Do longer leases encourage tenants to treat their rental property like their own?

31.9 per cent of New Zealand households (1.4 million people) are living in rented homes according to Stats NZ. Rents have risen faster than incomes. Further, more than 40 per cent of renter households now spend over 30 per cent of their income on housing.

Before exploring the potential policy changes, a small tweak might improve renters’ stability and financial health: increasing the term of residential tenancies.

Where are we at now?

• Tenant turnover is costly for landlords

When tenants move out, the landlord incurs costs from three components: cleaning and/or repairing, marketing the property to new tenants, and screening applicants and establishing the new rental agreement. Any vacant time is lost rent for landlords.

Every landlord’s dream is to have stable long-term tenants. However, that is not the reality for many landlords, so tenant changeover is an inevitable process. The bottom line is to minimise these events and get through them as efficiently as possible.

• Moving is expensive for renters too

Moving from one place to another is expensive and stressful. It takes time to search for a new home and it also incurs out-of-pocket spending – paying application fee, hiring movers, setting up new utilities.

• Most residential tenancy leases in NZ are 12 months

Despite the high cost of tenancy turnovers to both landlords and tenants, most residential leases in New Zealand only last for 12 months. Multi-year lease terms are the norm for commercial real estate, such as offices and warehouses. Residential leases running for longer terms (5-10 years) are fairly common in Europe and the UK.

Longer residential leases – can we learn from commercial leases?

The method and frequency of rent reviews is an essential term in commercial property leases. It ensures that the landlord can increase rent during the lease.

Commercial leases often allow the rent to be reviewed in various ways, a few of them can apply to residential leases – such as market rent reviews or fixed percentage rent reviews.

• Market rent review for residential

One of the most common ways is to adjust the rent in accordance with the current market rates of comparable premises. If this method was applied to residential – a landlord would initiate some form of due diligence to determine the current market rent (eg engaging a valuer).

The benefit of market rent review is that it ensures the rental is charged on the right track with the property’s value and its current market conditions.

• Fixed rent increases for residential

Both landlords and tenants could agree that the rent will increase by a set percentage, such as 2.5 - 5% increase on each review date.

Certainty is the biggest advantage of a fixed rent increase. The tenants know exactly what the revised rent will be after each review date while giving landlords certainty of income. This review method also reduces the potential for disputes between parties as financial commitment is clearly stated in the agreement.

Will longer leases inspire tenants to treat their rental property like their own?

In theory, landlords and tenants should be both responsible for keeping the property in good condition. But there’s the potential the property could be better looked after by the tenants.

Renting for longer might solve this problem. It does not just offer potential benefits to landlords – when tenants know they’ll have a home for a long period, they can put down roots and be connected.