What happens when you sign a two year contract in California but want to get out of it after a couple of months? Two year contracts are becoming increasingly common. Phone companies routinely lock you in for two years. Home security companies often do the same. Sometimes you sign a two year lease on a house or apartment. That may be because the landlord required it, or it may have suited you at the time that you signed it. But real life doesn’t happen in two year phases. Sometimes your plans change in a way that you could not have anticipated at the time you signed the contract. In the lease example, maybe you relocated to California for work, but then an even better job opportunity came up elsewhere. If you signed a two year lease, are you really locked in for two years?
First the easy bit. If you stop paying paying three months into a two year contract, you have breached the contract. Why does that matter to you? It probably only matters to you if the other party to the contract has the right to sue you. In most ordinary contract breach cases in California, if the other party wants to sue you, they will need to show that they have suffered loss. Using the lease example, it will be straightforward enough for the landlord to show that he has suffered a loss. The loss is the amount of rent he should have received from you for the remaining rent term.
But that is not the end of the story. The party suing you has a duty to mitigate his losses. Mitigation involves taking reasonable steps to try to avoid suffering the losses that resulted from your breach of contract. In the lease example, once you signalled that you would stop paying rent, the landlord had a duty to take reasonable steps to try to find a new tenant. That means advertising for a new tenant in the normal way. If he finds a new tenant to replace you on the same day you stopped paying rent, he can’t sue you because he hasn’t suffered any loss. If he finds a tenant but the tenant can only move in two weeks after you leave, he can only sue you for two weeks of rent.
Remember, though, that the duty to mitigate only requires that the other party to the contracts takes reasonable steps to try to avoid the loss. They are not required to do anything extraordinary. In the lease example, they would not be required to accept a tenant who has dubious credit. But they would have to accept a tenant who had a similar profile to yours.
Here’s a real life example of how this works, based on a recent experience that I had. My wife signed a two year contract with a home alarm company. Shortly after that, we moved house and so needed to end the contract. The alarm company said: no problem. You can end the contract but you need to pay over $1,000, which was the balance remaining on the two year contract. Always one step ahead, my wife utilized the powers of Facebook to find someone to take over the contract from us. The alarm company still refused to let us out of the contract. I informed the alarm company of their duty to mitigate their losses. In this case, that meant following up with the potential customers we had found via Facebook and transferring the contract to one of them. After receiving a letter from me explaining all of this, the alarm company agreed to let us out of the contract.
Breaching a contract is not to be taken lightly. But you shouldn’t assume that if you need to end a contract early that means that you need to pay the full balance outstanding on that contract. If you are being chased for payment, consider talking to an attorney to discuss your options.