The terms of your Lease Agreement define a tenant’s living situation, including how long they will rent your property.
When determining the length of a lease, should you choose a fixed or automatic renewal term?
Each certainly has its benefits, but will also depend on your rental situation. Let’s take a look at both terms, including their unique advantages and disadvantages.
Fixed Term Lease
A fixed lease term is when a tenant agrees to rent your property until a specific date. For example, if the tenant signs a one-year fixed term starting on July 1, it would end on June 30 of the following year. Once the agreement has been signed, the tenant is responsible for paying rent during this entire length of time.
Advantages
Fixed terms are the most popular lease type because they offer landlords peace of mind for a set period of time. During this term, landlords don’t have to worry about finding new tenants and are guaranteed steady income until the lease is up. A fixed lease term also prevents tenants from leasing a space temporarily and moving on quickly.
This type of security appeals not only to landlords, but to tenants as well. A locked-in rental period allows tenants to budget their yearly living expenses according to a fixed rent price in the Lease Agreement, without worrying about rent increases or finding a new place to live.
Disadvantages
The benefits are plentiful, but there are still some disadvantages to this type of arrangement. A fixed lease doesn’t allow you to make any changes to the lease, such as increasing rent or amending other terms, unless allowed by both the lease and your jurisdiction’s landlord-tenant laws. Additionally, you cannot make any extensive improvements that would force the tenant to vacate during the fixed term.
A fixed lease does not usually require a notice letter, since the end date is already set, but it is in both parties’ best interest to provide adequate notice anyway when the lease is coming to an end.
A tenant cannot break their fixed lease, nor can a landlord end their tenancy before the fixed lease term is up. The tenant can only leave early if the landlord allows them to sublet the property for the remainder of the lease period, or if both parties agree to terminate the tenancy before the fixed end date.
If a tenant decides to leave early anyway, they may have to pay rent until the landlord finds another tenant to occupy the space. For example, if a tenant leaves three months prior to the end of the fixed term, and the landlord does not find someone for two months, the tenant may be obligated to pay for the time the space is vacant (in this case, two months). During this time, the tenant may also have to reimburse the landlord for the cost of advertising the property.
While a landlord cannot terminate a tenancy before a fixed lease term is expired, they can evict a tenant for substantially failing to meet lease obligations, such as repeatedly missing rent payments, inflicting serious damage to the rental, or performing illegal activities--all the usual grounds for eviction. Likewise, a tenant may be able to end a fixed lease before expiry if the landlord has breached the terms of the lease, such as failing to repair an issue with the property that is affecting the health or safety of the tenant.
Automatic Renewal (Periodic) Term
An automatic renewal term is a lease period that renews every month, six months, or year for the same length of time. This arrangement continues until the landlord or tenant terminates the lease.
Advantages
Monthly leases work well for tenants who travel frequently, only require short-term accommodation, or may not be able to commit to a set length of time.
In a month-to-month lease term, landlords can revise their lease monthly if they wish to increase rent or amend other clauses. Periodic terms may also allow for improvements or eviction of a tenant, so long as the landlord provides adequate notice (30 days in most states).
Short-term leases are well suited to areas with unstable supply and demand, or a high turnover population, such as university or college communities where students are only looking for accommodation while in school.
Temporary lease terms may also be practical for landlords who are facing future uncertainty or planning to sell their property. If you don’t know what the next year holds for you, a month-to-month periodic lease allows you to earn rental income without committing to a long-term arrangement.
Disadvantages
The potential downfalls of a monthly lease agreement include the unpredictable length of a tenant’s rental period and the consequent fluctuation of rental income.
In most states, the tenant must give one rental period of notice before vacating the premises. The landlord is also obligated to give the same amount of notice should they want to terminate the lease. Check your jurisdiction’s landlord-tenant laws before serving proper notice.
Should You Choose a Fixed Term or Periodic Tenancy?
Ultimately, all property owners have their preferences and the better choice will depend on you.
If you enjoy the flexibility of a month-to-month term with the freedom to make improvements, or option to "try out" tenants without securing long-term agreements, you may thrive under this type of arrangement.
Conversely, if you don’t want to fuss over finding new tenants every couple of months, and like a stable, reliable agreement with a fixed deadline, the fixed lease term is likely more in line with your needs.
Whichever you decide, always specify term length, termination, and renewal clauses in your Lease Agreement to help ensure you and your tenant are on the same page and no misunderstandings arise at a future date.