With the end of year fast approaching, it’s a great time to check your tenancy agreements and start brushing up your knowledge. Fixed-term tenancies often end and begin in the warmer months, and with recent changes to the Residential Tenancies Act (RTA), you may need to re-evaluate what type of tenancy agreement you offer moving forward. In this blog, we explore the key differences between periodic and fixed-term tenancies and what to consider when renewing a tenancy agreement.

What is a fixed-term tenancy?

A fixed-term tenancy is a tenancy agreement that is in place for a set period of time, often for twelve months. This arrangement isn’t flexible, so neither the rental customer or property owner is able to give notice to end the tenancy before the fixed term has completed.

From 11 February 2021, all fixed-term tenancy agreements signed after that date will automatically roll into periodic tenancies at the expiry of their term, unless agreed otherwise by both parties or notice has been given in alignment with the Residential Tenancies Amendment Act 2020. Any fixed term agreement signed before 11 February 2021 remains extendable under the old RTA.

 

Benefits of a fixed-term tenancy

• Security for both parties
  Fixed-term tenancies are popular because they provide security for both parties. Rental customers are guaranteed a home at a set price for a specific period of time. And property owners know that they will receive rent for the full duration of the fixed term and won’t need to look for new rental customers during a difficult period, such as the Christmas holidays.
  It can also be beneficial for property owners to have a set timeline if they are wanting to sell the property at a certain time of year, or complete property maintenance that requires the house to be vacant, such as replacing carpet.
• Rental property has less vacancy
  An added benefit for rental property owners is that with a lower turnover of rental customers, the rental property will not be vacant as often. Owners will not need to spend as much time marketing the property as they might when using periodic tenancies.
• Costs of breaking a fixed term are borne by the tenant
  In the event the tenant chooses to break a fixed term, the cost of replacing this tenant is paid by the outgoing tenant, along with rent until the start of the new tenancy.

 

Key considerations

A fixed-term tenancy cannot be ended early unless agreed otherwise by both parties. So, it’s important that both the rental customer and property owner are comfortable with the terms of the agreement before signing. Some of the things both parties should think about before signing include:

• Whether the property is a good fit for the rental customer
• The condition of the property
• The length of the fixed term - whether this suits both parties’ plans
• The end date for the fixed term
• Whether the property owner has plans at the end of the fixed term, such as to sell the property
• Does the property fully comply with insulation standards
• Has the property been assessed for Healthy Homes standards

 

Renewing a fixed-term tenancy

So, what happens when a fixed term ends? Generally speaking, a fixed-term tenancy will convert to a periodic tenancy when it reaches the end of its term. This is a recent change that came out of the Residential Tenancies Amendment Act 2020 and will apply from 11 February 2021. Alternatively, the tenancy could end completely if the rental customer or property owner gives notice in accordance with the Residential Tenancies Act, or the fixed term could renew or extend if both parties agree.

Top tip: It’s a good idea for both parties to set themselves a reminder to review the rental agreement and living situation at least fourteen weeks before a fixed term ends. This way, there will be ample time to decide how to proceed and for rental customers to give the required notice if they choose to end the tenancy completely.
If an owner wants to move back in, they must give 90 days notice then stay in the home for at least 90 days, hence change to 14 weeks.

What is a periodic tenancy?

Unlike a fixed-term tenancy, a periodic tenancy agreement has no end date. This means it carries on until either party gives notice in accordance with the Residential Tenancies Act.

 

Benefits of a periodic tenancy

• Flexibility
  One of the most popular benefits of a periodic tenancy is flexibility. Neither party is locked into a fixed term, so rental customers are able to give notice if the property doesn’t feel suited to them or their living situation changes. Similarly, property owners can give notice if:
  — They want to sell the home and prefer to sell the home staged and vacant
  — They sell their home and the new buyer doesn’t want rental customers
  — A family member is going to live in the property
  — The property is needed for employee accommodation - if there is potential of this happening, it does need to be included in the tenancy agreement
  — The property needs renovations that would not be practical to complete with a customer in place
• Less paperwork
  Once a periodic tenancy agreement has started, there is no need to complete more paperwork every year to renew the agreement.

 

Key considerations

Flexibility can definitely be an advantage when it comes to tenancy agreements, but it can also cause problems for either party if they are given notice unexpectedly. Before signing a periodic tenancy agreement, property owners should consider:

• The property may be vacant more often as properties with periodic tenancy agreements can have higher turnover than those with fixed terms. This could mean more time and money spent on marketing the property and finding new rental customers.
• Rental customers may give notice during a difficult time to find new customers, such as the Christmas holidays.
• From 11 February 2021, property owners will only be able to give notice for reasons specified in the Residential Tenancies Act. This means that the same care should be put into checking rental customers as with fixed-term tenancy agreements.

 

Ending a periodic tenancy agreement

Rental customers

A rental customer can end a periodic tenancy agreement at any time, for any reason by giving at least 21 days’ written notice (28 days notice from 11 February 2021).

Property owners

For property owners, it’s a bit different. From 11 February 2021, property owners will only be able to give notice for reasons specified in the Residential Tenancies Act. For some situations, the termination also needs to be ordered by the Tenancy Tribunal. These situations include:

• If the rental customer has exhibited three antisocial acts, and been issued notices with very specific detail for each, in a 90-day period.
• If the rental customer has been issued notices for paying rent five or more working days late, on three separate occasions within a 90-day period.

Other reasons why a property owner may end a periodic tenancy include:

• If the property owner’s family member needs to live in the home
• If the home is going to be occupied by employees of the owner
• If the property is going to be sold
• If extensive renovations are planned
• If the property is going to be demolished or used commercially

What type of agreement is best for property owners?

There’s no one-size-fits-all answer. The type of tenancy that best suits your requirements will largely depend on both parties’ plans for the future, the area and even the property itself. Ask yourself the following questions to help decide what’s better for you:

• Are you planning on selling your home in the near future?
• Do you have any large maintenance plans that would require the property to be vacant?
• Are you planning on travelling during the summer break? This is a popular time to end periodic tenancy agreements, especially in popular student areas.
• Will it be easy to find new rental customers if you’re given notice?
• How much time do you have available to market the property and hold viewings?

If you find you’re answering ‘no’ to most questions, a fixed-term tenancy might be the better choice for you. At Quinovic, we usually start with fixed-term tenancy agreements because of the security this provides for both parties. However, periodic tenancies definitely have their advantages, especially if rental properties in your area are in hot demand, or if you’re planning on selling in the near future.

Top tip: Ask potential rental customers what their plans are in the next 12 months and share any definite plans you have for the property. While these can always change, it’s best to be transparent so both parties know what they’re signing up to. But ensure that you only mention renovations if they are locked in with contractors and guaranteed.

 

How can a property manager help?

Managing tenancy agreements can be tricky at the best of times. It’s important that property owners have a strong understanding of their obligations, especially with the increasing complexity of the industry. If you’re feeling unsure about legislative changes or how to start, renew or end a tenancy, adding a property manager to your team is an easy way to ensure every decision is made in your best interest.

Property managers should have expert knowledge of all relevant legislation and are legally obligated to act in the property owner’s best interest. Their expert advice can help you navigate difficult situations and ensure you’re getting the right rental customers for your property.

If you have any questions about tenancy agreements or how a property manager can support your journey as a rental property owner, please get in touch with your local Quinovic office today.