As an investor, it pays to know your rights and responsibilities when it comes to tenants.
Once you’ve set up your investment property, the next hurdle is finding the right tenant and setting up a lease agreement that works for you.
There are two main types of lease agreements in New South Wales – fixed term and periodic. ‘Here’s what you need to know about each of these agreements and how they function:
The ‘traditional’ fixed term lease agreement
The vast majority of lease agreements will start out as fixed term, signing the tenant up for a block of time such as 6 or 12 months.
If you plan to raise the rent during this time, you’ll need to include these details in the original lease agreement. Before this increase can take effect, you’ll also need to give tenants 60 days’ notice.
If you don’t include information about rent increases in the original agreement and the lease is for less than two years, you can’t ask for an increase.
Can tenants get out of fixed term leases?
While a fixed term lease can limit your ability to increase rent, it does protect you if your tenant decides to break the lease early. Your tenant may be required to continue paying rent until someone else takes over, along with a percentage of advertising costs. Alternatively, you can choose to include a one-off ‘break fee’ clause in your lease agreement to set a fixed fee for breaking the lease.
Periodic or ‘rolling’ lease agreements
Once the fixed term is up, tenants automatically transfer to a periodic agreement unless a new fixed term agreement is put in place.
A tenant on a periodic lease is required to follow all the same rules as in their original agreement, but they are able to vacate the property at any time, as long as they give 21 days’ notice.
It’s important to know about this automatic switch to a periodic or ‘rolling’ lease agreement as a landlord. Property managers who are familiar with this process can sometimes fail to communicate the change to landlords, and this can cause huge headaches if a tenant decides to take advantage of the 21-day notice period.
Why use a periodic agreement?
Periodic leases are clearly less stable from a landlord’s point of view and can cause stress for tenants as well. The flexibility of the periodic agreement means that you only have to give 90 days’ notice if you wish to gain possession of your property. This may be in the event that you decide to sell and want to present the property styled.
The bottom line when it comes to leases is: take the time to read the fine print and clarify any queries with your property manager. Knowing the rules will go a long way toward avoiding difficulties with tenants when it comes time to make changes.