But first, it will have to navigate a complex set of real estate laws.
Here’s the situation: You’re six months into a one-year lease, you just landed a job out of state, and you need to move out of your apartment—fast. One way or another you’ll have to break your lease, and no matter where you live, that’ll cost you.
Depending on the terms of your lease and the real estate laws in your jurisdiction, your landlord could charge you an early termination fee, keep your security deposit, or hold you responsible for rent until a new tenant moves in. It’s impossible to generalize about the costs, since the laws vary widely from state to state. New York City, for example, is especially hard to navigate. The contract law principle of “mitigation of damages,” which requires landlords to minimize their losses before suing tenants, doesn’t apply to residential leases in New York. Instead of trying their damnedest to find a new tenant, landlords “can sit there and sue you for all the rent that would have come due under the lease and make no effort to re-rent the apartment,” says Samuel Himmelstein, a New York tenant lawyer. “Landlords have great bargaining power in these situations.”
One way to smooth things over with your landlord: find a suitable subletter or assignee to take your place. But a good tenant is hard to find on short notice, especially in a free-for-all like Craigslist.
A new app called Flip aims to streamline that process, starting with rentals in NYC. The platform, currently testing for iPhone only, connects tenants who want to get out of their leases with people who want to take them over. Flip hinges on the concept of “leasehold interest,” treating the lease as an “asset” that a tenant can buy, sell, or transfer.
How it works:
- Get pre-qualified. The app itself is free, but there’s a $50 review fee. Flip farms this task out to third-party freelancers who check your credit and assess your fitness as a rental applicant.
- Find or post a lease. Tenants can assign whatever prices they want to their leases. If you find a lease that works for you, contact the tenant directly to arrange a viewing.
- Buy or sell a lease. Once you’ve settled on the lease you want, put down a deposit through the app. Flip holds your payment in escrow until both parties agree to the transaction.
- Hammer out a lease agreement with the landlord. This is between the tenant, the replacement, and the landlord; Flip stays out of it. In a sublease, the current tenant remains on the lease and collects rent from the subtenant to pay the landlord. In an assignment, the new tenant replaces the current tenant on the lease.
- Move in.
Susannah Vila, the Columbia MBA student who created Flip, thinks of the app as satisfying a “demand curve … that previously nobody would be able to access,” much like Kickstarter did for creative projects. With Flip, tenants can defray some of the costs of moving, while lease seekers get information about apartments before they’re on the market. Since the app pre-qualifies users, no one wastes time vetting or showing spaces to unsuitable candidates. If all goes well, Flip could solve a significant inefficiency in the rental market, saving tenants money and landlords effort in the scramble to find a new lessee.
No one’s more bullish about Flip than Vila’s advisor (and Flip investor), Zachary Aarons. The real estate developer believes that the platform will be nothing short of revolutionary: “The idea is to completely change how people think about what a lease is—both for the lessee and lessor, and both for residential and commercial real estate.” According to Aarons, Flip might be even more valuable to commercial landlords, because their leases are longer—ten years and up, compared to one or two years for residential—and often trap tenants who’ve gone out of business or tenants who’ve outgrown their space. Both sides stand to benefit from a more flexible rental market.
Even so, the app could face a number of legal hurdles.
The biggest problem may be that the app currently has no mechanism to contact property management directly. In general, sublease or assignment is only permitted with the express written consent of the landlord. Without it, you’re breaking the law. Vila plans to include this feature in a later version of the app, but until then Flip is counting on users to contact landlords on their own—leaving the door open to illegal subletting.
Under New York real property law, landlords cannot “unreasonably” withhold consent for sublease or assignment. If you, the outgoing tenant, did everything by the book and found a suitable replacement and your landlord still said no, you could sue her.
But assuming that Flip users do act in good faith and request consent ahead of time, there are still substantial obstacles to landlord buy-in. “It becomes something of a power issue for [landlords],” says Himmelstein. “They want to do their own renting.”
Deborah Riegel, a landlord lawyer, echoed his concern. “If a landlord is willing to take the lease back, I think they’d rather find and vet their own tenant, because it’s not just about financial qualification,” she says. “Landlords want to know litigation history. They want to know rental history. That opportunity is lost if the tenant is coming to them and saying sort of [as a] fait accompli, ‘I’m leaving and here’s my replacement.’”
Flip’s laissez-faire pricing policy is also likely to draw landlords’ ire. Since the app allows leaseholders to charge whatever prices they want—potentially above and beyond any fees or penalties they would incur for breaking the lease—it’s entirely possible to turn a profit. According to Himmelstein, landlords hate it when tenants make money off of apartments, whether it’s through a service such as Airbnb or overcharging subtenants on rent. “If the landlords get wind that this app does that routinely … they’re not gonna be happy, I can assure you.”
The courts won’t be happy either if they find out that Flip users are overcharging on rent-regulated units—that’s against the law. And for that reason Himmelstein and Riegel suspect that the app won’t do well, at least initially, in cities such as New York and San Francisco, where rent-regulated units make up 45 and 75 percent, respectively, of the total rental housing stock. The risks in these markets are simply too high.
Where it could succeed:
Both attorneys think the app could work just about anywhere else, as long as it sticks to connecting tenants and stays out of financial transactions. Himmelstein says, “I have seen a lot of landlords respond to a request by a tenant to break a lease by saying, ‘If you find me someone who I find acceptable, sure, we can do that.’ So maybe that’s the void where this app can be helpful … as a matching service.”
In the meantime, Flip hopes to stay in the clear by eschewing any liability for the listings or transactions on its platform. The app’s terms of service warn that “any transfer of a leasehold interest will be made at the apartment seekers’ own risk.”
Only time will tell whether Flip can solve a perennial renter’s woe while simultaneously avoiding the legal troubles that have dogged other sharing economy apps like Airbnb and Uber. But when you have to get out of a lease, you have to get out, even if there’s a hefty price tag. Hopefully Flip, when it’s fully operational, will help cushion the blow.