parallex

Long term commercial-like leases may become the norm for residential tenants

December 18, 2015 at 12:00 PM

 

By Francis McEntee

 

A changing residential rental property environment in New Zealand means that the time is now ripe for landlords to consider long term five to ten year leases for tenants that are similar to commercial lease arrangements with rights to make changes to the property, or renew.

New legislative changes are paving the way for a less intrusive (or active) relationship between landlords and tenants, than the current one to two year norms that dominate residential tenancy relationships at the moment.

While some property managers might not like the new arrangement, a number of factors – including legislative changes – are creating a rental environment similar to the United Kingdom and the United States where long-term residential leases are the norm.

House prices in Auckland are creating a rental culture here, and Government has recognised that, so I think we can expect a more developments favouring long term leases. 

It is something that favours landlords too. Recent law changes mean that people who own residential rental properties will be less inclined to buy and sell frequently because it has become a taxable activity, and we know that the Inland Revenue Department is actively information gathering under the law changes.

The culture of buying and selling short term will end.

The long term lease arrangements would be aimed towards young families – such as those in the first home buyer mould – who want a stable family environment, without disruption to children’s schooling, while they bed down and save for their own home down the line.

We’re not talking about students here. We’re not talking about a culture where tenants have no certainty, and have to put up with regular and intrusive property inspections, or the inability to ‘make a home’ by hanging up photographs or creating a small vegetable garden in the backyard. 

I expect property managers will resist this because their income is based on active tenancies and tenant turnover, but landlords need to start taking a long term business approach to property investment. 

The long term tenancy leases could work like current commercial leases, which have an existing body of law around them and established precedents, like the ability to assign the lease subject to landlord’s consent (sub letting), rights to renew after five or ten years (or the ability to extend the lease) and to make cosmetic changes to the property. 

Tenants need to be given the scope to make a home for themselves, without the uncertainty of being evicted within a short time period, and so long as the lease makes certain provision for them to return the property to it’s original condition, they should have rights to home making changes like painting the interior.

Landlords will become more passive, but in exchange they get lower tenant turnover, less costs on fees and maintenance – because tenants will have to carry out minor maintenance – and a more secure, predictable income.” 

In the past landlords wanted more flexibility to sell on short notice, but legislative changes and higher investments commitments into things like rental warrants of fitness, mean residential property investment is becoming a long-term investment.

A long term tenancy lease similar to a commercial lease is not the same as a ground lease or leasehold title, which generally get a bad rap because of the enormous rent increases that accompany rent reviews after sometimes decades.

What we’re talking about here is more of a business proposition; a balanced relationship between landlord and tenant. So it may be that landlords would still hold inspections from time to time, and there is also potential for holding bonds.

There would be, for example, be regular Consumer Price Index (CPIs) and market rent reviews. Concepts that are recognised in the commercial lease context.