Reasonable time to secure new tenants

Hi PC's,

I have two perspectives that interest me for this question - both as former tenant and as aspiring land lord. Property in question is located in Oakleigh East, 10m walk from station/shops, 5 minute walk from Bus that runs from Station to Monash uni. SQMResearch has vacancy rate at 2.2% for this area.

We gave notice of breaking our lease and requested agent re-let premises 27 May 2016 (Lease runs to 30 September 2016). Agent has advertised on RE.com only. Has been paid for a board, but has yet to erect one (not sure if it really makes a difference though). He holds a 15 minute open each Saturday with average turnout seeming to be 4-5 groups (mainly young couples). So far only 2 applications both of which have been rejected.

I understand land lord is to be no worse off; no problem here.

What constitutes "reasonable efforts" to find a new tenant?
How long should finding a new tenant take?

Both questions have immediate interest as the tenant who is still paying rent for a vacant property, but also as a prospective land lord in working out what period of vacancy I should allow for in my budgeting.

Cheers,
Scott

 

When you break lease the power is on PMs side. Pm an agent of the owner will always act in the best interest of the owner so if you are a better tenant compared to the new applicants the pm might reject the new applicants. Even if there's many groups their proof of income etc may not be very attractive compared to yours.

When you break lease did you have to pay the 1 weeks worth of rent?

Some PMs prefer 4 weeks notice and you keep the 1 weeks worth of rent.

Takes time to get the right tenants. Better to have an empty house than bad tenants.

 

@fullylucky I'm not sure what "one weeks worth of rent" you're talking about?

In Victoria you are liable for pro rata letting fees, advertising and all rent up until a new tenant is found or the end of the lease, whichever comes first. Will VCAT always enforce this, no, but that's what it should be.

In terms of leasing the property. What's the feedback from prospective tenants? 5-6 weeks, two applications - seems awfully low. Oakleigh East and surrounding areas tend to have a lot of quite similar properties available, however in saying that I would expect no more than a month between tenancies (ideally 2 weeks or less, of course).

Melbourne winter tends to turn tenants off, so more times than not leasing a property will take longer in the winter months. But again, 5-6 weeks is a long time to do nothing except one inspection a week..

 

Put the shoe on the other foot for a moment.
If you were an owner of an investment property that was currently tenanted.
That tenant paid rent on time, had good references, looks after the place and had a stable income.
That tenant then wants to vacate.

The tenants that apply are
1. No income, ok'ish references
2. Good income, never rented before

Are you going to accept those one of those two tenants, or wait until a decent tenant (that is similar to the existing tenant wanting to break the lease) applies?

For me, as a property investor, I budget 4 weeks + leasing fee in vacancies per year - this is based on capital city in suburbs that aren't considered "far away" (every state is different - 25km in Sydney is considered good). I also prefer to fix up the property upon purchase before leasing so that it's as close to maintenance free as possible - otherwise I would be constantly shelling out for handymen to fix small items at an exorbitant fee.

(My latest for clearing gutters is $440 from the PM's handyman.... my PM knew exactly where I was going to tell the handyman to shove that quote).

 

After tenant 1 breaks the lease. The PM will need to find tenant 2 to fill in the rest of the lease correct?? This will cost the PM money for advertisement time and energy etc. but The PM doesn't get any money like letting fee?

Instead the Tenant 1 pays PM for this which is 1 week's worth of rent + GST. (this penalty also acts as a disincentive for tenant to break lease. a lease is a lease it's mean to make it so both sides have a stable expected outcome from uncertainty.)

Is this correct? I think it's like this because in a way it's PM's fault for finding tenants that broke the lease. If the PM found solid tenants they wouldn't have broken the lease none of this hassle would have happened.

It would be unfair for PM to get first week commission for tenant 2, because it would be an incentive for PM to get the tenant 1 to break lease all the time. The PM could sign someone up, break lease, sign someone else up, break lease. Owner would lose so much rent in terms of first week's rent to the PM.

Can a PM expert please clarify if this understand is correct.

 

I don't quite know what you're saying - but I can't see why the PM shouldn't get their normal letting fee for finding a new tenant. Its exactly the same process and work as if it wasn't a break lease situation.

Your loss in having to pay the letting fee earlier than expected should be covered by the outgoing tenant anyway.

 

@fullylucky - **** happens. things change. It's not the PM fault

 

When you say your loss. What does Your refer to? the PM, tenant, owner?

I really wish people would repeat the noun anytime where there is confusion.

like I try not to use They when the previous sentence that goes before They has multiple nouns.

 

Wouldn't it be more logical if:

Option 1.
Tenant 1 breaks the lease, Tenant 1 needs to pay break lease fee (1 week's worth of rent + GST) to PM. PM doesn't charge letting fee to owner for finding the next tenant (tenant 2) to fill in.

Option 2.
Tenant 1 breaks the lease, Tenant 1 needs to pay break lease fee (1 week's worth of rent + GST) to owner. PM does charge letting fee to the owner for finding the next tenant as per normal.

 

The owner.

No it wouldn't be more logical. Not even close. There's nothing wrong with how break lease liabilities are calculated currently.

 

How so? How is the owner's cost covered by the outgoing tenant?

 

In short the owner has no loss as rental is paid by the outgoing tenant until a new tenant is secured.

In regards to the letting fee, I can end the speculation for you as I have already had the 'discussion' with the PM.

