What is your office procedure when a fixed term tenancy ends? Do you proactively seek a formal renewal of the lease agreement, or do you have a large number of periodic tenancies on your rentroll? Simon Cox of Real Estate Dynamics, suggests some strategies to ensure you are maximising the value of your income and your rent roll through fixed term agreements.
In the past, it has been a common practice for New South Wales real estate 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 or continuing agreement.With the recent changes to the Residential Tenancies Act, agents have had to review systems and procedures to cater for the new laws. 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, 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.
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, or a termination notice (without grounds) may be issued if the tenant is proving to be difficult or demanding.
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. A renewal of tenancy fee can be charged to the landlord as agreed on the management agreement or other written 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. The following information will help in the education and communication process.
As indicated, there are benefits for an agency to manage the majority of their rent roll under fixed term tenancy agreements. Periodic tenancy agreements are to be kept at a minimum as the potential loss of income to 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. This will generate more profit into the property management division.
It is important to note that the portion of the lease preparation fee can no longer be passed onto the tenant, which raises the question, is thelandlord prepared to pay 100% of this fee? Possibly not, but it doesn’t mean that you can’t introduce other fees, for example, a ‘renewal of agreement fee’ may be able to be introduced.
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.
- Rent increases can be written into tenancy 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 cannot leave prior to the end of the fixed term but does need to give 14 days notice if they are ending the agreement.
- Agent has the option of charging the landlord a renewal of agreement fee. Providing secure tenure to the landlord will outweigh any monies paid as a renewal of agreement fee.
- If the rent roll is ever sold, the buyer through their due diligence will be concerned if the majority of properties under management are periodic tenancies. Fixed term agreements provide security to any buyer as secured income. Financiers also prefer fixed term tenancies when considering.
- When commission is forecast each month for the principal of an agency as income, fixed term agreements provide greater security and reliability.
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 ‘slow’ time therefore the property will be vacant longer. This equates to loss of income to the landlord and to the agent as commission due.
- 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.
- Buyers and financiers of a rent roll purchaser do not like periodic tenancies. Less ‘periodic’ is best.
- Less security for agent’s reliable forecast income as fixed term tenancies provide.