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Step 1: Review the original lease agreement
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Step 2: Negotiate the terms with the tenant
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Step 3: Draft the early termination clause
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Step 4: Sign and date the lease renewal
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Here’s what else to consider
If you are a property manager, you may encounter situations where you or your tenants want to end a lease agreement before the expiration date. This can happen for various reasons, such as relocation, financial hardship, or property damage. To avoid disputes and legal issues, you can add an early termination clause to a lease renewal. This clause specifies the conditions and fees for breaking the lease early, and protects both parties from unexpected losses. In this article, we will show you how to add an early termination clause to a lease renewal in four steps.
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- Dariusz Chlopecki, MBA Real Estate Broker at HomeSmart Connect Real Estate
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1 Step 1: Review the original lease agreement
Before you draft a lease renewal, you need to review the original lease agreement and check if it already has an early termination clause. If it does, you can either keep it as it is, modify it, or remove it. If it does not, you can decide whether to add one or not. You should also check if the original lease agreement has any other clauses that affect the renewal, such as rent increase, maintenance obligations, or security deposit.
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- Dariusz Chlopecki, MBA Real Estate Broker at HomeSmart Connect Real Estate
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Retrieve a copy of the original lease agreement and carefully read and understand all its terms and clauses. Highlight sections relevant to lease renewal, termination, and conditions. Take note of any restrictions or conditions specified in the original lease regarding modifications or renewal. Clarify any ambiguous language and consider past communications related to the lease. Understanding the existing terms is essential for proposing and negotiating modifications effectively.
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2 Step 2: Negotiate the terms with the tenant
Once you have reviewed the original lease agreement, you need to negotiate the terms of the early termination clause with the tenant. You should discuss the reasons for adding the clause, the amount and timing of the termination fee, the notice period, and the responsibilities for finding a replacement tenant. You should also consider the tenant's circ*mstances and preferences, and try to reach a mutually beneficial agreement. You can use a lease renewal letter or a lease renewal addendum to communicate the terms with the tenant.
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- Dariusz Chlopecki, MBA Real Estate Broker at HomeSmart Connect Real Estate
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Initiate a discussion with the tenant to negotiate the addition of an early termination clause. Clearly explain the purpose and benefits of the clause, such as flexibility and potential cost savings. Discuss key aspects like the notice period required, any penalties or fees for early termination, and the conditions under which termination would be allowed. Listen to the tenant's concerns and aim for a mutually agreeable solution. Clearly document all agreed-upon terms to be included in the lease renewal addendum. Open communication and a collaborative approach are crucial for a successful negotiation.
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3 Step 3: Draft the early termination clause
After you have negotiated the terms with the tenant, you need to draft the early termination clause and include it in the lease renewal document. The clause should be clear, concise, and consistent with the original lease agreement and the state laws. You can use a template or a sample clause to guide you, but make sure to customize it to suit your specific situation. Here is an example of an early termination clause: Early Termination Clause: The Tenant may terminate this Lease Agreement before the expiration date by giving the Landlord a written notice of at least 60 days and paying a termination fee equivalent to two months' rent. The Tenant is also responsible for finding a suitable replacement tenant who meets the Landlord's approval and signing a lease assignment agreement. The Landlord may terminate this Lease Agreement before the expiration date by giving the Tenant a written notice of at least 30 days and complying with the state laws regarding landlord-tenant relations.
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- Dariusz Chlopecki, MBA Real Estate Broker at HomeSmart Connect Real Estate
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Draft the early termination clause addendum. Outline termination conditions (e.g., relocation), notice period (e.g., 30-90 days), penalties or fees for early termination, security deposit handling, responsibilities upon termination, tenant's confirmation of understanding, and signatures of both parties. Ensure clarity and legal compliance.
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4 Step 4: Sign and date the lease renewal
The final step is to sign and date the lease renewal with the early termination clause. You and the tenant should review the document carefully and make sure you understand and agree to all the terms and conditions. You should also keep a copy of the signed document for your records and provide one to the tenant. By signing the lease renewal, you and the tenant are legally bound by the early termination clause and its consequences.
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- Dariusz Chlopecki, MBA Real Estate Broker at HomeSmart Connect Real Estate
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Schedule a meeting to review and sign the lease renewal, including the early termination clause addendum. Clearly explain the terms, ensure understanding, and have both parties sign and date the addendum, formalizing the agreement. Provide copies for their records.
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5 Here’s what else to consider
This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?
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STOP drafting or modifying agreements based on DIY advice! Unless you know the implications and unintended consequences, how can you protect the Owner?Here, there is no mention of fresh consideration. Absent that, your new lease "may not be worth the paper it’s written on”. Don't hesitate to use Counsel, but do your homework before calling them. Do all the leg work for them (preparing drafts, revisions, etc.). They are your “call-a-friend” lifeline so make sure they know they are appreciated. Invite them to open houses, networking events, golf tournaments, etc., as they are great sources of referrals (especially if that leads to more work for them 😊). Soon, you will be able to identify the “legal wheat from the guru chaff”!
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