Re-Rental Fee or Lease Break Penalties

This article was originally written for and published by the Alberta Residential Landlord Association Rental Gazette Newsletter.

The question of whether a landlord can charge a re-rental fee or a lease break penalty is more complex than it might first appear. This note addresses some legal information for consideration; but landlords are encouraged to seek legal advice in regard to their particular situation.

It is important to recognize as a starting point that a lease is really just a contract where the parties are limited in how they can contract due to the operation of the Residential Tenancies Act (“RTA”). Parties to a contract each agree to give something (Tenant gives the Landlord rent, Landlord gives Tenant a place to live) and to get something (Tenant gets a place to live, Landlord gets rent). There’s a further component to this – time.

The importance of time varies based on the type of lease in place: fixed term or periodic.

In fixed term leases the parties also agree to a timeline, usually a year. So in those cases not only are the landlord and tenant agreeing to a rental arrangement but they are agreeing to a rental arrangement for a specific period of time. This provides some security to the tenant in terms of knowing how long the tenant has the right to remain in the premises. It also provides some security to the landlord in knowing how long they have the right to receive rent from that tenant.

In the case of a fixed term lease, if a tenant wants to break the lease and end the tenancy early, the landlord is not required to accept. The landlord can continue to look to the tenant for rent until the end of the tenancy, subject to the duty to mitigate. In this scenario, a lawyer would say that the tenant has “repudiated” the agreement and the landlord has not accepted the repudiation. The requirement to pay rent until the end of the term would be the basic measure of the landlord’s “damages”.

The reason the landlord can require a tenant to pay rent until the end of the term is because that was what the landlord bargained for – that was the position the landlord expected to be in at the end of the lease. However, the landlord cannot get more than what the landlord expected to get from the lease. So, the landlord cannot get all of the rent as well as a lease break penalty or re-rental fee.

Further, there is a risk that if a landlord charges a lease break fee a court would view that as the landlord’s acceptance of the tenant’s repudiation of the agreement. If the court did view it that way then it would conclude that the landlord and tenant agreed to break the lease and that the landlord agreed to accept the lease break penalty in lieu of the potential damages. In that case the landlord would get the lease break penalty but could not also get rent to the end of the term (or to the point of mitigation).

In a periodic tenancy, the time component means much less. In that case, the landlord can only expect rent to the end of the period of time in which the landlord had a right to be given notice of termination. In most cases, periodic tenancies are month-to-month tenancies in which case the most that a landlord could look for in damages would one months’ rent.

Another aspect of the law to keep in mind is that a penalty will always be scrutinized by the court and if it is viewed as an amount larger than an amount that is a genuine pre-estimate of damages it may not be enforced. For example, in a periodic tenancy, a penalty which exceeds one months’ rent would not likely be enforced.

The question of a re-rental fee faces similar logic. If a landlord and tenant have a fixed term tenancy and the landlord agrees that the tenant can break the lease but insists on the tenant paying a reasonable re-rental fee, that fee might be upheld. If the landlord insists on the rent until the end of the term as well as a re-rental fee then the court would not likely award such an amount. Renting out units is part of the cost of doing business for a landlord; so landlords should expect that any court reviewing such a fee will do so with a careful eye and will be quick to be critical of amounts which are not viewed as “reasonable”.

As these matters are always informed by the specific facts and circumstances of a situation, the foregoing is to be read as a primer only. Only specific legal advice from your counsel who has knowledge of your specific situation can give you guidance of how to proceed in the course of your business.∎

If you have questions or would like advice, reach out to our Real Estate Team.

This post is meant to provide information only and is not intended to provide legal advice. Although every effort has been made to provide current and accurate information, changes to the law may cause the information in this post to be outdated.