Renewing Leases and Adjusting Rent

Renewing Leases and Adjusting Rent

A common concern expressed by landlords is whether they require, or encourage, their tenant to sign a new lease upon the expiry of the existing lease.  Often, this is based on the misapprehension that a new lease should accompany a rent increase. When a lease is not renewed, the agreement is now a Periodic Agreement and it cannot revert back to a Fixed Term Agreement unless the tenant agrees.

My primary concern, especially lately, is that rent increases are made every 12 months. We should not tie a rent adjustment to a lease renewal. There is no obligation for a tenant to renew a lease, but a rent increase is effectively not negotiable, given the notice complies with the Act.

Over the years of legislated changes to residential leases, it turns out there are fewer positive benefits for the landlord in the renewal of a lease.

Let’s look at the two situations, firstly where the tenant requests a new lease and next, when the owner does so.

A tenant may want security of tenure when they are putting down roots near schools or employment or they simply don’t enjoy change. In this case, given that rent is adjusted up to the market value annually and the property is being well cared for, most owners will be more than happy to host a long-term tenant.

However, when a tenant foresees changes over the horizon, then being locked into a lease is unwelcome. If an owner insists on a new lease, then it may provoke a tenant to push back or even prematurely vacate the property. The question then becomes, what value does an owner gain from a lease renewal with a reluctant tenant.  The answer is not much.  It’s now easier and less costly (reduced Break Fees) for tenants to break a lease, so the lease is not providing the owner with a high level of security of tenure.

The latest changes to the Act stipulate that rent can be increased no more often than annually, regardless of the length of the lease. In effect, a six-month lease cannot be renewed with any rent increase in the next six months.

Inevitably, a tenant will leave one day. Tenants who wish to vacate are required to give 21 days’ notice. We very often secure a new tenant who will move in with almost zero days of lost rent. Most are very cooperative and allow plenty of opportunity for us to show the property to prospective tenants and are cognisant of the value of a good reference from the managing agent.  Losing a tenant is not ideal, but it’s part of being a landlord. An upside, in these times of run-away rental values, is that often the next rental amount is significantly higher than previous.

Leases can constrain the owner as well, as there is no ability require a tenant to leave before the end of their lease. Today, 90 days’ notice is required, but at least there is not just one day per year available.

In the past, some Landlord Insurance policies were invalidated if a fixed term lease was allowed to expire. Today, your cover is valid for Periodic Agreements.

In summary, my recommendation is that owners should separate Lease Renewals from Rent Increases – just go with the flow on renewals and be vigilant with the 60-day notice for a yearly rent adjustment.

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