The lease renewal process – striking the balance between maintaining strict office and honouring the clients’ instructions

Investors, Property Management, Tenants,  Property Managers

Many offices have set policies, systems and procedures in their office and this is certainly an excellent control and accountability measure. When a procedure is put in place it ensures that all members of the team know and understand the way in which that particular task must be administrated.

Lease renewals, however, are a task item that falls a little left field of a strict policy and procedure.

A lease renewal requires input from all parties – the lessor, the managing agent and the tenant. Instructions and commitments from all parties must be taken and negotiated until a mutual agreement can be made.

So it is rather tricky to create a ‘one size fits all’ policy for lease renewals when there are so many variables.

Section 62 of the RTRA Act states that a tenant must return the General Tenancy Agreement within 5 days of issue, so it would, therefore, be important to have discussed the possible offer options with both client (lessor) & customer (tenant) before physically issuing a written agreement.

Essentially, we know that under the Property Occupations Act we are working under the instructions of the client but it is relevant to remember that they have engaged a Property Manager to professionally guide them when it comes to making decisions concerning the property they have managed.

Typically, the PM will contact the lessor three months prior to the end of the tenancy seeking instruction to either renew the tenancy or issue a Notice to Leave (Form 12). If the lessor instructs to renew, a new set of documents is issued to the tenant. A PM may also attach a Form 12 – stipulating to the tenant that if the lease is not signed and returned within five days, the Notice to Leave will be in effect.

Tenants receiving both a lease offer and a Notice To Leave would find this contradictory and confusing. A lot of tenants are ready to commit to a new tenancy where the lease still has several months to run its course and this can give the impression that the tenant has no right to negotiate on any of the terms.

Is this working in the best interest of your client? I believe it isn’t.

As the engaged professional, it is our responsibility to explain the different possibilities that both the lessor and tenant may experience during the lease renegotiation process.

It would be relevant to advise the client that this could take time, but handling the negotiations effectively will result in maximising the clients overall return and minimising the hassle for the tenant.

Successful negotiation of a lease renewal process could have a positive result on the office workload and culture as less vacancies mean a continuous income stream, less risk of losing a client to another agent because a property is vacant and less work for the property manager to bear with conducting exit condition reports and finalising tenancies.

When first discussing the expiry of the tenancy with the client, it would be important for them to understand their rights and obligations. Many lessors are not aware that if they require vacant possession at the expiry of the tenancy, they are required to give a minimum two months written notice to the tenant.

If the lessor doesn’t require vacant possession, it would be wise to discuss with your client the tenancy to date, current market conditions etc. This information will help the lessor make an informed decision about presenting a tenancy offer to the tenant and any new terms that might be applicable. It is essential to determine the overall outcome the lessor wants to achieve from the renewal.

Under the RTRA Act, when a fixed term tenancy ends and the parties agree that the tenant can remain in the rental premises, the lessor and tenant need to decide on the future tenancy arrangements. This will ultimately be the first step in the negotiation.

Based on the Act, there are three ways a fixed term tenancy can continue:

  • extend the existing fixed-term agreement by agreeing on a new finishing date, or
  • enter into a new fixed-term agreement, or
  • do nothing and allow the agreement to revert to a periodic agreement.

An extension of an existing tenancy agreement can only occur where all terms and conditions remain exactly the same as previous and a new end date of the agreement is agreed to. The REIQ does not support the extension method as a best practice method and advises that entering a new tenancy agreement is a better practice.

Entering a new agreement at the end of a tenancy is the ideal time to increase rent or propose changes to the terms of the agreement.

If the lessor intends to use the expiry of the tenancy agreement as an opportunity to review the rent for a new agreement, there is no required time provision for notice of the increase for the new agreement if the tenant accepts the offer to lease. However, it is important to note that rent cannot be increased if it is less than six months since the initial tenancy agreement was entered into, or less than six months since a previous rent increase.

However, the tenant may not accept the offer put to them and a negotiation may take place. In this respect, it is essential that a rent increase notification is also issued as a separate instruction at the time of issuing the lease offer.

This means that if the tenant does not accept the lease on offer but is remaining in the property after the expiry of the current agreement, the lessor still is able to receive a new rental amount without further delay.

If no action is taken in way of offer and acceptance of a new tenancy agreement or a negotiation is reached where the lessor and tenant agree to a periodic tenancy, a periodic agreement automatically comes into place. The periodic agreement continues under the same terms that applied to the fixed term agreement except for the end date. A periodic agreement is NOT a new agreement.

At any time, the tenant and property manager can agree to end the periodic agreement and begin a new fixed-term agreement or terminate the tenancy and finalise the bond.

The RTRA Act is very clear that there are only two types of tenancy agreements – fixed term and a periodic agreement.

Setting an office policy that no periodic tenancies are allowed may not allow the best outcome for the lessor. Remember, it is an obligation that we put the client’s needs before our own.

Many PMs warn off lessors from agreeing to a periodic tenancy, often saying that a periodic tenancy will void the lessors’ insurance.

This is not always the case. Each insurer has their own set of fine print and restrictions on payments should a claim be required and it would be in the client’s own interest to research the impact of a periodic tenancy may have on them. The lessor should have the right to enter into a periodic agreement if it is beneficial to them.

Tenants are able to negotiate the terms of the proposed new agreement before they sign it. If the lessor does not want to negotiate on the proposed terms issued to the tenant, then the tenant can dispute significant changes between agreements, such as excessive rent increases or whether pets are allowed. However, the tenant must first sign the proposed agreement and within 30 days of signing the new agreement, apply to QCAT to have the significant change reviewed.

PMs should be discussing with clients the pros, cons and possible outcomes that could be impacted where the client is not prepared to negotiate. This process can mitigate expense and loss to the client. Lease renewals are an important aspect in a duties, handling a tenancy renewal effectively can result in increased return for the lessor and increased profitability for the agency.

At all times the property manager must be acting under the instruction of the lessor not necessarily the “office process”. It is all well and good to have an office policy that states if the tenant doesn’t return a lease offer prior to the end of the lease than the office policy is to revoke the offer and issue the tenant with notice to leave. Many landlords are far happier to have a good tenant in place on a periodic tenancy then the possibility of a costly vacancy.

Lease renewals quite simply put are a negotiation between a lessor and tenant. The negotiation will be based on the terms of the tenancy and the dates of the tenancy.

When negotiating a lease renewal on behalf of a client it is a good idea to seek the lessor’s instructions and bottom line prior to the commencement of the negotiation. Don’t agree to terms or issue instructions to the tenant that the lessor is not willing to accept.

In doing so, you are putting yourself at risk of the client making a claim against you for failing to act under their instructions.

Bringing both parties together in agreement is the overall main objective.