Deciding which rental agreement is best for the income you want to earn on your property can be challenging for homeowners. As with any successful business, your journey as a homeowner must begin with a viable business plan of which the term of your rental agreement is an essential part.
In these tough financial times, month-to-month leases should be considered as they provide homeowners with flexibility, increased profits, and protection in an increasingly competitive market.
However, understanding the law governing how rights and obligations in your lease can be mind-boggling at first glance.
I share my thoughts on the pros and cons of month-to-month leases compared to fixed-term leases, and how they can ensure that owners get the maximum income potential from their property.
There is a lot of fear and misinformation surrounding eviction, which leaves many people baffled by how complicated the process seems. While it is true that tenants cannot simply be thrown out without due process, both tenants and landlords have rights and obligations to honor the contract they enter into. In short, tenants are responsible for the rent and landlords have the right to claim their rent or cancel their contract with a non-paying tenant.
Globally, there may be some variations, but the basic principle is that landlords have the right to claim their rent, demand unpaid money, and cancel the lease. In South Africa, the entire legal process is governed by the Rental Housing Act, and the rights and obligations arising from this law are also set out in the rental agreement.
Eviction is an absolute last resort for both the tenant and the landlord, and requires a large investment of energy beforehand to secure the items necessary for 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 demand letter for the money owed, evidence of dispatch of the demand letter and receipt thereof, and a letter of cancellation of the lease.
Historically, leases have been signed for a period of 12 months, during which the rent is paid in advance monthly in 12 installments. However, if the tenants anticipate that they will not be able to pay the rent amount under the lease, there is a provision for the tenant to cancel early. Similarly, a landlord also has the right to cancel the lease early, given specific circumstances, such as the need to occupy the property for themselves or if they intend to sell the property.
The general practice is that the landlord must notify the tenant two months in advance, while a tenant can notify the landlord 20 business days in advance of early termination. These terms are the reference point, however, in some cases they may vary from one contract to another as long as they are stipulated in the lease.
The standard twelve month lease
Historically, there has been a sense of comfort around obtaining a longer-term lease. For tenants, it meant not having to move as often, and for landlords the fixed time and related penalties mean a relatively hassle-free income for the next year.
The standard 12-month fixed-term lease carries a 20-day demand letter, which means that if the landlord wants to cancel when a tenant does not pay, then they must provide the tenant with 20 days to remedy the situation, before the cancellation of contract. The notice can be issued on the 21st.
The downsides to these leases are that, for landlords, this affects the timing of the demand letter and the lease cancellation process. Ultimately, this causes landlords to wait longer before canceling the lease if payment is not received. There are also implications for real estate agent fees, as the full 12-month fees would be payable even if the lease is canceled early.
Over time, the demand for options and flexibility over established contracts means that more and more landlords and tenants are choosing to give month-to-month leases a shot because of their ability to respond to a tenant’s default. That said, even in a “fixed” lease, each party has the right to cancel at any time. They are only obliged to give the amount of notice of cancellation stipulated in the contract, that is, 60 days for owners and 30 for tenants.
Short-term leases (1, 3 and 6 month leases)
Basically, the advantages of a landlord from a month-to-month lease is that if a tenant is unable to pay their rent, the lease can be legally canceled earlier, allowing the landlord to place a new tenant on your property and generate an income. . A month-to-month lease only carries a 7-day demand letter that is effective for landlords to initiate action in the event that the tenant breaches the rental agreement.
This form of leasing gives owners a greater ability to take faster action in the event of default. The landlord could certainly act faster in hiring another tenant given the short terms, taking a low-income or no-income asset and making it take the profits the landlord has staked. Also, on month-to-month leases, liability for agent fees may be less onerous.
Since the pandemic, we are adapting the way we contract 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 whenever homeowners receive rentals that may have been lost. Part of this recovery is helping homeowners understand their property’s declining affordability and adjusting rental rates appropriately.
One way to provide an additional layer of security is to encourage collection of rent by debit order; This provides rental landlords with a layer of security, but also allows tenants the opportunity to rehabilitate their payment records and credit scores. Finding creative ways to respond to non-payment of rent more quickly and effectively is one of RentMaster’s main motivators. One of these ways is for the tenant and the landlord to sign lease agreements that give them more freedom to respond and change their agreement 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 nonpayment is greatly influenced by the type of lease.
Are all the adults on the property listed on the lease? As a landlord, the more adults you have listed as responsible for the rent, the more likely you are to get traction on a demand letter, as each person is sent a demand letter.
What are the cancellation clauses and notice periods associated with the lease?
Is there a presumed reception clause in the contract? It is important that you as a landlord have proof that you have sent your procedural communication to the correct address and individual in case you need to go through the legal process for debt collection or eviction.
Are all the fields and signatures that should be in the document present? This is imperative as incomplete documents are not enforceable documents.
The optimal type of lease is ultimately one that the tenant can comfortably live with and pay for. As soon as affordability is in question, a renegotiation should take place between the landlord and the tenant to review the rental value and decide whether to seek a new tenant. A month-to-month lease gives the landlord and tenant the ability to work quickly and make these changes with the shortest possible time between each legal step. But a 12-month agreement allows for a certain degree of perceived security regarding the property’s income for the following year.
Rentmaster believes that homeowners should not be alone in the intricate property landscape. We often see landlords taking ownership of their property management by underestimating the time and energy involved in collecting rent, controlling tenants, and collecting debts.
Our world is constantly changing. To maximize wealth creation from rental properties with minimal emotional strain, owners must adapt their thinking from traditional ways of hiring and be open to adjusting 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 go through the legal process for them to find another tenant and earn the money they deposited.
Shanaaz Trethewey, CEO of RentMaster.