Leverage Review – Property Management

Break Lease Fees

A catch for young players

By Bailey Compton

We have all been taught that the fixed term is a fixed term. A landlord or tenant can terminate a fixed term lease without some level of economic punishment.

The Residential Tenancies Act 2010 (RTA) permits two alternatives if a tenant wishes to terminate a residential tenancies agreement prior to the end of the fixed term tenancy:

  1. The residential tenancies agreement may provide a “break lease fee”. This means that, a tenant knows of the penalties, under the residential tenancies agreement, for breaking the lease early.
  1. Compensation under the common law. The common law provides that a landlord is entitled to compensation where a lease is terminated early. In short, loss of rent, cost of finding a new tenant and loss of agent are fees that can be claimed. This however is balanced with the common law principle that all contractual breaches must be mitigated. This places pressure on the agent and the landlord to do everything in their powers to find a tenant as soon as possible. The rent can be discounted for failure to mitigate. This is complex and it can often be hard to determine whether an agent has done everything they possibly can to mitigate.

The 2010 amendments allow for these two alternatives. Due to the complexities and lack of clarity in relation to the common law remedy, they permit a break lease fee to be entered into the agreement. Agents and landlords need to pick one or the other. They cannot have both remedies available. The standard agreement allows for six weeks rent prior to 50% of the lease period passing and four weeks thereafter. This has clarified the situation, but has not simplified the approach.

Section 98 of the RTA provides:

(1) A tenant may give a termination notice on the ground that the landlord has breached the residential tenancy agreement.

(2) The termination notice must specify a termination date that is not earlier than 14 days after the day on which the notice is given.

(3) The termination notice may specify a termination date that is before the end of the fixed term of the residential tenancy agreement if it is a fixed term agreement.

(4) The Tribunal may, on application by a landlord made before the termination date and within the period prescribed by the regulations, revoke a termination notice by a tenant if satisfied that the landlord has remedied the breach and that it is appropriate, in the circumstances of the case, to continue the tenancy.

Note. The tenant may apply directly to the Tribunal on the ground of breach by the landlord for a termination order without first giving notice (see section 103).

In simple terms, this provision permits a tenant to terminate a residential tenancies agreement early if the “landlord has breached the tenancy agreement”. Provided the notice is no less than fourteen days, the tenant is released without penalty.

Under section 98(4) of the RTA, the landlord or agent must, within the prescribed period, lodge an application with NCAT to state that the tenancy agreement has not been breached by the landlord. The prescribed period, under section 22(3) of the Residential Tenancies Regulations 2010, is seven days. Hence, after receiving a notice to terminate lease due to the landlord’s breach, if the agency does not make an application to NCAT within seven days to confirm that the tenancy agreement is still valid, the landlord has no remedy.

Be careful; if you allow a tenant to break their lease without reason, you may cost your clients the break lease fee or the common law remedies.

Leverage suggests the following:

  1. When a tenant wants to leave early, something should be placed in writing by the tenant to say that they are breaking the lease with no excuse. You may even wish to use terms such as “the landlord has not breached the lease and therefore the break lease fees are required to be paid”. It may be in an acknowledgement, letter or some form of deed of release.
  1. Make an application to NCAT requesting that the tribunal make an order that the tenancy agreement is valid and therefore the lease has been broken and penalties are payable.

Where a tenant has sent you an email wanting to break the lease early and provides a raft of excuses why they are breaking, if any of these excuses amount to a possible breach of lease, you need to take one of the two actions above.

The break lease penalties are predicated on the belief that the landlord has not breached their lease first. If a tenant walks away, section 98 encumbers the landlord or agent to take steps to prove the lease is valid. Merely walking away by the tenant is not enough to protect the landlord.

We have had two people contact Leverage in the last week, one a landlord and the other a tenant. In both cases, the landlord has lost out because the agent has not taken steps to protect the tenant.

We often think we are travelling well because the tenant has not made an application against the landlord. If you do not get an acknowledgement that the landlord has not breached the lease prior to the tenant leaving, or you do not lodge an application, your landlord is robbed of a remedy.