CONCESSION PAYBACK AND THE EARLY TERMINATION AGREEMENT

Approximately 30% of apartment communities are utilizing the new Early Termination Addendum which gives the resident a choice of “damages” upon breaking the lease before the natural end of the lease. If the resident chooses Option 1, the resident will owe a fixed amount, usually one or two months’ rent to the apartment community, in addition to any past or current rent owed and physical premises damages which may be attributable to the resident. Most residents, when they are given the explanation of the choices, choose Option 1, as it is in their best interest, since the apartment they vacate may stay vacant for quite some time, making Option 2 a much more risky venture. A large amount of confusion occurs when the resident has been given a rent concession, chooses Option 1 and then breaks the lease. An equal amount of confusion has to do with the “notice” requirements imposed upon the resident in Option 1.

Concession Chargebacks

Most concession addendums or clauses have some form of chargeback provision in the event the resident defaults on the lease agreement by vacating before the end of the lease, either voluntarily or through an eviction. One would assume that if the resident chooses Option 1, receives a rent concession and then breaks a lease, the concession payback can be charged in addition to the Liquidated Damages amount provided for in Option 1. This is INCORRECT. If the resident chooses Option 1, the liquidated damages amount is fixed to the one or two months’ rent that have inserted in Option 1. YOU CANNOT also charge the resident a concession payback. Now you may be wondering why this is the case. The law is not clear on its face regarding this, BUT the legislative history of the law will show that the legislative intent of the bill passing process dealt with this. In attempting to get the Early Termination Law passed, early drafts and versions of the bill before it was enacted into law INCLUDED a concession chargeback. Through negotiations with the legislators and the Governor, it became clear that the Governor wanted concession chargebacks removed from the bill, or else he was going to veto the bill. The concession chargeback language was removed from the bill, and therefore it is fairly clear now that the liquidated damages are limited exclusively to the one or two months’ rent in Option 1. While this does not seem fair for a resident to receive a generous concession, break a lease and then only be required to pay liquidated damages, the manager must understand that providing rent concessions are done at the risk of the apartment community. Give the gift, but don’t expect anything in return.

Requiring Notice From the Resident

Under the Early Termination Law, the resident can be required to give notice to the manager of up to 60 days in addition to being charged liquidated damages of up to 60 days’ rent. It would appear to the average reader that this means you can ask a resident to give you notice, charge the resident through the notice period and then ALSO charge the resident up to 60 days additional rent as a liquidated damages. For example: a resident walks into your office, pays the rent and gives you 60 days’ notice. The resident then leaves after 30 days. What does the resident owe you if they chose Option 1? The resident only owes you the 2 months’ liquidated damages. Now suppose the resident gives you 60 days notice and stays and pays for the 60 days and then vacates. What does the resident owe you? The exact same thing: 2 months’ rent as liquidated damages. As you can see, the notice requirement of Option 1 is really quite hollow. You want them to give you notice, BUT if they do not, the penalty is exactly the same. We caution you to never charge the resident through the notice period PLUS the liquidated damages, because that is how all the lawsuits and the need for the law change begin in the first place. If the resident gives you 60 days’ notice and lives there for 60 days, great. If they give you 60 days’ notice and pack up and leave or do not give you notice at all, you can STILL only charge the liquidated damages amount. If you have any doubts as to what you can charge the resident, call your attorney ASAP.