Tenant requesting long lease

[Freedom]

Hi!
We have just had some new tenants request a five year lease. This might be an early sign of a trend - older tenants who have not bought seeking security.

Our PM advised No - that it is hard or impossible to raise the rent. They moved in on a one year lease and have made the request again.

What about if we inserted CPI increases in the lease, or even reviews to markets rents. Surely something like that would be fine? They are OK with something like that.

Is there anything else to watch out for?

 

[Andrew]

Yields are incredibly low right now, the
tenant may be looking to lock in low rates
for the next 5 years, good for them, not
so great for you.

I think that we will see rents rise significantly
above CPI over the next 5 years (once all
these damn mum + dad investors find
something else to do with their dough.)

If you do this go for the "independent market
appraisal" route rather than CPI IMHO.

andy

 

[duncan_m]

Originally posted by Freedom
Hi!
We have just had some new tenants request a five year lease. This might be an early sign of a trend - older tenants who have not bought seeking security.

Our PM advised No - that it is hard or impossible to raise the rent. They moved in on a one year lease and have made the request again.

What about if we inserted CPI increases in the lease, or even reviews to markets rents. Surely something like that would be fine? They are OK with something like that.

Is there anything else to watch out for?

Two issues to be wary of are:

1. You may be required to advise your Bank of this lease as it affects their security.. Read your mortgage documents I almost guarantee you'll need their approval as well..

2. A lease of this length, depending on your states Residential Tenancy Laws may in fact turn the Lease into something of a more commercial nature and it may deny you access to the process of your tenancy tribunal..

All in all, I would NEVER sign a 5 year lease.

Duncan.

 

[Kristine..]

Yes, Duncan, that's a good point

Residential tenancy laws are just that, for residential property.

In Victoria, anything outside five years does not come under the Residential Tenancy Act, so the comsumer protection inherent in the Act does not cover either the tenant or the landlord.

It is not feasible to include 'fixed' market reviews for residential, and even if the request comes from the tenant, because it commits them to the full value of the lease at the outset - eg 5 x annual rental, if push came to shove, and they wanted to move on, they could easily claim hardship if they had to pay out the lease for that period of time.

Also, it would severely limit your ability - or the lender's ability - to sell the property if need be.

Your lending arrangement may then be viewed as a commercial arrangement, and your lending ratio reduced to, say, 60% LVR, which is the usual ratio applied to commercial property / commercial tenant.

Each category of property has it's own lending & leasing parameters. Stay with the tried and true way of doing things for your category, to minimise your exposure to unnecessary risk.

Remember, all that glistens is not gold. If it seems too good to be true, it probably is.

Cheers

Kristine

 

[Jean]

5 year lease

There are many 'what ifs' when the lease is over a year.

The tenant is safe - they can sub-let or re-neg or whatever.

However as owner you have to play by all of the rules. Tenancy attracts more rights because it is their abode, even if they don't take much care of it or make you fight each fortnight to get the rent.

There have been occasions when I have spent 11 1/2 frustrating months waiting for the end of the lease. What would 5 years be like!

 

[Freedom]

Thanks everyone for your advice. Looks like one year is plenty.