New lease break fees – what do they mean for investors?

There will be some significant changes to the property industry in NSW commencing on 23 March 2020. One of the biggest changes for landlords is the new legislation around tenants breaking their leases.

Previously, if a tenant broke a fixed-term lease in the first half of the lease, they would be required to pay a landlord 6 weeks’ rent, or 4 weeks’ rent if they broke it in the second half of the lease. However, new mandatory set break fees for fixed-term agreements that are 3 years or less will come into effect for all leases signed from 23 March this year.

The new break fees are:

4 weeks’ rent if less than 25% of the lease has expired
3 weeks’ rent if 25% or more but less than 50% of the lease has expired
2 weeks’ rent if 50% or more but less than 75% of the lease has expired
1 week’s rent if 75% or more of the lease has expired

This will clearly be a cause of concern for landlords, and as your property managers we are also concerned. In the past, the break fees have been a tool to deter tenants from leaving a property early, to help maintain consistency of tenancy for NSW landlords, and to ensure that landlords’ rental income stream is maintained even in the event of a broken lease. These break fees were used to cover lost income for the time the property was vacant between tenants and pay for re-marketing the property for lease.

The worst-case scenario under the new laws is that you have a tenant on a fixed-term lease – say, 12 months – and 12 weeks before the lease is due to expire, the tenant packs up and moves out with no notice. The tenant will only be required to pay one extra week of rent after the date they vacate.

In this scenario, for you to not lose your income stream as an investor, all of the following will need to be carried out within the space of seven days:

Detailed vacate inspection of the property to assess any damage caused during the tenancy and any maintenance, cleaning or rubbish removal that will be necessary prior to showing the property to prospective tenants
Scheduling and supervising the carrying out of repairs, maintenance, cleaning and rubbish removal
Advertising the property with enough time to gain interest from prospective tenants
Scheduling inspections and carrying them out
Gathering and processing applications, following up references and tenancy history of applicants
Presenting you with your options and you choosing a tenant
Offering the property to the chosen tenant and having them accept the offer and pay their holding deposit, setting them up with the Rental Bond Board and having them pay their bond online
Signing the lease
Having the tenant move in, assuming the approved tenant is already packed up and ready to move immediately and does not need to give notice where they are currently renting

Those of you that are experienced landlords – or indeed those of you that have tried to coordinate two tradespeople to do work on the one property in the same week – will see that it is highly unlikely that all of the above could be completed in seven days.

So how can we help you?

As experienced property managers, we at The Property Market have a few suggestions that will help you to minimise your risk of having tenants break their lease and move out early. Some of our suggestions are:

When processing applications, it is vital to thoroughly background check all applicants and maintain a consistently high standard of tenants that you will accept. An experienced property management team with a dedication to detail and a discerning eye has a better chance of identifying potential problems before they occur and can offer you advise about which tenants to approve to rent your property. This may mean a little extra time before you have a tenant occupy your investment, but that slight delay at the beginning is better than approving tenants who may cause major disruptions to your income further down the track.

It’s also important to note that the longer these laws are in place, the more obvious a history of breaking leases will appear when we check a tenant’s background.

Having a property management team that maintains good, prompt, positive communication with tenants is vital. If the tenant feels listened to and heard, they are more likely to see out the full term of their lease.

While at first it might look like having a tenant on a fixed-term lease has little benefit under the new laws, we at The Property Market feel that providing tenants with a lease will give them a sense of security that will make them more inclined to stay put.

Be prepared to negotiate a bit. If a tenant says they’d like to lease your property but would need some sort of adjustment at the beginning before they’d be comfortable signing a lease – for example, requesting that some minor repairs are completed, a hand rail is installed, or a professional clean is undertaken – our experience tells us that tenants that feel like their landlord has given a bit extra are more likely to remain in the property.

Similarly, if your tenant requests repairs or alterations during their tenancy, saying “yes” makes for happier and more comfortable tenants who are more likely to see out their lease and even sign a new lease with you. The new laws actually say that a landlord can’t unreasonably refuse tenant requests for minor alterations (more on that in a future blog post), but promptly approving requests for small modifications – like picture hooks or to install a veggie garden – and being quick to arrange and approve repairs when needed, will show a tenant that you value them and that you’ll do what you can to keep them satisfied while they are in the property. It’s your investment, but it’s their home.

Pets are another important issue. We understand that pets can sometimes cause wear and tear on a property, but it can’t be denied that having a pet increases a person’s quality of life, and that tenants whose landlords approve pets are happier and more likely to stay. If you currently do not allow pets (and are not controlled by strata by-laws that prevent them), we encourage you to consider allowing pets. Whether it’s an indoor cat or a couple of chooks in the back yard, a tenant with pets is more likely to feel at home in your property, and is more likely to stick to their lease term and treat your investment as if it was their own.

Finally – and we can’t stress this enough – now is the time to look into the terms of your landlord insurance and find out exactly what you would be covered for in the event of a tenant breaking their lease and paying only a minimal fee. Insurance companies like Terri Scheer provide coverage if tenants abscond or fail to give vacant possession, as well as many other scenarios.

Please feel free to reach out to us if you have any questions about how the new laws will affect you and your property. We’re always here to help.

Click here to read about the new smoke alarm laws commencing 23 March 2020.

Click here to read about the new laws about minor alterations commencing 23 March 2020.

Click here to read about what hasn’t changed for investors since 23 March 2020.

Click here to read about the new laws about minor alterations commencing 23 March 2020.

Click here to read about changes to what tenants must be told about their rented home from 23 March 2020.

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By Rebecca Nutley