Lease Renewal
Finding a good tenant is a challenge. Keeping a good tenant is a sign of good business. Tenant turnover is expensive and time consuming. There is no guarantee the replacement tenant will be equal to or better than the outgoing tenant. There is every potential that a new tenant can be a problem tenant once installed. A new tenant can place a drain on landlord resources to orient the new tenant to rental rules and policies. Until the new tenant establishes a good on-time payment history with the landlord, the landlord cannot really count on the tenant’s rent as money in the bank.
Few landlords want the hassle of starting over with a new tenant. Most landlords would prefer to retain the current tenant by renewing the lease, keeping the status quo and simplifying property operations.
The decision to retain a tenant or to allow the lease term to expire is not always an easy landlord decision. Tenants can be equally troubled by stay or go decisions for the rental future. A landlord should start the renewal decisioning process at an appropriate point in the lease term that allows a timely decision and notification to the tenant. The tenant is due consideration of sufficient time to take action as needed for a move-out.
Both landlord and tenant will need to evaluate their current situation and make an informed decision after considering all facts and known risks.
While a tenant may want to renew his lease and thus avoid the cost and hassle of moving, it is the landlord’s decision to renew the lease agreement with the tenant or allow the lease agreement to expire at the end of the lease term. A landlord should be well aware though of the applicable state’s landlord-tenant statutes pertaining to lease renewal terms and conditions. Accordingly, the landlord’s lease agreement terms and conditions should be in accordance with legal requirements. The lease agreement should state end of lease term procedures and whether lease renewal is an option, an automatic lease term and condition, or whether the lease simply expires with no provision for renewal.
Landlord Considerations Regarding Lease Renewal
As a fixed-term lease nears the end of the term, a landlord must consider the best business decision for his rental operations. Should he offer the current tenant a lease renewal or allow the lease agreement to expire at the end of the term? There can be circumstances that make the renewal decision somewhat easier for the landlord, such as whether the tenant has adequately performed to the lease terms and conditions. If a good tenant is described as one who makes timely payment of rent, respects the rights of neighbors, takes good care of rental property, and makes good effort to work with the landlord to resolve issues, then a bad tenant can be described as tenant who does none of the listed above. The lease renewal decision is therefore influenced by the tenant’s behavior during his tenancy.
Should You Renew?
Lease renewal happens most commonly in order to:
- Avoid the time consuming process of finding a new tenant
- Avoid the costs of filling a vacancy
- Holding costs of a vacant unit including overhead costs of mortgage, utilities, taxes, and insurance
- Loss of rents due to vacancy
- Advertising and marketing costs
- Tenant Screening costs
- Move-in costs including tenant orientation and property inspection
- Reduce cleaning and unit update costs associated with tenant turnover
- Eliminate the tenant learning curve on rental policies, procedures, and rules
- Strengthen existing landlord-tenant relationship
On the Other Hand
Providing that the lease agreement and state statutes do not address the issue or specify requirements for lease renewals and the landlord decides the better business decision is to let the lease expire at end of term, there is no option for the tenant to extend his tenancy. The decision to not make an offer for lease renewal is most commonly based on:
- A problem tenant
- Suspected illegal activities
- Below market rent with tenant known to be unwilling to pay market value
- Planned major renovations of unit
- Planned sale of the property
Other Landlord Considerations Regarding Lease Renewal
While the option of offering lease renewal to the current tenant could make rental operations a little easier, there are several issues associated with lease renewal that could be overlooked when conducting an analysis and evaluation of a renewal offer.
Property Condition
While the current tenant may have paid rent on time, been a good neighbor, and otherwise adhered to rental rules, a landlord should conduct a property inspection to determine that the rental unit is being properly maintained by the tenant and that tenant housekeeping is at an acceptable standard before offering a lease renewal. Absent tenant complaints or requests for property maintenance and repair, a landlord may not become aware of an issue until a small problem develops into a much bigger problem. The property inspection should be conducted to the move-out inspection standard to determine the current condition of the unit. Specifically, the landlord is inspecting the unit to determine there is no visual sign of tenant-caused damage or unreported maintenance or repair issues. If the tenant has not fulfilled his maintenance responsibilities and the unit is not in good condition, it would be inadvisable of the landlord to renew the lease and allow future potential damage to the property.
Enforcement of Lease Terms and Conditions
When a tenant has been a good tenant and has established a good working relationship with the landlord, a landlord may be tempted to ignore the tenant’s minor lease violations. Selectively enforcing rental rules is tenant discrimination and prohibited by federal, state, and local fair housing laws. It is a best practice to keep landlord-tenant relationships on a professional basis to guard against claims of discrimination. It should be made very clear to a tenant being offered a lease renewal that all applicable laws and lease terms and conditions will be enforced according to requirements. Any tenant expecting a rental concession or that the landlord will allow a lease violation just this one time should be made aware that termination of tenancy may occur as a result of the tenant’s action(s).
Change in Tenant Qualifications
Many fixed term lease agreements are for a term of one year. A tenant who qualified under the landlord’s rental standards a year ago may have had a change in regard to one or more of the landlord’s qualification criteria. Many landlords do requalify a tenant to current standards if the landlord is considering offering the tenant a lease renewal. Some landlords do not. However, it is possible that the tenant has been current with rent in the past year and has had no lease violations, yet a recent job loss, family obligations, or unexpected medical conditions may present difficulty to meet future obligations. A landlord should evaluate his potential financial risk if he chooses not to requalify a tenant for lease renewal. A landlord should be knowledgeable of legal requirements or prohibitions in screening/rescreening a tenant. Some states have specific regulations in the use of tenant screening/background reports for use by landlords. If tenant screening is legally permissible, the results of the screenings could be compared to the tenant’s screening reports at initial application. If the debt structure is significantly greater, a landlord may want to more thoroughly examine other areas of qualifying criteria.
A possibility, although not as likely, is that the tenant hopes the landlord will automatically renew the lease because the tenant knows he will not be able to qualify under another landlord’s rental criteria due to changes in the tenant’s financial condition or as a result of incidents that may be discovered in conducting a background check.
Market Conditions
A lease renewal decision may be influenced by local area market conditions and the market position of the landlord’s property. Starting over with a new tenant may allow for increased rents while a slow market may be more favorable to renewing the current tenant lease.
Conclusion
Lease renewal is controlled by the landlord through his business policies. Landlords must carefully analyze the potential risks of lease renewal along with the known rental history of the current tenant.