Tuesday, November 11, 2014

Long fixed terms are not the solution

Domain ran an article the other day about 'long leases' – or to be precise, residential tenancy agreements with long fixed terms. People often suggest long fixed terms as a way of addressing the insecurity of renting, but we don't think they're the solution.

First, let's get clear on what fixed terms do.

Fixed terms are a hangover from the common law, which said every lease had to be for a term – and if it wasn't for a term, it wasn't a lease (resulting in lots of fun case law about what is a term... is 'until the end of the peanut crop' definite enough to be a term?). But never mind about that – it's a hangover, and the Residential Tenancies Act 2010 says a fixed term is not essential: you can have a residential tenancy agreement with a fixed term, or without.

Under the Act, a fixed term protects you (the tenant) from termination without grounds and termination on the ground of sale requiring vacant possession. It also protects from rent increases, but that protection is not absolute: you can get hit with a rent increase during a fixed term if the agreement has an additional term providing for it.

These protections are why people think long fixed terms are a good idea. But there's another side to a fixed term: during one, you cannot terminate without grounds either.

With those things in mind, let's consider the structure of our rental market. It is dominated by small-holding landlords: most (73 per cent) own a single property only. Most are in it as speculators, in pursuit of capital gains (for 66 per cent of them, their rental income doesn't cover the cost of owning). Their best chance for capital gains lies in being able to sell the property not just to other landlords, but to owner-occupiers too (because owner-occupiers also speculate in housing). And to do that, they have to be in a position to deliver the property to its new owner with vacant possession – that is, without you.

For those reasons, Australia's small-holding speculator landlords don't – and won't – voluntarily tie up their properties in long fixed terms.

And there's another implication of the structure of the market. These small-holding speculator landlords are amateurs (they prefer the term 'mums and dads'). Most would try to conduct themselves reasonably, but they don't trade on their reputations and there's not a lot of market discipline operating on them. When you apply for a tenancy, you will most likely have no idea who the landlord is, or how good or bad they may be. They could be a nightmare... and for that reason, tying yourself up in a long fixed term isn't a good idea for you, either.

Long fixed terms are an attempt at a legal fix that doesn't really fit with the structure of our rental market. To really make renting more secure, we need to address both the legal and structural causes of insecurity.

In terms of structure, we need a different type of landlord. Instead of small-holding amateur speculators, looking for the best chance to realise capital gains, we need the sort of landlord who is instead more in interested in receiving an ongoing trickle of cash, in the form of rents... from a multitude of properties, so that a problem in a single tenancy doesn't upset the whole enterprise. In other words, an institutional landlord. This sort of landlord would be a lot better disposed towards long-term tenancies... and because of their scale, they might trade on their reputations and be concerned about their customer relations, and you might be more disposed to consider a long-term tenancy with them too.

That sort of structural reform is going to take some time. Meanwhile, we can improve security in terms of the law, with reforms that are doable considering the present structure. Here's what we should do:
  • Legislate a list of reasonable grounds for termination by landlords. The RT Act already has some (for example, 'failure to pay rent' and 'sale requiring vacant possession'), to we'd add:
    • 'landlord or family member requires premises for own residence', 
    • 'employment-related tenancy and employment is terminated',
    • 'premises to undergo renovation requiring vacant possession, demolition or change of use'.
  • Abolish termination by landlords without grounds (including termination at the end of a fixed term). This wouldn't cramp the style of landlords who operate reasonably (they'd use termination notices with grounds, as above), but it would give all tenants more peace of mind and assurance.
  • Limit rent increases to not more than once in 12 months.

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