As a Property Manager, we spend a lot of time negotiating Lease Renewals as tenants’ leases come up to expire. My opinion is that it is ideal for both owners and tenants to have the security of having a lease in place.
With the recent NSW changes to Residential Tenancy Laws, I’m already seeing landlords reconsidering this and opting to have their tenants remaining on continuing agreements.
This is largely because of the changes relating to the costs incurred by tenants when they need to Break their Lease.
These changes are likely to see increased instances of vacancy periods and therefore loss of rent where the current lease arrangements provided landlords with much more security. For a landlord, being told that their property is vacant with little “compensation” being the Break fee, leaves them open to unpredictable and unforeseen vacancy periods.
“The question now, is it worth renewing a Lease, when they’re so easy for a tenant to break?”
Whilst a fixed-term lease provides tenants and landlords a period of security, with new legislation coming in on 23/3/2020, it’ll be easier for these leases to be broken by tenants so we might see more and more tenants leaving before the Lease expires simply because it’s more affordable to do so.
Close to a Lease expiring your options are to either;
- Not renew a Lease and have continuing agreement where tenants provide you with 3 weeks’ notice to vacate at any point
- Renew a Lease where tenants can break the agreement by paying a set break fee as outlined below
New mandatory set break fees for fixed-term agreements
Mandatory set fees when a tenant breaks a fixed-term agreement early will apply to all new fixed-term agreements that are 3 years or less. This applies to agreements that are entered into from 23 March 2020 onwards.
The break fees are:
- 4 weeks rent if less than 25% of the lease had expired
- 3 weeks rent if 25% or more but less than 50% of the lease had expired
- 2 weeks rent if 50% or more but less than 75% of the lease had expired
- 1 week’s rent if 75% or more of the lease had expired.
Using the example of a 12-month tenancy agreement, a tenant would only be required to provide two weeks’ rent to their landlord (that is, an amount equal to two week’s rent) to end their agreement early, if seven months (or 58%) of the agreement had expired.
I’ll be speaking to my clients on a case by case basis as Leases come up for renewal throughout 2020 but already, I am hearing “What’s the point of a Lease”.
The consensus is that at least getting 3 weeks’ notice on a continuing agreement gives you more lead time to advertise and show the property to secure new tenants, it’s all about minimising vacancy here.
As a Property Manager, it’s my job to maximise my landlords investments, and where leases are renewed at a cost to landlords it might not be the best investment to all clients when you consider a lease can be broken in the last 3 months and all the owner will receive is 1 weeks rent as the set break fee.
While there are many other changes to legislation coming in, which I’ve covered in my posts, I feel this change will have the greatest impact on both landlords and tenants.
Landlords face uncertainty in terms of the higher probability of lost income and Tenants face not having the offer or opportunity to renew their lease and get some long-term security in their homes.
My opinion is that there are no real winners here, unfortunately.
While it may sound advantageous to tenants being able to more affordably break their lease and move, long term investors may simply be turned off investing and may simply not offer the tenants that want to secure longer leases, the option.
As an investor, will I be renewing my tenant’s leases? Probably not, unless I’ve got tenants that really demand it and where I feel they’ll give me the courtesy of some notice of their vacating rather than none.
“What’s crucial here, is keeping good working relationships with tenants. Relationships where tenants will communicate any changes in circumstances to their Property Manager. So that we will get the heads up and some notice, even though the tenant doesn’t technically have to provide it.”
As Property Managers, it’ll be in our, and our client’s best interests that we keep our eyes and ears open and are attentive to our tenant’s movements and their circumstances.
Antonio @ The Management Agency