How Leases Expire: What You Need to Know About Premises Condition, Termination, and Security Deposits

Landlord tenant relationships are largely creatures of contract. The lease document and terms generally set out the business relationship between the parties, circumstances that constitute default, consequences for default, and remedies available to the non-defaulting party. Oral leases may be enforceable, but there are significant legal restrictions that may either render a verbal lease unenforceable. Also, even if enforceable, often times the evidence necessary to prove up the terms of the lease and the elements of the deal struck by the parties is so tenuous and difficult the lease is realistically unable to be proven and consequently unenforceable. Therefore, it is critical any lease (whether for property, realty, equipment, or otherwise) be in writing. Any writing that sets out the terms of the agreement and signed by both parties is generally better than no writing at all.

Leases typically are for a specific time period, and they terminate at the end of that time period, usually without a requirement of notice of termination (unless the lease instrument requires notice of expiration/termination be sent). If the lease contains a provision to extend or renew that is not timely exercised, the lease expires by its own terms.

The most common question I get relates to a lease that expired some time ago, but the parties have continued operating as if the lease were still in effect. If the lease is to last for a specific time period, and the parties’ relationship continues beyond the lease term without extending the lease or signing a new lease, then this is what is called a “periodic tenancy”, terminable on notice, also known as a “tenancy from month to month.”

Under the Texas Property Code, termination of the periodic tenancy relationships require notice of termination. In this situation, the tenant may not simply be called and told to remove his/her belongings immediatly or tomorrow. If notice of termination is given, and the rental period is at least one month, the tenancy terminates on the later of (1) the day given in the notice for termination; or (2) one month after the day that the notice is given. If the rental period is less than one month, the tenancy terminates on the later of (1) the day given in the notice termination; or (2) the day following the expiration of a period equal in length to the payment interval. The notice rules of the Texas Property Code may be altered or removed by the terms of a written lease, which again underscores the imporance of a signed written contract.

Under the common law, when a tenant abandons premises and stops paying rent, the landlord has four possible courses of action available:

  • Maintain the duty to lease, suing for rent as it comes due;
  • Treat the breach as an anticipatory repudiation, repossess, and sue for the present value of future rentals;
  • Treat the breach as an anticipatory repudiation, repossess, and re-lease the property; the tenant may be sued for the difference between the contractual rent the former tenant was obligated to pay and the new rental amount received from the new tenant;
  • Declare the lease forfeited and relieve the tenant of liability for future rent.

Landlords have a duty to mitigate their damages in this situation, and must take reasonable and proper action to limit damages incurred for a tenant’s breach. Failure to take such action will impact relief available to a landlord for a tenant’s breach.

I often have clients seek advice about options available if the landlord won’t keep the premises in good repair. Again, the lease instrument typically addresses the duty to repair, so the first thing to review is the lease document itself to ensure notice requirements have been complied with. In a commercial lease, the landlord’s duty to repair and the tenant’s duty to pay rent are independent of each other. In other words, the landlord’s failure to keep the premises in good repair will not justify a tenant’s refusal to pay rent. However, if a commercial landlord’s failure to repair and upkeep the premises renders the premises unsuitable for the tenant’s operations, a tenant may abandon the premises and discontinue rental payments.

In a residential lease, the landlord’s duty to repair is conditioned upon the tenant’s rent being current a the time notice of a condition needing repair is given. A residential tenant may not withhold rent (or any portion of rent) if the landlord fails to remedy or repair the premises. There is a very limited exception to this rule for failure to remedy/repair certain conditions that materially affect the physical health or safety of an ordinary tenant. If a tenant withholds rent for failure to repair/remedy the premises, and the issue does not fall into the narrow exception, the tenant may be liable to the landlord for actual damages. If the tenant continues to withhold rent after receipt of written notice from the landlord of the illegality of the rent withholding and the penalties of Texas Property Code Section 92.058, the tenant may be liable for an additional civil penalty of one month’s rent plus $500.00, as well as the landlord’s attorney’s fees.

Once a residential lease terminates, the question arises as to what happens to the security deposit most landlords require at the beginning of the lease. A security deposit must be refunded by a landlord within 30 days after the tenant surrenders the premises, and upon receipt from the tenant of a written statement of the tenant’s forwarding address. If any deductions are made from the security deposit, the landlord must provide a written description and itemization of the deductions, unless there were rentals due and unpaid when the tenant surrendered the premises and there is no controversy over the amount of the unpaid rent. Deductions are also permitted for damages and charges set out in the lease agreement or resulting from breach of the lease agreement. Normal wear and tear may not be deducted from the security deposit. A landlord that retains the security deposit beyond the time allowed by the Texas Property Code and is found to have acted in bad faith may be liable for $100.00, three times the refundable portion of the deposit, and attorney’s fees. A landlord who fails to return the deposit or provide a written itemization of deductions within 30 days is presumed to have acted in bad faith. Bad faith means that the landlord acted in dishonest disregard and implies an intention to deprive the tenant of the refund. Failure to refund the deposit or provide an itemization may also waive the landlord’s right to withhold any funds or sue the tenant for damages.

A residential tenant also may not withhold payment of any portion of the last month’s rent on the grounds that the security deposit is security for unpaid rent. Such a withholding has been presumed to constitute bad faith, and subjects a tenant to three times the rent wrongfully withheld and the landlord’s attorney’s fees in a suit to recoup the rent.

Lease relationships are complex, and a working knowledge of rights is critical to both parties for a successful business venture.

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