Fixed term versus periodic tenancies - what is best practice?
Fixed Term Versus Periodic Tenancies and Why Does this Matter?
What is your property manager’s procedure when a fixed term is coming to an end? Do they proactively seek a formal renewal of the tenancy agreement or do they just automatically roll over the fixed agreements and yet you don’t know about it?
At all times there are strategies to ensure you are minimising rental income loss which includes prolonged vacancy, falling rental value and exposure to income loss by having fixed term agreements in place.
In the past, it has been a common practice for New South Wales property management agencies to commence a new tenancy with a fixed term tenancy agreement and at the end of the term simply continue the tenancy as a periodic (continuing roll over) agreement. However, the change in legislation which extended the landlord’s right to terminate a periodic agreement by giving the tenant 90 days' notice period, formally 60 days (no grounds notice) means that agents have had to review systems and procedures to cater for the new laws and minimise the landlord's exposure. New practices include a change in the management and control of tenancies at the end of a fixed term tenancy.
The following case study will highlight the reason for the change.
The tenancy rolled over to a periodic agreement and the landlord was not advised that it was no longer a “fixed term”. After a period of time the landlord had reason to terminate the tenancy without grounds and notified the agent to issue a termination notice. The agent provided ninety days notice, and the tenant promptly moved out and handed in the keys. Under s110 of the Residential Tenancies Act 2010, in respect to a periodic tenancy, the tenant is not required to provide any notice once in receipt of a termination notice and can end the tenancy at any time during the 90-day notice period with nil notice to the landlord.
The landlord was expecting at least another 90 days of rent and was upset with the agent for not advising him of the pitfalls of a periodic tenancy agreement.
Renewing a tenancy
There are often reasons a landlord may wish to end the tenancy. For example, they may need to move into the property, move in a family member or relative, prepare to sell it or upgrade it.
There are pros and cons for both a fixed term and a periodic agreement that affect both the landlord and the agent. For the agent, the overwhelming advantage is the increase in income that is possible after securing a new fixed term agreement as part of the renewal process rather than allowing the tenancy to become periodic. Some agents charge a fee for a renewal of the existing tenancy to the landlord as agreed on the management agreement.
With a change in agency renewal practices, the agent will need to be able to ‘sell the benefits’ of a fixed term to the landlord. There are benefits for the agent to do so.
Periodic tenancy agreements should be kept at a minimum in your portfolio as the potential loss of income to you as the landlord and to the agent is far greater. When renewing each tenancy agreement, work to secure the tenant on a new residential tenancy agreement. In particular what is crucial is not the date the tenancy agreement begins, but the date it expires. The cyclical and seasonal nature of tenancies can affect the rent value and its rentability in any given season that is generally tied in with the highs and lows of any given location of the property. For example, popular beachside Sydney suburbs like Bondi or Bronte experience very high vacancy and drop in rental value during the off- peak months of the year. You would not dare tie in a lease which expires near or the middle of winter. You are asking for trouble if you do.
Benefits of a fixed term agreement
- Provides security and peace of mind to the landlord knowing they have a fixed income for the period of the agreement.
- Enables the landlord to forecast and budget accordingly for any expenses or refurbishment required.
- Some landlords insurance policies are subject to fixed term tenancies and are voidable if they are not.
- Rent increases can be written into tenancy agreements even on 2-3 year fixed term agreements.
- The term of the agreement can end at a time where the market is at its premium, therefore giving greater control to the landlord and agent.
- To end a fixed term agreement, a termination notice of 30 days is required to be provided to the tenant.
- A tenant can still vacate prior to the end of the fixed term but does need to pay a break lease fee to the landlord if they are ending the agreement.
- Security of tenure benefits both landlords and tenants. Moving homes is a stressful and expensive.
Disadvantages of a periodic agreement
- The tenant is in control and can dictate when they wish to end the tenancy.
- The tenant can leave at any time after receiving an agent issued termination notice and only pay rent until the day they hand in the keys or vacate the premises whichever is the later.
- The option of increasing the rent is often missed as the tenancy continues unless the agency is particular about following through with monitoring all periodic agreements.
- Tenant may terminate the tenancy at a time in the market that is low season therefore the property will be vacant longer and possible rent value reduction can occur.
- The landlord/agent has to provide 90 days termination notice if vacant possession is required. Once the tenant receives notice they can move out at any time without further notice.
- Agent cannot charge for achieving a periodic tenancy unlike a fixed term renewal fee option.
- Financiers of investment property do not like periodic tenancies. Its higher risk to them and more risk means more hurdles to obtain finance in an already tight financial market
- Less security for the landlord and less reliable forecast of income versus fixed term tenancies provide.
Consider your objectives for your investment property before deciding which term is best for you. While a periodic agreement may provide you with more flexibility should you be considering selling or developing the property, a fixed term agreement will provide you with more piece of mind, security and control of your investment.
Discuss your investment plans with your property manager and should you not have any immediate plans that require vacant possession of the property, considering aligning the lease term with the peak rental periods throughout the year is best strategy.
If you would like a free consultation about the impacts of tenancy agreements on your rental property, contact me on 0418 600 806, or via the contact page on our website.