Lease Renewals
Lease renewal is a tenant retention strategy. For many landlords a lease renewal policy may be a best business practice depending upon local market conditions, business necessity, the individual tenancy, and other variables related to property location, condition, rents, and statutory requirements. A landlord, by utilizing a lease renewal strategy for his quality tenants, avoids vacancy and reduces the costs associated with traditional tenant turnover.
However, not every tenant is a quality tenant. There are many reasons that leases are not renewed. Some tenants choose to move on, while other tenants do not perform at a level to warrant renewal. A landlord must evaluate each tenancy on its own merit for consideration of renewal. In some situations, it is better for business if the lease expires and a vacancy is created.
The benefits of lease renewal include:
• Avoiding the time consuming, costly process of finding a new tenant, including:
o Holding costs of a vacant unit including overhead costs of mortgage, utilities, taxes, and insurance,
o Loss of rents due to vacancy,
o Advertising and marketing costs,
o Tenant Screening costs,
o Move-in costs including property cleaning, repairs, tenant orientation and property inspections,
o Eliminate tenant learning curve on rental policies, procedures, and rules,
• Reducing potential risk associated with installing a new tenant,
• Potentially increasing monthly rent without incurring new tenant expenses.
As part of the landlord’s lease renewal policy and practices, there are preliminary tasks that should be done before considering a lease renewal offer. These include:
• researching current state and local landlord-tenant laws applicable to the property’s location to determine whether laws address the issue of lease renewal including rent increases, security deposits, or other terms and conditions associated with lease renewals,
• reviewing current lease terms and conditions to identify policies and practices already in place regarding end of lease procedures. Review of the current lease will also serve to identify terms and conditions that may need to be changed for a renewal lease contract,
• conducting a property inspection to determine whether the tenant is keeping the rental unit in good condition and housekeeping to an acceptable standard. Specifically, the landlord is inspecting the unit to determine whether there are visual signs of tenant-caused damage or unreported maintenance or repair issues, and
• conducting a rental survey for local market conditions, fair market rents, and comparable properties.
A lease renewal is an opportunity for the landlord to increase rent. Landlords can generally set their own asking rents unless rent control, rent stabilization, or other landlord-tenant statutes and ordinances govern rents and rent increase amount. Current market conditions could also influence asking rents. If the tenant’s current rent is below fair market rent, the landlord will usually try to increase rent to market rent for a renewal lease. Rent that is significantly below market rent may need to be adjusted incrementally if the landlord wants to retain the tenant.
A large rent increase could have a significant impact on the tenant’s ability to make rent. There is a risk that a tenant’s financial situation could have changed since the initial tenant screening was conducted. A landlord should be clear on legal requirements for tenant screening and/or rescreening. Some states have specific regulations on the use of tenant screening/background reports by landlord for housing decisions. If rescreenings are permissible and the landlord has a policy for rescreening, all tenants considered for lease renewal should be screened according to policy and legal compliances. Care should be taken that discrimination does not occur by selectively choosing tenants for requalification.
The lease renewal decisioning process usually has a set time period for the landlord to make a renewal offer and the tenant to respond. As a rule of thumb, a landlord will contact a tenant 90 days before the lease expiration date and require a tenant response within the next 30 days. In the event that the tenant declines the renewal offer, the landlord would have sufficient time (approximately 60 days) to prepare for a vacancy. There may be state or local regulations on the time period for landlord notifications and tenant response that could change notice requirements.
Of primary importance is whether the landlord wants to keep the tenant. The best candidates for lease renewals are those tenants who have satisfactorily performed to contract terms. Those tenants have established a rental history and a relationship with the landlord that the landlord would be fairly confident of future tenant behaviors.
There are several other issues associated with lease renewal that are sometimes overlooked when conducting analysis and evaluation for a renewal offer. A renewal tenant does not have privileges over an incoming tenant. House rules and lease terms must enforced for all tenants. A landlord may be tempted to ignore a good tenant’s minor lease violations. Selectively enforcing rental rules is tenant discrimination and prohibited by federal, state, and local fair housing laws.
There are factors that can influence a tenant’s acceptance of a renewal lease. Of primary importance to most tenants is a satisfactory experience with property management and customer service. This can include:
• Landlord being accessible and responsive to tenant requests, questions, and concerns,
• Tenant screenings – good tenants want good neighbors,
• Fair rents,
• Enforcement of lease terms and conditions,
• respect for tenant privacy,
• Safe secure environment,
• Well-maintained property.
The most commonly cited reason for moving is the landlord’s lack of response to repair and maintenance problems.
A landlord should be prepared to respond with documented procedures when a tenant declines to renew. The lease should detail what happens at termination date:
• the lease expires and the tenant moves out according to the protocols established by the lease terms.
• the standard residential rental lease clause provides for a reversion to a month-to-month agreement with an automatic month by month renewal.
If the tenant declines the renewal offer and accordingly plans to move out at lease end, the landlord may require the tenant to provide written notice of intent to vacate as specified in the lease agreement. The notice allows the landlord to begin preparations for the upcoming vacancy.
After receipt of the tenant’s notice to vacate, the landlord should confirm the tenant’s stated departure date in a move-out letter. In the move-out letter the landlord can review the lease terms and conditions for tenant move-out, including property inspection, cleaning, and return of keys.
The landlord should be prepared to respond to a tenant request for a lease concession in return for the tenant signing a renewal contract. Most commonly a tenant will ask for a rent discount or unit upgrades. Granting a lease concession is a business decision that can move a tenant forward in his renewal decision. If a lease concession is granted, the renewal lease agreement should be documented in clear language regarding the type of concession, details of the terms and conditions agreed to, and the available remedies if the tenant should default on his obligations. A landlord should research state and local laws to determine if there are requirements for notification and disclosure of tenant incentives or lease concessions.
A renewal lease is a new lease with the existing tenant. A lease should always be documented in writing with detailed language of lease terms and conditions. The amount of detail in the renewal lease should be the same amount of detail as was written in the original lease. The lease should identify the parties to the lease, the premises address, the beginning and ending dates of the lease, lease terms and conditions, rental policies, what constitutes lease defaults, remedies for lease default, rents and deposits held. The renewal lease may have different lease terms and conditions than did the original lease either by modification, addition, or deletion, and should be reviewed with the tenant to ensure the tenant understands the new terms and conditions.
Experienced landlords plan the tenancy process from prospecting tenants to lease termination date to renewal. Tenant selection is done with long-term tenancy as a consideration. The landlord can increase his lease renewal rate by his policies and practices, setting the right expectations during tenant orientation, enforcing lease terms and house rules, treating tenants with respect, protecting tenant privacy, providing a safe and secure environment, and maintaining the rental property in good condition.