Should tenants be allowed to sign 5-10 year home leases?

September 20, 2020

Tenants love the security of a long-term lease while landlords love the consistency of a regular rental payment.

But does that mean the potential introduction of long-term leases would be a marriage made in heaven – or could it spell disaster?

The Victorian government is currently undertaking an extended review of its residential tenancy laws, with one of the issues up for discussion being the possibility of 5-year or 10-year tenancies.

Property manager Scott Johnson from Blink Property believes a long-term lease could offer a number of positives for both tenants and property owners.

“It offers stability to the landlord, as the long-term lease ensures your property is tenanted and you have a steady stream of funds coming in,” he explains.

“Meanwhile, the tenant can firmly place themselves into a specific location. A longer lease also provides protection to the tenant if the property is sold.”

The financial benefits for landlords and tenants

Signing a five-year lease (or longer) could prove to offer a financial upside to all parties involved, Johnson says.

“Longer leases enable a tenant to have effective financial planning and enable them to budget the expenses more efficiently, particularly in regards to future market reviews and rent increases,” he explains.

“As a landlord, a long-term lease provides you the ability to calculate your return on investment over a longer period, and this could be a benefit if you’re looking to sell, as often investment properties are sold based on rent yield. This is important as if the property is located in an area that supply is greater than demand.”

He points out that just because a long-term lease is signed, that doesn’t mean the rental amount would necessarily stay the same for that entire period.

For instance, a five-year lease could be created with an automatic annual increase of 5% or a specific amount written into the contract.

Either way, depending on which side of the fence you stand on, being able to plan this increasing cost or return in advance could be a huge financial benefit.

Potential pitfalls of a long-term lease

Benefits aside, there is one potential pitfall of long-term leases that could negatively impact those who live in the home and those who pay the mortgage ­– and that is a loss of flexibility.

From a landlord’s perspective, long-term leases “do have a greater risk, as tenants may make it difficult to sell a property in the event you need to sell”, Johnson suggests.

It can be similarly tricky for renters to exit a lease early, without having to pay expensive break-lease fees and costs.

“Landlords may only grant your permission to leave under pre-determined, specific circumstances, so you would need to carefully consider the circumstances under which you might want to exit the lease,” Johnson says.

In saying all of this, however, debating the merits and pitfalls of long-term housing leases may be a moot point to begin with.

Research from Swinburne University’s Institute for Social Research, led by Wendy Stone, has shown that almost 40 percent of private tenants moved 3 or more times in five years.

This suggests that the demand for long-term tenancies may not be very strong after all – so even if 5 to 10-year residential leases were readily offered and covered by the Residential Tenancies Act, they may fail to attract any interest!

The Victorian state government is still conducting a wide-ranging review of its residential tenancy laws, with a reworking of rental laws that aim to make renting a smoother process for both tenant and landlord.

The information in this article is general information only and does not constitute financial or legal advice.  This does not take into account your personal circumstances and accordingly you should seek independent financial and legal advice before taking any action, or refraining from taking any action in reliance on any information contained in this article. 

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