Fixed-Term vs Periodic Tenancies: Which Suits You Best?

Fixed-Term vs Periodic Tenancies: Which Suits You Best?

As the year-end approaches, it’s an ideal time to review your tenancy agreements and refresh your knowledge. Fixed-term tenancies often start and end during the warmer months. Given the recent changes to the Residential Tenancies Act (RTA) in New Zealand, it’s crucial to reconsider the type of tenancy agreements you offer in the future. In this post, we delve into the primary distinctions between periodic and fixed-term tenancies and what to contemplate when renewing a tenancy contract.

Understanding Fixed-Term Tenancies

A fixed-term tenancy is an agreement that spans a specified period, typically around twelve months. This arrangement lacks flexibility, meaning neither the tenant nor the property owner can terminate the tenancy before the fixed term concludes.

From 11th February 2021, all fixed-term tenancy agreements signed thereafter will automatically transition into periodic tenancies upon the term’s expiration unless both parties agree otherwise or notice adheres to the Residential Tenancies Amendment Act 2020. Any fixed-term agreement signed before 11 February 2021 remains extendable under the previous RTA.

Fixed-term tenancies in New Zealand have positively and negatively impacted the population. According to government data, over 40% of the country’s rental agreements are now fixed-term. While this provides some security to renters, it also has increased rental costs, with a 15% increase in average rent prices over the past five years. The flexibility of fixed-term arrangements benefits those who require short-term housing solutions, such as students. However, it has created challenges for families seeking long-term stability, contributing to a 12% increase in the rate of households experiencing multiple relocations in recent years.

Advantages of a Fixed-Term Tenancy

Security for Both Parties: Fixed-term tenancies offer security to both tenants and property owners. Renters are assured of a stable home at a predetermined rate for a set duration. Property owners can count on a consistent income for the entire fixed term, eliminating the need to search for new tenants during challenging periods, such as the holiday season.

Reduced Vacancy: A lower turnover of tenants benefits property owners by reducing property vacancies. They won’t need to spend as much time and resources marketing the property compared to periodic tenancies.

Costs of Breaking a Fixed Term: If a tenant decides to terminate a fixed-term agreement prematurely, the costs of replacing the tenant fall upon the departing tenant, including rent until the new tenancy begins.

Key Considerations

Since a fixed-term tenancy can’t be ended prematurely without mutual agreement, it’s essential that both the tenant and property owner are comfortable with the terms before signing. Factors both parties should ponder before signing include:

• Suitability of the property for the tenant.
• The property’s condition.
• The duration of the fixed term and whether it aligns with both parties’ plans.
• The fixed term’s end date.
• Property owner’s plans at the end of the fixed term, such as selling the property.
• Property compliance with insulation and Healthy Homes standards.
• Renewing a Fixed-Term Tenancy

Upon a fixed term’s conclusion, it typically renews as a periodic tenancy, as per the Residential Tenancies Amendment Act 2020, effective from 11 February 2021. Alternatively, it may cease altogether if either party provides notice under the Residential Tenancies Act. The fixed term may also be renewed or extended if both parties agree.

Pro Tip: Setting a reminder at least fourteen weeks before a fixed term ends allows ample time to decide how to proceed and, if required, provide the necessary notice for ending the tenancy.

Exploring Periodic Tenancies

In contrast to fixed-term tenancies, a periodic tenancy agreement has no predefined end date. It continues until either party serves notice in accordance with the Residential Tenancies Act.

Periodic tenancies have significantly impacted the people of New Zealand. According to official statistics, nearly 45% of rental agreements in the country are now periodic. This type of arrangement offers flexibility for both tenants and landlords. Along with that, renters can adapt to changing life circumstances, including job relocations or family needs, while landlords have the freedom to sell or renovate their properties with shorter notice periods. However, this flexibility has also led to increased rental turnover. 

The data shows that 30% of periodic tenancies end within one year. Although some tenants appreciate the freedom to move without being locked into long leases, it has also created challenges for those seeking stable, long-term housing. Frequent moves can also disrupt children’s education, increase stress for families, and strain the resources needed for relocations, ​affecting an estimated 40% of families annually.

Benefits of a Periodic Tenancy:

Flexibility: A periodic tenancy’s primary benefit is flexibility. Neither party is locked into a fixed term, enabling tenants to provide notice if the property no longer suits their needs or if their circumstances change. Property owners can also provide notice in various situations, such as selling the property, having a family member move in, or requiring property renovations.

Reduced Administrative Work: Once a periodic tenancy starts, there’s no annual paperwork required for renewing the agreement.

Key Considerations

While flexibility is an advantage, it can pose challenges if either party receives unexpected notice. Before signing a periodic tenancy agreement, property owners should consider a few things. These include increased property vacancies, as periodic tenancies tend to have higher turnover, and potential notice from tenants during challenging periods, such as the Christmas holidays. As of 11 February 2021, property owners can only serve notice for specific reasons defined by the Residential Tenancies Act. This makes it vital to assess potential tenants just as thoroughly as with fixed-term tenancies.

Ending a Periodic Tenancy Agreement

Tenants: A tenant can terminate a periodic tenancy agreement at any time, for any reason, by giving at least 21 days written notice (28 days from 11th February 2021).

Property Owners: Property owners can provide notice for specified reasons according to the Residential Tenancies Act from 11th February 2021. Some situations require a Tenancy Tribunal order, such as when a tenant has displayed antisocial behaviour or consistently paid rent late. Other reasons include property owners needing the property for personal use, property sale, extensive renovations, or commercial use.

Choosing the Right Agreement for Property Owners

There’s no one-size-fits-all answer. The best tenancy type depends on both parties’ future plans, the location, and property specifics. Property owners should consider:

• Their intention is to sell the property shortly.
• Any major maintenance that necessitates property vacancy.
• Any upcoming travel plans during peak seasons.
• The ease of finding new tenants when given notice.
• The time and effort available for marketing the property and hosting viewings.
• If most answers lean toward “no,” a fixed-term tenancy is typically the better choice. It offers security for both parties. Nevertheless, periodic tenancies can be advantageous in high-demand areas or if the property is likely to be sold soon.

Nonetheless, periodic tenancies certainly have their benefits, particularly if rental properties in your region are in high demand or if you’re considering a sale in the near future.”

Pro Tip: Open communication about future plans helps both parties understand and agree on the tenancy terms. Ensure that renovation plans are confirmed with contractors.

How can a property manager assist?

Managing tenancy agreements can be challenging, especially with the increasing complexity of the industry. It’s crucial for property owners to have a solid grasp of their responsibilities. If you’re uncertain about legislative changes or how to initiate, renew, or terminate a tenancy, adding a property manager to your team is a simple way to ensure that every decision is made in your best interest.

Property managers should possess in-depth knowledge of all relevant legislation and are legally bound to act in the property owner’s best interest. Their expert guidance can assist you in navigating complex situations and ensure you attract suitable tenants for your property.

If you have any questions about tenancy agreements or how a property manager can enhance your journey as a rental property owner, please reach out to your local Better Property Managers’ office today.