There is no guarantee your tenant will want to stay in their lease agreement for the entire term. Even as a landlord or property owner, you may determine breaking the contract early is the right call for your personal or business needs. But this situation requires preparation and mutual agreement from both parties. Ending a lease prematurely may be unfamiliar territory but learning about how it works will help you navigate the process with greater ease and tactfulness.
What is a Lease Buyout Clause?
A lease buyout clause, which is one of many clauses you can include in a contract, is a provision that allows the tenant or landlord to end the lease agreement before the term expires. For example, you or your tenant can agree to terminate the one-year lease agreement for six months instead. Whoever initiates the buyout gives the other person money for prematurely ending the lease. The buyout is usually less than the total costs of the remaining lease.
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Types of Lease Buyout Clauses
The type of lease buyout you use will depend on your circumstance and needs. Here are three types for you to consider:
1. Lease Buyout with Notice and Penalty
Under most circumstances, you or your tenant can use a lease buyout if you give the other party advanced notice. You must also pay a penalty, but this can vary significantly. The lease agreement should indicate the required notice period and payment amount required to buy out the remainder of the lease.
2. Lease Buyout Under a Rent-Responsible Clause
Using a lease buyout under a rent-responsible clause is an option that may be more cost-effective. It states a renter must continue paying the rent until a new tenant takes over the lease. This solution might be easier on your renter because the sooner a new lessee is found, the sooner they can stop paying the rent.
3. Lease Buyout for Military Personnel
The Servicemembers Civil Relief Act allows active duty, deployed, or reassigned military members to use a buyout clause to end their current lease. As a landlord, this is a provision you legally cannot deny. The military member only needs to provide a written notice to their landlord.
When Should You Use a Lease Buyout Clause?
As a property owner, keep an open mind and understand circumstances can change. While the lease agreement is a resolute document, a good landlord is ethical and fair—willing to work with their tenant to achieve the best outcome. Here are some conditions when using a lease buyout clause is appropriate.
Medical reasons
The most common reason tenants need to buy out their lease is because of medical-related issues. For instance, a lease buyout would be necessary if your tenant can no longer live independently or needs to move into a nursing home or rehab facility. The renter must provide their landlord with a letter of proof from the court or their doctor, including a “release” clause stating when they can officially end the lease early (usually within 30 to 60 days).
Personal protection and safety
Tenants dealing with personal safety issues can break their lease early without paying a penalty. Some of the most common situations include:
- Domestic violence
- Harassment
- Physical and sexual assault
- Stalking
To finalize the buyout clause, your tenant must provide:
- A copy of their protection order.
- A written report from a law enforcement agency.
- A written affidavit signed by an official third party verifying the victim’s abuse.
The lease ends 30 days after the tenant makes the next rent payment or submits the vacate notice.
Active duty or military deployment
Active duty and deployed military personnel can legally buy out their lease agreement before the term ends without penalty. They can either send their landlord written notice, a letter from their commanding officer, or a copy of their military order. Additionally, the widow of an active military member who passes away while in service can terminate the contract within a year of their spouse’s passing.
Property negligence
Even the most well-intentioned landlords may struggle to properly manage and upkeep their rental property. Under these circumstances, a tenant may want to use a buyout clause if you, as the landlord, do not uphold your part of the lease agreement. Some issues that justify this provision include:
- Not resolving rodents, bugs, and other pest problems promptly.
- Not resolving frequent and intolerable noise issues (neighbors partying late at night, etc.).
- Letting the property become virtually uninhabitable.
However, lease termination laws vary across the nation, so you and your tenants would need to review the regulations for your area before making a final decision.
Property refurbishment
As demographics change and populations grow in an area, the buildings in those locations may also change. For example, you might convert your rental property into a bed and breakfast or a small boutique restaurant to meet rising commercial demands. If you want to refurbish or redevelop your property for another reason, then using a buyout clause could work.
Self-occupation
Self-occupation is when a landlord decides to move back into their property. There are many reasons you might do this, like wanting to be closer to family or needing to save money. However, if you have a tenant already living in your rental property, you can’t just kick them to the curb before the lease expires. You must wait until the contract ends or pay them the settled amount described in the buyout clause.
5 Things You Should Know About a Lease Buyout
Most buyout clauses are customized to meet the specific needs of the landlord and their tenant. There are five key details you should know about regarding lease buyouts, including:
1. The notification period
Any legitimate lease buyout clause will include details about the notification period. It indicates how much time in advance a tenant must notify their landlord about wanting to cancel the contract early. Thirty days (about four and a half weeks) is the most common requirement, but it can vary, so clearly state what the notification period is in the clause.
2. The penalties
Aside from a few exceptions (military enlistment, personal safety issues, etc.), most clauses come with a penalty. The penalty describes the amount of money either the landlord or the renter must pay to break the lease early. For example, the clause could require two months of rent for the tenant to buy out the remainder of the lease altogether. Make sure to document all these details, so there is no confusion about the expectations.
3. The buyout price negotiation
Negotiations are an integral part of the rent buy-out process. There is no set price for the buyout amount. You must negotiate with your tenant to determine a reasonable cost for you both.
4. The law
Before you begin crafting a buyout clause, you should familiarize yourself with the law. States and cities have local laws regarding the lease buyout process—detailing what is and is not permissible. The more knowledgeable you are about applicable regulations, the better you can avoid legal troubles.
5. The alternative solutions
If you and your tenant cannot agree to the buyout clause, here are some other solutions you can try:
- Pass the lease to a new tenant
- Sublease the rental property to a new tenant
- License a third party to use a specific part of the leased property
Research your local laws about subletting, as they may differ nationwide.
Frequently Asked Questions
Does the law require a buyout clause in a lease?
No, the law does not require a buyout clause in the lease. However, you should include one if you or your tenant need to terminate the lease early.
What is a buyout fee?
The buyout fee is another name for the penalty. It is the amount a tenant or landlord must pay to “buy out” the lease before the end of the term.
Is a buyout from a lease capital gain?
Yes, a buyout from a lease is a capital gain, and as such, it is taxable.
