What Is Settlement Agreement?

A settlement agreement is a legally binding arrangement made by a tenant and a landlord, through which they acknowledge the conclusion of the rental agreement executed between them. It also states whether their erstwhile rental agreement’s terms have been complied with.

The settlement of lease basically includes the acts of the tenant vacating the rented premises and the landlord returning the security deposit, whether lump sum or partial. And in case the parties have any dispute(s) related to leasing or the terms and conditions they had entered into earlier, the settlement agreement interprets the same and also about how to solve the dispute(s).

What Is Security Deposit?

Security Deposit is the money paid by a tenant to a landlord as a surety while renting his/her premises. When the tenant vacates the house, with prior notification, the landlord is bound to return the security deposit. However, the landlord shall return the entire amount only if the tenant complies with the terms and conditions mentioned in the rental agreement.

For instance, if it is mentioned in the various clauses of the rental agreement that the landlord or owner can deduct 3 months’ rent if the tenant does not notify him about vacating the premises in 2 months advance, and if the tenant vacates the house without notifying the landlord in advance as specified in the agreement, then the landlord will have the right to deduct a part of the deposit.

As many of us would already know, tenants often land in trouble to pay hefty amounts of money as security deposit while renting properties. While arranging a huge sum of money itself is a big problem many tenants face, the biggest problem lies in getting back the money from the landlords. This is exactly one of the many motives of a well-drafted rental agreement that comes in handy with reliable solutions to such anticipated risks. Furthermore, regardless of what clauses you have included in the rental agreement, it is recommended that the landlord and tenant enter into a settlement agreement, once the parties decide to end the lease.

When Do You Need A Settlement Agreement?

An agreement for settlement or surrender of lease should be executed when the agreement is terminated mid way. If the tenant completes the lease tenure as mentioned in the rent agreement and then vacates the rented premises, then there is no need of a separate agreement.

Should Landlords Fully Refund The Security Deposit?

When the tenant vacates the house, the landlord is expected to return the security deposit. However, the landlord can deduct some amount of money from the deposit if he has a valid reason and it should also have been mentioned in the rental agreement/lease agreement made at the time of renting the property. Some of the reasons owing to which the landlord can deduct a part of the security deposit include-

• If the tenant has any arrears of rent for a month or more.
• If the tenant has not cleared of the utility bills or owes money to the landlord for any other reason.
• If there are any damages to the property which are caused because of the tenant (other than regular wear and tear).
• If the tenant has not kept the property clean or well-maintained which may end up in the landlord spending some extra money to get the property cleaned.
• If the tenant has not given back the property keys or if things like taps, geyser, fans, etc, which were provided by the owner, but would have been missing during the tenant’s stay.

What To Include In A Settlement Agreement?

The important clauses to be covered in a settlement agreement includes-

• That future claims shall not be allowed on the same subject matter of an existing dispute

• That all prior agreements, understandings and negotiations shall be overridden

• That admissions made during the negotiations earlier will not be valid any more
• The total amount of deduction from the Security deposit along with the reasons for deduction
• The amount of security deposit being returned and the number of instalments through which it will be returned, if the parties agree for the amount being refunded in instalments

How To Create A Settlement Agreement For Lease?

To create a Settlement Agreement, one has to follow the steps given below:

• Draft the agreement first. Make sure you have included all the required information and the prime clauses mentioned above.
• Get it printed on Stamp paper of recommended value.
• Both the parties, the owner and the tenant, have to place their signatures on the document in the presence of two witnesses.
• Witnesses, in whose presence the parties signed the document, should also sign the agreement.