Monday, December 19, 2016

Long term leases: merely fiddling around the edges

There has been some discussion on the Brown Couch lately about long term leases, which are often touted as Australia's solution to a chronically insecure private rental market.

A recent posting suggested the NSW Government is considering options for long term residential tenancies. Our worry is that optional long fixed term tenancies, with reduced rights for tenants, would be offered on a take-it-or-leave-it basis. Read more here.

Another posting examines the probable cost of entering into a long term tenancy. You may check it here. And, there’s a further posting here which argues that considerable disagreements over who is responsible for which repairs and maintenance costs (structural, general or cosmetic?) may be far greater than expected. And another posting talks about the experience of protected tenants in NSW because their lease is silent on the issue of repairs. Check it here.

The interest in long fixed-term tenancies is laudable. However, if it is because more people are renting for longer, then this is not the answer, because only a few landlords will ever take it up.

The answer is at the federal level
The answer is more with the federal government which has the 'levers' to change the types of landlords who dominate in the private rental market.

Private rental housing is structurally insecure because the private rental market is enmeshed in the owner-occupier market. Most landlords are individual persons who own a single rental property for speculative purposes (that is, most are operating at a loss – they are negatively geared – and hoping for capital gains). In order to maximise the prospect of capital gains, they need to be able to sell their property with vacant possession when it suits them, selling to either other landlords or owner-occupiers. This speculative strategy is encouraged by our taxation laws. So, tax changes to negative gearing and the treatment of capital gains are necessary to discourage, not encourage, speculation in the private rental market which has led to this proliferation of ‘mums and dads’ investors. Because of this Jennifer Duke says tenants are at the mercy of their landlord’s personal life decisions. Read more here.

Melbourne Institute of Applied Economic and Social Research (The Household, Income and Labour Dynamics in Australia Survey: Selected Findings from Waves 1 to 14, 2016, p 74) puts the proportion of households owning investment housing at 13.0% in 2014. Ownership by such landlords is not conducive to the existence of affordable and secure rental housing stock.

But the Federal Government flatly refuses to do anything about negative gearing or capital gains tax arrangements. In fact, Liberal MP David Coleman, who chaired the Federal Government’s 20-month inquiry into home ownership, states the report found that there was no structural problem with housing affordability. Read more here and here.
Cartoon by Ron Tandberg, appearing SMH 16/12/16
For another view on the dynamics of the private rental market across Australia, check out the publications here and here.

Here's an interesting take by Michael Kaziol who asks ‘Renting property? Don't hold your breath for a long lease.’ You may read his article here. There also are other impediments at the federal level under the existing regime which highlight the importance of moving away from a rental market dominated by ‘mums and dads’ investors. Read about one here.

Rather, we need to remove the barriers and provide incentives so that superannuation funds direct their funds to institutional landlords, especially not-for-profit housing organisations, so that they might expand their residential rental stock. At last, we are finally seeing movement on this front in Australia. See report on HESTA’s funding of social and affordable housing in Queensland here. Outgoing Reserve Bank board member Heather Ridout has backed a greater role for institutional investors in funding more affordable housing. Ms Ridout, who also chairs Australian Super, told a panel at a Citi conference, that the fund had invested in social housing in London, where it has backed residential development projects that include social housing. See more here.

Michael Pascoe writes a sobering piece here on why institutional investors steer clear of the private rental market. However, this may be about to change. Just recently Jessica Irvine wrote about the best thing for renters since 3M hooks. Read more here. There is more about this model for financing affordable housing here. Even if this proposal was to draw upon even a small slice of Australia’s multi-trillion dollar superannuation industry, its impact would be significant and vulnerable tenants would benefit from a greater supply of affordable properties, owned and run by not-for-profit institutional landlords more committed to providing a secure tenure.

Coming back to New South Wales …
If we insist on toying with long term leases and limit our focus to what the State Government can do, we should consider a change in the current land tax. As things stand, the very narrowly defined current land tax regime discourages landlords from owning more than a few properties. We need go no further than a previous blog on The Brown Couch here to look at alternatives.

Section 20 of the Residential Tenancies Act allows landlords to omit or vary some mandatory terms of the statutory residential tenancy agreement, and include otherwise prohibited terms. Accordingly, this section should be amended to explicitly state that a landlord cannot opt out of their obligation for repairs of a structural nature and, further, what constitutes ‘structural repairs’ should be defined. This will provide clarity and avoid many disputes at tribunal hearings.

A dilemma arises where the landlord is a social housing provider, because of the operation of Section 148 of the Residential Tenancies Act 2010. This allows a social housing landlord to evict a tenant who refuses to accept an offer of alternative social housing premises, regardless of the fixed term of their social housing agreement on a specific property. This undermines the purpose of a long fixed-term lease.

A current anomaly with long term tenancies of 20 years or more requires urgent legislative action, because it allows a social housing landlord to evict a tenant in fewer than 28 days, even without issuing a notice of termination. This arises as a result of Section 154G of the Residential Tenancies Act 2010, which commenced on 18 December 2015 ... a massive step backwards for long term tenancies. It requires the Tribunal to reduce the period before a possession order is made from 'not less than 90 days' to 'no more than 28 days', unless there are 'exceptional circumstances justifying a later day'. At law, the words 'exceptional circumstances' have a very high bar. Section 154G is an amendment which forms part of the Residential Tenancies and Social Housing Legislation Amendment (Public Housing - Antisocial Behaviour) Act 2015, but long term tenancies have nothing to do with anti-social behaviour. Indeed, this new provision defeats the purpose of an important provision for long term tenants (who are usually older tenants), that came into force under the 2010 Act.

But, this is merely fiddling around the edges …
The answer is to make renting generally more affordable and secure. So, a far better alternative is the introduction of a 'reasonable grounds' eviction regime in residential tenancy legislation, in place of the provisions that allow a landlord to evict a tenant for no reason. Read more here. This would make long term leases less important from the tenant’s perspective, because once a fixed term expires the landlord would have to provide their reason if they required vacant possession … and this reason could be tested in a tribunal. Let’s make this happen!


  1. Get ready for a new model - the nine-month lease. When landlords in "hot" airbnb areas realise they can make as much in 3 months as they can in a year through holiday lets, watch them double dip with part residential, part short-stay lets when residential tenants are sent packing during high-demand periods. The latest US figures show airbnb lets can make as much in 83 nights as they do in a whole year. You do the math.

    1. No need for a new model Jimmy - the six month lease with a 90 day notice of termination without grounds is all the canny landlord needs. As we've said before, this has been happening in "hot" areas since about the beginning of time. Airbnb is more symptom than cause, and the solution needs to include an end to evictions without grounds...


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