What happens to a security deposit if a tenant breaks the lease?

What happens to the security deposit if a tenant leaves before the lease ends?

A lease to rent a home is a contract, but landlord/tenant law can cause some unusual results compared to other areas of contract law. When a tenant breaks their lease they are breaching their contract. But, unlike normal contract law, many states have more clear guidance on the outcomes of this situation than other breach of contract issues.

So what happens to a deposit if a tenant breaks their lease before the end? The short answer is that the landlord can apply the deposit towards the damages, including the lost income from renting the property. However, in Iowa and many other states, a landlord may have an obligation to make the damages as little as possible.

There are three situations where a tenant breaks their lease and leaves early.

  1. There is a legitimate problem with a rental home and, despite giving the landlord proper notice, the landlord has not fixed the problem and it effectively makes the unit unsafe or uninhabitable. In this case, the tenant can break their lease without penalty.
  2. The tenant has to move and gives the landlord notice that they are abandoning the property. This may be in the form of the tenant going to the landlord and turning in their keys, but it could be some other notice. The key element is that the landlord knows or should have known the tenant has left and is not coming back.
  3. The tenant leaves without notifying the landlord and the landlord doesn’t know about it for an extended period of time, often when rent comes due and the landlord doesn’t receive the rent payment.

Early Lease Termination due to a Failure of the Landlord

If there is a legitimate problem with the home, the tenant needs to notify the landlord in writing. This could be a letter, an email, and it is my personal opinion a text message exchange should qualify. A phone call must be followed up in writing, such as an email, and a text message should also be followed up with a better form of writing. A situation that affects the health or safety of a tenant needs to be dealt with. For example, if the locks on a door are broken, this qualifies as an issue needing attention. Small problems that can be fixed cheaper than one month’s rent can be fixed by the tenant and deducted from the rent if the landlord is unresponsive to written requests. Bigger problems need a response by the landlord or the tenant may choose to terminate the lease. A great resource on landlord obligations can be found at the Iowa Legal Aid’s Summary of Iowa Landlord and Tenant Law. For those wanting more technical detail, see Amber DeSmet’s Legislative Guide to Landlord Tenant Law.

If a tenant is legally permitted to end a lease, then the landlord will need to treat the security deposit in the same way as if the lease ended normally. If you are a landlord in this situation, it is worth contacting me to get specific advice, because this area of the law can be tricky. If in doubt, be extra cautious. As you know, landlord/tenant law tends to favor tenants, especially in situations where a tenant’s health or safety is at risk.

Notice of Abandonment

The more common scenario is the second. In this case, the tenant notifies the landlord they have to terminate the lease early. This can happen for a variety of legitimate reasons, such as marriage, divorce, job change, sickness or financial problems. I counsel landlords and tenants to work together in this situation. A tenant may be able to give a month or more notice to a landlord and work with the landlord to have the home rented shortly after the planned move-out date. A landlord in this situation should consider themselves lucky and try to make the process as smooth as possible. That said, the landlord does not need to accommodate a tenant who wishes to break the lease.

The tenant must still pay rent for the remainder of the lease unless the landlord can find a new tenant. If the tenant stops paying the rent, the landlord may apply the security deposit toward the unpaid balance. If the security deposit does not cover the unpaid rent and any necessary repairs that would have been taken from the deposit, the landlord can sue the tenant to recover any unpaid amounts.

However, the landlord does have a responsibility to mitigate damages. If a lease has six months remaining when the tenant gives notice of abandonment, the landlord cannot simply leave the unit empty for six months and then sue the tenant for lost income. They need to promptly work to fill the unit. In this case, once they receive notice, they should clean the unit out, make any necessary repairs, and then re-list the unit to find a new tenant. Once a tenant moves in and starts paying rent, the damages stop adding up for the previous tenant.

Here’s an example:

  • Tenant pays $1,200 per month on a one year lease
  • The security deposit is $1,200
  • Landlord receives notice on March 1st that the tenant is leaving immediately when the tenant surrenders the keys
  • Landlord cleans out excessive trash, incurring expenses of $200, and makes repairs costing $200
  • A new tenant moves in on April 15th and starts paying rent of $1,200 per month
  • The old tenant owes 1½ months rent plus $400 in repairs, so $1,200 x 1.5 = $1,800 + $400 repairs = $2,200 total owed
  • Landlord applies the $1,200 security deposit toward the debt and the former tenant’s outstanding balance is $1,000 which the landlord must collect or write off

Abandonment Without Notice

The third scenario is if the tenant abandons without giving notice. This is a challenging situation because the landlord doesn’t know if the tenant has abandoned or if it is simply an extended absence. To make matters more challenging, Iowa’s landlord/tenant law does not define abandonment.

I’m going to get a little geeky here, but Iowa and many other states’ landlord/tenant laws are based on versions of the Uniform Law Commissions Uniform Residential Landlord Tenant Act (URLTA). This makes it easier to create and regulate laws because many states use the same or very similar laws. The URLTA does not define abandonment, so neither does Iowa’s version of the laws. States often make changes to uniform laws, and in fact, Nebraska has added rules about abandonment. However, Nebraska’s abandonment laws only activate if there is an abandonment clause in the lease.

Iowa has no legal definition of abandonment, and the Iowa courts have not published decisions that make it clear. They have filled part of the gap in the lack of abandonment legislation saying that owners have a duty to mitigate damages when they are notified of abandonment, which is applicable to the previous scenario, but not to situations where there is no notice of abandonment.

So what does a landlord do if they suspect a tenant has abandoned a property? You are in a very tough spot. If you clean out the unit and rent it, you may be mitigating your damages, which is good in the prior situation. You also may be stealing someone’s property if they were just on vacation. If they come back to the house and find their belongings in the trash and someone else in their home, they have a right to sue you, the landlord.

Do not take this situation lightly. If you suspect abandonment but do not have notice of abandonment, you need to follow the terms of the lease precisely. If the lease does not make this clear, you need the help of an attorney, so contact me.

For Law Geeks

The URLTA falls back to common law in situations where the law is silent. In the case of abandonment and mitigation of damages, the prevailing authority is the Iowa Supreme Court case, Vawter v. McKissick, 159 NW 2d 538 – Iowa: Supreme Court 1968 – Google Scholar. This is from 1968 but has been upheld more recently, for example in DR Mobile Home Rentals v. Frost, 545 NW 2d 302 – Iowa: Supreme Court 1996 – Google Scholar on point from 1996, and BOSSART v. Central Freight Lines, Inc., Iowa: Court of Appeals 2012 – Google Scholar which is not as relevant to residential landlord/tenant law but does show the standard upheld and, more interestingly, addresses what kind of diligence is required to prove the landlord properly mitigated damages. Spoiler: there is no standard, but if called into court, the landlord will have to provide evidence that they used diligence and the court will decide if they were or weren’t diligent.

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