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No matter how good of a landlord you are, you will inevitably have to deal with some trouble tenants. You could have the fairest practices and the most thorough screening process possible, but you can never completely eliminate the risk that a trouble tenant will slip through the cracks. Maybe they were a good client who fell into some financial troubles, or maybe they just managed to keep their more negative traits below the surface. The question is: what do you do when a tenant goes bad?

The most obvious choice is to simply evict them, but even this is called for, it might not be the best option for you or the tenant. If you take someone to court, you’ll wind up paying a filing fee, possible attorney’s fees, and your own time. If you are dealing with a particularly bad tenant, they might end up doing additional damage to the property out of retaliation as well, which will lead to an additional hearing and a settlement that likely won’t match the lost time and money that went into the process. Of course, there is an alternative choice: offer to give the client a few hundred dollars to leave the property immediately without further damaging it. This method is a Settlement Agreement, often referred to as “Cash For Keys.” It is a somewhat controversial option that, while not applicable in every eviction case, can be very helpful in specific circumstances. When executed effectively, it allows landlords to compromise with good tenants who have fallen into difficulties or move on from trouble tenants in a way that’s easier and cheaper than going through the eviction process.[1]

[1] I.C. § 32-31-7-7 “Actions by landlord.” & I.C. I.C. § 32-31-6 “Termination of lease for failure to pay rent.”

What is a Settlement Agreement?

A Settlement Agreement (sometimes known as “Cash For Keys”) is when the manager agrees to pay a troublesome tenant to move out. Though some managers will never need to use this Agreement, it can be helpful if you have a disgruntled tenant that you are worried about damaging the property or is actively causing problems. The Agreement is drafted in such a way to encourage them to leave, as the payment is often cheaper for them than whatever the end result of a lawsuit would be.

Some landlords hate doing settlements like this, as it can be frustrating to actually pay a bad tenant. However, there are some situations where it is simply a better deal for everyone involved. If you have an angry client who has punched a hole in the wall, doesn’t any immediate job prospects, and has told their neighbor tenant that they plan on trashing the place if they are evicted, then it might not be worth it to go forward with an eviction. Not only is there the potential risk of further damage to the property, but the amount of time and money that goes into a court case (especially with a troublesome client) is rarely worth the trouble. So in situations like this, offering a client “Cash For Keys” so that they will leave quickly and peacefully would arguably be cheaper and less troublesome for everyone involved.

How Does It Work?

When you have a Settlement Agreement, there are two parts to consider: the Terms & Conditions and the Satisfaction Addendum. The Terms & Conditions describe the details of your arrangement, specifically that the tenants will leave by the agreed upon departure date without further damaging the property, and in turn, the manager will pay them to leave. How much you decide to pay will vary, but you should aim for something that is both financially beneficially for yourself and reasonable for the tenant.

The Satisfaction Addendum is executed when you complete three main tasks:

  1. You have walked through the property to ensure no further damage has been done,
  2. The tenants are completely exited from the property, and
  3. The tenants have handed over the keys.

Once all parts of the Satisfaction Addendum have been fulfilled, you can hand the tenant their cash and they can leave. Despite the name “Cash For Keys,” you should pay via check if possible in order to ensure that you have an official record for the transaction.[1] If you do decide to pay via cash however, be sure to sign something to make the transaction official and provide the tenant with a receipt. This avoids potential conflict or confusion down the line. Additionally, once you see the tenant drive away, you should change the locks on the property immediately. You do not want them to simply drive around the block, use a spare key, and move right back in (and yes, this has actually happened).

[1] White, S. M. (2016, January 15). Landlords and Cash for Keys: 5 Tips and 5 Common Mistakes. RentPrep. Retrieved from https://www.rentprep.com/evictions/cash-for-keys/

When To Go “Cash For Keys”

While a Settlement Agreement can be very useful and even mutually beneficial in some circumstances, it is somewhat controversial in some real estate circles, often due to the actions of misguided or over-eager landlords who make the mistake of trying to use the “Cash For Keys” method anytime they have a tenant with eviction looming. The fact is that the “Cash For Keys” method is an excellent alternative to taking a tenant to court, but it should approached as just that: an alternative. It is a choice that should be made based on the specifics of your situation and leveraged in a way that is beneficial to both parties. Regardless as to whether the tenant was a constant source of trouble or just someone who fell behind, you should take the time to see things from their perspective, as this is the best way to inform your decision making and figure out if it is time to go to court, or if a compromise is in order.