In Victoria the PM is legally entitled to a pro-rata letting fee plus advertising costs. The tenant is legally obliged to pay rental while the PM makes 'reasonable efforts' to re-let the property. The landlord is to be no worse off during the period of the lease.

PM argued that the letting fee is 2 weeks rental as per the lease special conditions, and therefore 2 weeks rental was due. Even claimed that the lease took precedence over Tenancies Act. They accepted the pro-rata fee a couple of days later, no doubt after checking the case.

I have no qualms paying the rent until another good tenant is found, as long as 'reasonable efforts' are taken. When we were looking last year most properties were let after a week or two so I'm guessing either the rental market has died (unlikely) or the PM is disinclined to try too hard after the letting fee issue.

 

By the tenant giving the landlord a proportion of the costs incurred... I'm not sure what you're struggling with here.

 

What does "pro-rata letting fee" mean?

Would what you are thinking be option 2 in what I posted?

"Option 2.
Tenant 1 breaks the lease, Tenant 1 needs to pay break lease fee (1 week's worth of rent + GST) to owner. PM does charge letting fee to the owner for finding the next tenant as per normal."

Ok imagine you are the owner.

Rent = $500
Agent comm = 10%
Vacancy rate = 100%

Which would you prefer:

Case 1: two x 6 month leases: $450 + $450 ... + $450 = $450 x 50 = $22,500
2 of the weeks rent are given to agent for letting commission.

Case 2: Same thing except in late Feb, there is a break lease also in June, September Nov there are some more break leases.
$450 + $450 ... + $450 = $450 x 47 = $21,150

Good for the agent but bad for the owner...? No penalty for tenant for breaking a lease.

 

*occupancy rate = 100%
*vacancy 0%

 

No.

Correct, but the fee payable for the break lease is actually based on what is on the landlords authority.

To clear it all up. Let's say the authority charges the landlord a letting fee of two weeks rent, plus GST with all advertising charges included.

Tenant signed a 12 month lease, broke the lease 3 months in - rent is $500 per week, which means the landlord paid $1,100 to secure this tenant.

Tenant is liable for a pro rata amount based on the time left on their tenancy. $1,100 / 12 x 9 = $825.

Tenant needs to pay $825 letting fee, owner is charged $275 remaining. Agent takes commission as normal.

It's not the agents fault a tenant breaks their lease, how are we to know for certain someones personal circumstances? Some years back we broke our lease, we loved the house and would've happily stayed for years - unfortunately (fortunately?) I got pregnant expectantly and felt the property was no longer suitable. There was no way for me or the agent to know this when we signed the lease about 6 months earlier.

 

Thanks for explaining pro rata letting fee.

"Tenant needs to pay $825 letting fee, owner is charged $275 remaining. Agent takes commission as normal."

Tenant pays who? the owner or PM?
The tenant pays the PM who passes the money to the owner as a Payment?

Or is the $825 paid as a charge to the PM so there will be GST on top of this?

Is this only in Victoria or all states?

You say the owner is charged $275 remaining but it's not like they need to pay that amount now right? Wouldn't the PM have already taken the full cut at the very start of the 12 month lease.

If the owner is charged $275 the PM would receive $1100 + $275? and then another $1100 for signing up the next person.

Why is the owner charged $275 they didn't do anything wrong. They weren't the ones that caused any additional work.

Sorry for saying agent's fault if tenant breaks lease. I didn't mean it like that.

 

Hi Scott,

The sad truth is that the landlord has absolutely no incentive to find a new tenant quickly.

We were in the same situation as tenants, bought a house and broke the lease 9 months in. We moved out and simply stopped paying rent. It's amazing how quickly a new tenant is found after you stop paying. In our case we paid four weeks rent and nothing. After we stopped paying, the tenant moved in after 10 days. We reimbursed all costs as per contract , ie rent , break fee, and advertisement. The law says that tenant is liable to pay but it doesn't say when. It is perfectly legal to stop paying and reimburse the landlord after a new tenant is found.

Now, I don't recommend doing this if you ever need a future reference from this agent/landlord. But if you bought a PROP and don't need to rent for the next several years, it is worth considering.

 

Tenant pays the agent. Agent pays to owner. GST was inclusive in my calculations.

This is only Victoria, although other states may be similar.

Owner is charged as normal, they will be charged the full letting fee of $1,100 with tenant 1 to reimburse the fee charged at the start of their tenancy. The agent would have charged the initial $1,100 but the letting fee charged is for the new tenant, not the previous.

Whilst the owner didn't do anything wrong or cause the additional work, the way it's seen at VCAT as the owner has paid for a 12 month lease (or whatever the lease was), 3 months has already been used, therefore the owner can only claim 9 months as compensation.

The PM would receive, in total, two letting fees - the PM has done the same work, same advertising, same everything to secure the tenant.

Calculation would be $1,100 initial letting fee for tenant 1, $1,100 letting fee for tenant 2 (as per authority), tenant 1 pays $825 to cover the letting fee already paid and not "used". Total charge to owner would be $1,375. Owner has brand new 12 month lease in place.

Owner doesn't lose anything if tenant 1 had vacated at the end of their 12 month lease.

Also the reason VCAT is getting nit picky and won't award lease break charges like the above for lease renewals, and instead will only award the renewal fee paid (if any) as the compensation is based on the fees already paid.

 

This seems risky af. What if PM doesn't find new tenant fast enough you would need to pay for all the rent unto until the point new tenants move in.