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. 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.
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 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.
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.
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.
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.