates this clause elsewhere in the agreement. In this way, your tenant will acknowledge and agree to this verbiage not once, but twice.
When the tenant calls requesting an early termination, don't have lengthy verbal communication with the tenant. There is nothing to be gained by verbally reiterating the terms of your rental agreement. You cannot control whether the tenant vacates or not. Why get the tenant anxious or defensive about the costs associated with a breach of the agreement? Besides, you might inadvertently encourage your tenant not to pay her last month's rent if she thinks you are going to be unscrupulous or heavy-handed with her security deposit disposition.
Simply ask the tenant to put her notice to vacate in writing. If she asks about the costs associated with her breach, simply refer her to the appropriate clauses within the agreement.
Upon receipt of her notice to vacate, send her your standard acknowledgment of notice to vacate with a written reiteration of the costs associated with an early breach of her rental agreement.
Do everything possible to minimize the costs associated with the breach, like advertising and showing the apartment while it is still occupied and using free advertising mediums like Craigslist.
Send the tenant her security deposit disposition document within 21 days of taking possession of the apartment. Itemize the leasing commission (typically 50% of one month's rent) and advertising costs. Deduct them from the money owed. Also use this opportunity to deduct any lost rent; you should only go out 21 days from the termination date for this computation.

Ultimately, everyone's rights and obligations relative to security deposit dispositions are defined by the state's Security Deposit Law, Section 1950.5. Many attorneys interpret this lengthy section in a way that prevents the property owner from using the security deposit to pay for leasing commissions, lost rent and advertising costs. These attorneys recommend suing the tenant in small claims court after the tenant vacates for these costs. Obviously, I do not embrace this interpretation. I have been deducting leasing commissions and advertising costs from security deposits for over 20 years, and I have never had a problem—until recently. (More on this later.) The vast majority of tenants just want to be treated fairly. They understand that when they breach a rental agreement, they enjoy 100% of the benefits of the breach and it is simply not reasonable to ask the landlord to incur 100% of the costs associated with the tenant's breach. Leasing commissions, advertising costs and lost rent are the normal, necessary and ordinary costs associated with the breach of a rental agreement, and these costs should be borne by the party who breached the agreement.

The key to avoiding hard feelings and misunderstandings (in other words, staying out of small claims court) is to clearly define the specific costs of a breach within your rental agreement. Your reiteration paragraph should stipulate, to the extent possible, the exact costs that the tenant can expect to incur when she breaks her lease. This will serve two purposes. First, it will document that the tenant has agreed in advance to these costs and that she has agreed to have these costs deducted from her security deposit. Second, it will minimize the chances that the tenant will feel blindsided by the costs associated with her breach because she will understand the consequences of her actions in advance.

Ironically, I was recently taken to small claims court over this very issue—only the second time in 25 years of owning rental property! The interesting thing is that the judge and I never discussed Section 1950.5 or the law relative to security deposit dispositions. There was never a question as to whether I was entitled to a leasing commission or whether I was entitled to deduct this cost from the security deposit. The judge was simply having a problem figuring out whether 50% of one month's rent is a fair and reasonable leasing commission. I made two mistakes in this case: I failed to articulate within the rental agreement the exact cost of the leasing commission, and I rented the apartment to a friend of the vacating tenant. The tenant felt that a leasing commission was not warranted because I didn't actually "drum up" the prospective tenant. The solution is to avoid working with the tenant in finding a replacement; it will waste your time and, ultimately, dilute your rights relative to the agreement. You have nothing but legal risk to gain.

Did I mention my third and biggest mistake? The biggest mistake I made was not immediately refunding the money I withheld as a leasing commission when she demanded it. We are talking about $500! I don't know about you, but my time and energy have value. The preparation for and appearance at small claims court took at least three hours. The judges or commissioners are, in general, not very sympathetic to property owners. All things being equal, they will go with the tenant every time. It was painfully obvious to everyone in the courtroom that the judge was predisposed to rule in favor of the tenant, not withstanding the fact that absolutely all of the rental agreements and other documents supported my position. Why fight an uphill battle? Pick the battles that are worth the money and, most importantly, have a high probability of success. If in doubt, always refund the security deposit.

The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of SFAA or the San Francisco Apartment Magazine. Marc Wilson is the president of SFAA and has specialized in the brokerage of San Francisco apartment buildings for 20 years. He can be reached at 415-229-1275. Copyright © 2006 by the San Francisco Apartment Magazine. All rights reserved.