I receive distress calls daily from agents and landlords alike, telling me their tenant has ?breached? the lease by cancelling early and asking me what penalty can be enforced for said breach. They read me their breach clause in their respective leases, some of which contain an amount to be paid on cancellation.
My advice is always the same: a tenant has the RIGHT to cancel a lease agreement, be it in the 1st month, 4th month or second-to-last month of the lease agreement. He cannot be ?punished? for doing this and the cancellation does not constitute a breach of the lease agreement.
So what exactly must an agent do?
Obtain the cancellation in writing from the tenant.
Ensure the cancellation gives the requisite 20 business days notice.
Charge rental until the end of the 20 business days (even if this is not a full month?s rental).
Log on to TPN and end the lease as at the end of the 20 business days.
Keep in mind the lease now ends as at the end of that 20 business days.
Should the tenant remains in the premises a new lease MUST be signed as once cancelled, a lease cannot be revived at law. If you fail to do this, you essentially have no long-term lease in place.
Begin advertising the property immediately- the onus is on the agent/landlord to find a replacement.
Keep all invoices from the advertising as this is one of the costs you may pass along to the tenant in terms of a ?reasonable cancellation penalty?.
What can an agent charge the tenant that cancels early?
The idea behind this reasonable cancellation penalty is not to penalise the tenant, but to recover any actual loss suffered by the landlord as a result of the cancellation. Follow these guidelines and you will never have another dispute over penalties again:
To assist agents, I have formulated an acronym to help remember what can be billed:
?CAR?
Credit check costs for any prospective replacement tenants (even those who are not accepted)
Advertising costs (only the actual amounts on the invoices);
Rental- the exact number of days that the unit remains vacant after the tenant vacates.
It is important to keep in mind that all calculations of the penalty can only be made once a replacement tenant has been found. You cannot possibly give the tenant a penalty calculation on the day they cancel and it is important to understand and explain to them the reasons for this. It must also be kept in mind that where a tenant cancels, for example, in month 10 or 11 of a 12-month lease, you cannot charge the tenant the full remainder of the lease as this would negate the cancellation. The principles behind cancellation penalties lie in our law of undue enrichment. A landlord/agent cannot make a financial gain or benefit off of tenant?s cancellation.
What about an agent?s commission?
Upfront commission must be separated from ongoing monthly management commission. If an agent were paid an upfront commission, he/she may charge the tenant the balance of the placement commission as it is an expense you need to recover for your landlord. If, however, commission is paid monthly for the management of the premises, finding a replacement tenant will cover the ongoing payment of this fee and there is no need to bill the outgoing tenant.
The CPA
For those who want to know the actual laws behind the reasonable cancellation penalty, please click here to read about CPA Section 14 and Regulation 5.