Q: The rental market in my city is tight, and it’s common for applicants to offer many months’ prepaid rent as an incentive for landlords to rent to them. I accepted six months’ rent from a couple who signed a year’s lease, then left after a few months. The damage they left behind was more than the security deposit could cover. Can I use the balance of the prepaid rent to make up the difference? –Judd T.
A: Sorry to begin on a note of disappointment, but I sure wish you had told us that your lease specifically states that prepaid rent may be applied to rent and to any other sums due under the lease. If the lease had included a provision like this, then you would be able to use the prepaid rent to cover damage caused by the tenants.
Because the lease makes the tenants financially responsible for damage, the cost to repair that damage becomes a "sum due under the lease."
But we’ll have to assume that you didn’t specify how the prepaid rent could be used — in other words, that the lease simply described it as prepaid rent. The law is clear that you can use that money for rent.
Even if your state requires landlords to use reasonable efforts to re-rent when tenants break their leases, you are within your rights to keep the unit vacant through the last month for which the rent was prepaid and use that money to pay yourself rent.
But consistent with your duty to re-rent, you will need to begin looking for a replacement tenant to take over as of the day the prepaid rent runs out. If you can’t rent it by that date, your tenants owe you for the additional time it stays vacant, up to the end of their original lease term.
Of course, you’ll have to find them — and sue them — to recover the rent you lost beyond the amount they paid in advance, as well as for the damage that the deposit didn’t cover.
Rather than letting the place sit empty, it might make more sense to try to find a new tenant right away. After all, few landlords like to leave properties vacant, for very commonsense reasons. If, as you say, the market is hot, you might get a renter quickly, leaving you with only a month or two of vacancy. You can use the prepaid rent to cover these vacant months.
If a new tenant moves in during a time period that’s covered by the prepaid rent, you don’t get a windfall: Collecting double rent is not permitted in a "reasonable efforts to re-rent" state. So now we have to answer the harder part of your question: Can you use that extra prepaid rent not as rent, but as a source of money to pay for damage caused by the tenant?
You’re asking whether, in legal terms, you can apply a set-off, using the tenants’ rent money to pay for repairing the damage they caused.
A set-off involves settling accounts between two parties, each of which owes the other money. The right of set-off is often captured in statutes, allowing banks, for example, to set off a general deposit against a depositor’s matured debt or take money from your savings account to pay overdrawn amounts on your checking account.
The right to set off may also be expressly included in the contract between the parties — my wishful thinking at the start of this column was that you had such a provision in your lease.
But luckily for you, there’s another right of set-off, contained in good old English (and American) common law.
As long ago as 1841, the Supreme Court described a set-off as a person’s right "to apply the unappropriated moneys of his debtor, in his hands, in extinguishment of the debts due to him." (See: Gratiot v. United States, 40 U.S. 336, 370; 1841.)
Importantly, you can’t use this money as a source of funds to pay future debts; you must use it now when the debt is already owed and the amount of the debt is certain.
There are certainly lawyers who would argue against using a set-off, pointing out that it’s safer from a legal perspective to return the rent and then sue in small claims court for the cost of repairs that exceeded the security deposit. But let’s step into the real world for a moment: Suppose you use the prepaid rent, or some of it, to cover the uncompensated damage costs.
If your tenants want that money back, they will have to file a lawsuit in small claims court. If they sue you for improper use of their prepaid rent, you can countersue for the costs of repairing the damage they caused — and everyone will have as much money at the end of the lawsuit as they did at the beginning.
In short, if the tenants object to your use of their prepaid rent, they can force the small claims court lawsuit that you may choose now if you wish. Most landlords will use the money as needed (returning any balance to the tenants) and wait to see whether they’re hauled into court.
Q: I’m nearing the end of my year’s lease, and have been told by my landlady that I have to be out by the 20th day of the last month. I checked my lease and just realized that this is in there — on that date of the last month, my lease ends. But I’m supposed to pay full rent for this last month, and my new place isn’t available until the first of the following month. Is this legal? –Ashley J.
A: You get the prize for the question of the month — I’ve never heard of a landlord using such a clause. Doubtless, your landlady hopes to have your apartment rented by the time you leave, by someone ready to move in 10 days after you depart. She’s also assuming that you will leave it clean and undamaged — or at least clean and tidy enough so that she can have it ready within 10 days. Voila! No lapse in rent payments. That’s a pretty nifty scheme.
Alas, your question is also the perfect illustration of the need to read what you sign — before you sign it. That’s because there’s nothing illegal in this arrangement. There’s nothing wrong with ending your lease before the end of the 12th month, and charging you full fare for that short last month.
Had you noticed this clause before signing, you would have doubtless objected; and at that point, your landlady would have had to choose between changing the clause or losing you and starting all over (hopefully with someone who would not read the lease).
Her decision would doubtless be driven by her experiences and the market — in a soft market, she might figure that she stands to lose more than 10 days’ rent if she starts her search over again; but in a tight market, she might decide that she can get a gullible replacement right away.
This chiding doesn’t do you any good now, I realize. If you have nowhere to live for the 10 days until your next rental begins, how about raising that with her? Perhaps she hasn’t found someone who is ready to move in on the first. But if she has, think carefully if you decide to stay on anyway.
She may not take the time and expense to file an eviction lawsuit against you, because she knows you will be gone in 10 days, but she will take 10 days’ worth of prorated rent out of your security deposit, and may even try to keep some of it to use as compensation for the new tenant who won’t be able to move in (whether this last ploy is legal is another matter).
The bottom line for you is that things could get messy. I realize that the cost of storing your belongings and living elsewhere for 10 days is not minor — it’s a heavy price to pay for not reading your lease before you signed it.
Janet Portman is an attorney and managing editor at Nolo. She specializes in landlord/tenant law and is co-author of "Every Landlord’s Legal Guide" and "Every Tenant’s Legal Guide." She can be reached at janet@sandbox.inman.com.