Deciding which rental agreement is best for the income you want to earn on your property can be challenging for landlords. As with any successful business, your journey as a landlord should begin with a viable business plan of which your rental contract term is an essential part.
In these difficult financial times, month-to-month leases should be considered as they provide landlords with flexibility, increased profit, and protection in an increasingly competitive market.
However, understanding the law surrounding how rights and obligations in your lease can be mind-boggling at first glance.
I share my insights into the pros and cons of month-to-month versus fixed term leases, and how they can ensure landlords earn the maximum potential income from your property.
There is a lot of fearmongering and misinformation out there surrounding eviction, leaving many people bewildered by how complicated the process seems. While it is true that tenants can’t simply be thrown out onto the street without due process, both tenants and landlords have rights and obligations to uphold the contract that they enter into. In short, tenants are liable for rental, and landlords have the right to claim their rental or cancel their lease with a non-paying tenant.
Globally, there may be a few variances, but the basic principle is that landlords have the right to claim their rent, demand unpaid monies, and cancel the lease. In South Africa, the entire legal process is regulated by the Rental Housing Act, and the rights and obligations derived from this act are also housed in the lease agreement.
Eviction is an absolute last resort for both the tenant and the landlord, and requires a great energy investment beforehand to secure the elements necessary to have a successful eviction. These include a legally binding lease agreement signed in full by both parties, evidence of invoices and payments up to the current date, an official letter of demand for the monies owed, evidence of sending the letter of demand and receipt thereof, and a letter of lease cancellation.
Historically, lease agreements have been signed for a 12-month period, during which rental is paid in advance monthly in 12 instalments. However, should tenants foresee that they will not be able to pay the rental amount as per the lease agreement, there is a provision for a tenant to cancel early. Similarly, a landlord also has a right to cancel the lease arrangement early – given specific circumstances such as needing to occupy the property themselves, or if they intend on selling the property.
The general practice is that a landlord must provide two months’ notice to a tenant, whilst a tenant can give the landlord 20 business days’ notice of early cancellation. These time frames are the benchmark, however in some cases can vary from one contract to another provided they are stipulated in the lease agreement.
The standard twelve-month lease agreement
Historically, there has been a sense of comfort around securing a longer-term lease. For tenants, it meant not having to move so often and for landlords the fixed time and related penalties means a relatively hassle-free income over the coming year.
The standard 12-month fixed-term lease carries a 20-day letter of demand meaning that if the landlord wants to cancel when a tenant does not pay, then they need to provide the tenant 20 days to remedy the situation, before a lease cancellation notice can be issued on day 21.
The negatives of these lease agreements are that for landlords it impacts the timing of the letter of demand and lease cancellation process. Ultimately, this results in landlords having to wait longer before cancelling the lease if the payment is not received. There are also implications for the property agent fees as the complete 12-months’ worth of fees would be payable even if the lease is cancelled early.
Over time, the demand for choice and flexibility over set contracts means that more and more landlords and tenants are opting to give month-to-month leases a chance because of their ability to respond to non-payment by a tenant. That said, even in a “fixed” lease, each party has the right to cancel at any time. They are only bound to give the amount of cancellation notice stipulated in the contract, namely 60 days for landlords and 30 for tenants.
Short term leases (1, 3 and 6-month leases)
Fundamentally, the pros for a landlord of a month-to-month lease is that if a tenant cannot afford to pay their rent, the lease can be legally cancelled earlier, allowing the landlord to place a new tenant in their property and generate an income. A month-to-month lease only carries a 7-day letter of demand which is effective for landlords when instituting action should the tenant breach the rental contract.
This form of lease provides landlords greater ability to take quicker action on non-payment. The landlord would certainly be able to act quicker on procuring another tenant given the short time-frames, taking a non-income generating or low-income generating asset and making it earn the profits the landlord has banked on. Also, in month-to-month leases, the liability on agent fees can be less onerous.
Since the Pandemic, we are adapting how we contract with our leases in terms of their type (fixed term versus month-to-month), and certain conditional terms. The focus at RentMaster during and after each wave of the pandemic is always that landlords receive rentals that may have been missed. Part of this recovery is helping landlords understand the decreasing affordability of their property and adjusting rental rates appropriately.
One way to provide an additional layer of security is by encouraging the collection of rental by debit order; this provides leasing landlords with a layer of security but also allows tenants the chance to rehabilitate their payment records and credit scores. Looking for creative ways to respond to non-payment of rental more quickly and effectively is one of the prime motivators at RentMaster. One of these ways is for the tenant and landlord to sign lease agreements which provide them more freedom to respond and change their arrangement due to individual circumstances.
Questions to answer when signing a lease
What type of lease, fixed-term or month-to-month, is it? Your ability as a landlord to respond to non-payment is greatly influenced by the lease type.
Are all the adults on the property listed in the lease? As a landlord, the more adults you have listed as accountable for rental, the more likely you are to get traction on a letter of demand as each person is sent a letter of demand.
What are the cancellation clauses and the notice periods associated with the lease?
Is there a deemed receipt clause in the contract? It is important that as a landlord you have evidence of sending your procedural communication to the correct address and individual should you need to follow the legal process of debt collection or eviction.
Are all the fields and signatures that need to be on the document present? This is imperative as Incomplete documents are not enforceable documents.
The optimum lease agreement type is ultimately one that the tenant can live comfortably with and afford. As soon as affordability comes into question, a renegotiation between landlord and tenant should take place to revise the rental value and decide whether a new tenant is sought out. A month-to-month lease agreement provides the landlord and tenant with the ability to work quickly and make these changes with the least amount of time between each legal step. But a 12-month agreement allows a certain degree of perceived assurance regarding the property’s income over the year that follows.
Rentmaster believes that landlords should not be alone in the intricate property landscape. We often see landlords taking ownership of their property management underestimating the time and energy involved in the rental collection, tenant monitoring and debt collection.
Our world is constantly changing. To maximise the wealth creation from rental properties with minimal emotional strain, property owners need to adapt their thinking from the traditional contracting ways and be open to adjusting from fixed-term contracts to month-to-month leases. In a competitive market, the sooner we can respond on behalf of landlords, the sooner we can follow legal process towards them finding another tenant and earn the money they banked on.
Shanaaz Trethewey, CEO of RentMaster.