The great debate: fixed-term versus periodic leases
15 December 2022
There is a great deal of contention in the industry around whether it’s better to allow initial leases to run into periodic or lock tenants into a fixed-term.
In many cases, the final decision is based on what fits in with the property manager's existing workflows – and not so much on, what I would argue, is the enormous value a fixed-term lease offers to property investors.
Here is why it’s critical to be proactive locking in fixed-term leases, and how to articulate their value to clients:
The majority of property investors have their properties leveraged, which means they rely on the rent to cover their mortgage repayments.
Vacancy days are a high friction point for these investors, particularly if they are caught off guard by a renter vacating at short notice. In addition to loss of rental income for a period, they will need to manage their cash flow to cover advertising fees and letting fees. Tenant turnovers are expensive. And for most people, this means dipping into their holiday fund or personal savings to ensure the mortgage repayment can be made.
Locking the renter into a fixed-term lease allows the property manager to better manage the risk of a renter vacating unexpectedly, and minimising potential vacancy days. In most states, the notice required by a renter to vacate the property is relatively short if approaching the end of a fixed-term lease or a periodic one. By proactively locking the renters into a new lease well before the current lease expiry, we can minimise vacancy risk. Should the renter wish to vacate, the property can be advertised well in advance to ensure a new renter can take over the property immediately, reducing any vacancy days for the investor.
Maximise insurance claims
Many insurance companies have a limitation on the amount of rent an investor can claim if the renter defaults while on a periodic lease. In most of these cases, it is capped at the notice period that a renter would have had to give if they vacated the property. For example, if the renter was on a periodic lease and was only required to give two weeks notice to vacate, the capped amount claimable for loss of rent would be two weeks. With the rent arrears process blowing out because of local tribunal wait times, I have seen rent default claims as high as six to eight weeks – which is unclaimable by the landlord should a claim be required.
Locking renters into fixed-term leases ensures proper insurance cover is maintained by the investor in the event a renter should default.
The trick to staying on top of fixed-term leases? Ailo
Property managers typically contact tenants about renewing a lease 60-90 days before the lease is set to expire. But in the old way of keeping track of a never-ending to-do list (think post-it notes, calendar reminders, multiple trello boards, email inbox…), it’s hard to stay ahead of upcoming renewals.
That’s why we built a workflow feature in Ailo called Projects – to help make regular tasks, like lease renewals, easier to manage, delegate and keep track of.
Maryann Buston is the head Head of Operations at Ray White Inner Brisbane Apartments and she loves using Ailo to track and manage lease renewals.
“Ailo’s Project feature is fantastic, especially for lease renewals as the whole process is simply laid out and links with Docusign and RealWorks,” she said. “There are a lot of moving parts to renewals, and everyone in the team had their one way of managing them."
Her team used to come to meetings with handwritten notes on where they were up to. Now the process is streamlined with a central checklist of tasks – including a report on upcoming lease renewals and rent reviews – that she can easily check to see where things are up to, what’s stalled and who needs a helping hand.
Read more: Close those 25 tabs! Projects is here