What is a fixed-term tenancy? pros and cons

The rules around fixed-term tenancies have changed dramatically.

The Government made changes to the Residential Tenancies Act in February 2021, aiming to give tenants more security.

But these changes have got some property investors wondering: “Are fixed-term tenancies still relevant?” and “Do fixed-term tenancies still have benefits for landlords?”

In this article, you’ll learn how relevant a fixed-term tenancy is in today’s market and what the benefits and drawbacks are to having your tenant’s sign one. This will allow you to make an informed decision for your property.

And if you have a question, write your questions or thoughts in the comments section below.

What is a fixed-term tenancy?

Fixed term vs periodic – what’s the difference?

Before we begin, let’s explain the difference between a fixed term and a periodic tenancy. 

It’s particularly important to know the difference because (after changes to the Residential Tenancy Act in February 2021) any fixed-term tenancy agreement automatically rolls into a periodic tenancy … unless a new fixed-term contract is signed.

Fixed term

As already stated, a fixed-term tenancy agreement means a tenant and a landlord are locked in for a certain amount of time (12 months is the norm).

So, let’s say Bob and Simon sign a 12-month fixed-term tenancy agreement in July 2022.

This means before July 2023 Bob and Simon can’t just hand in their 4-weeks’ notice and leave without breaking the contract. If they do, the landlord can charge them for the remaining tenancy. More on this below.

Periodic tenancy

Whereas, a periodic tenancy is a rolling tenancy that has no end date – unless the landlord or the tenant gives notice to end the tenancy.

Having said that, in a periodic tenancy a tenant can give notice for any reason. And while the landlord can end the tenancy in some situations (and ask the tenants to leave) they have to give a legally-approved reason.

And the main reasons now allowed for giving notice are:

• If the landlord is doing extensive renovations on the property

• If either the landlord or a family member is moving into the property

• If the landlord is selling the property.

There are a few more. But, importantly, there is now no ability for the landlord to ask a tenant to leave “just because”.

So, if your tenant is on a periodic tenancy they are pretty much setting up camp for good (if they want). They can live there indefinitely, which does mean it is rather difficult to give your unruly tenant the boot.

What happens at the end of a fixed tenancy?

If the tenants (or the landlord) wants to avoid the agreement becoming a periodic tenancy by default, then either party has to give notice.

This notice must be given between 90 and 21 days prior the end date of the fixed term.

Linda Forsyth, of Venture Management (Opes’ sister company), says 50% of tenants will re-sign for a fixed term because they want the security of a home for a set period of time.

Why? Well, because they want certainty of accommodation that a periodic tenancy doesn’t provide.

For example, a fixed-term tenancy agreement protects tenants from an unexpected boot, even in the event of the landlord selling the property. More on this below.

Can you end a fixed-term tenancy earlier?

As a rule, no.

The tenant can’t give notice to end a fixed-term tenancy early because they are legally bound to keep paying the rent until the end date of the contract (according to Section 66 of the Residential Tenancy Act).

That’s the point of a fixed term right? It is fixed and therefore certain for a set period of time.

However – life does happen – so there may be exceptional circumstances. For example, in instances of severe hardship like losing your job, health issues or abuse, the tenant can leave early.

But the primary way tenants “get out” of their fixed-term tenancies is by assigning the tenancy to someone else. More on this below.

Fixed-term tenancies are pretty rock solid. And they can be difficult to get out of, from a landlord’s perspective. Even if your tenant is displaying significant anti-social behaviour, you cannot end the tenancy for that reason, as this next case study shows.

A landlord cannot end a fixed-term tenancy early, even if there has been anti-social behaviour.

For instance, the Tenancy Tribunal dismissed a landlord’s pleas to evict a tenant who’d been using drugs, was being violent and intimidating, and played loud music. That was the case even though some of this behaviour was filmed and used as evidence.

In this case, the judge ruled that the ability to evict a tenant for anti-social behaviour only applies to periodic tenancies.

What if the tenant wants to end the tenancy early?

If both parties agree to an earlier end date it’s more than likely the landlord will charge a fee to the tenant for ending the fixed-term early.

This fee should be to cover “actual and reasonable costs”, according to Tenancy Services.

For instance, to cover the cost of advertising for new tenants.

Also, the tenant will sometimes have to cover the rent up until a new tenant occupies the property, on top of break fees.

Either party can apply to the Tenancy Tribunal for help, but generally speaking the landlord and tenant should try to reach an agreement before it gets that far.

The tenant can also apply to the tribunal to end the fixed-term early if their rent has increased by such a large amount that it would cause “severe hardship”.

In the past, the Tenancy Tribunal has upheld break fee payments to landlords. For instance, media headlines reported a Hamilton tenant with dementia had to pay the landlord $700 plus rent for breaking her fixed term agreement.

Can a tenant assign a fixed term?

Another option for getting out of a fixed-term contract (from the tenant’s perspective) is to assign the tenancy.

So, let’s say our couple from earlier on, Bob and Simon, have signed up to their 12-month lease in Auckland. But, 4 months later Bob’s got a job down south in Nelson. So, both of them need to move.

There’s nothing stopping Bob and Simon from getting their mate Sally to move in to the property to see out the remainder of the fixed-term tenancy.

Although the tenancy does need to be assigned – and Sally will need to sign an agreement to take on the rest of the fixed term.

This can be an issue for landlords. Sally might be a nice, good tenant, or she could belong to a motorcycle gang and have 14 cats.

Property investors are allowed to object to an assigned tenant, but only if they have reasonable grounds to do so.

So, what are “reasonable grounds” I hear you ask? Well, it’s not explicitly stated.

It could be safe to assume that Sally with her 14 cats and her passion for revving at 11pm would come under this category, but it’s a risk and is ultimately decided by the Tenancy Tribunal.

Who is a fixed-term tenancy good for?

Which tenants benefit most from a fixed-term tenancy?

Fixed terms are usually preferred by tenants because they know they are able to rent the property for a fixed amount of time.

For instance, fixed terms are good for families with kids in school, when the parents want the security of knowing their child will be in the school zone for a foreseeable period.

They can also be a popular option with university students, who want steady accommodation during the semester months.

This is because landlords can’t just boot you out of a fixed-term like they can in a periodic tenancy (e.g. if the landlord wants to renovate the property).

While there can be rent increases during a fixed-term tenancy, this tends to be less common (more on this below). So, tenants like that sort of certainty.

Which property investors benefit most from a fixed-term tenancy?

There are also benefits for landlords, when it comes to fixed-term tenancies.

They tend to work especially well for property investors who rent properties where the tenants are more likely to leave early on in a lease. For instance, if you are renting to university students, you might like to get them to sign a 12-month fixed-term tenancy.

This means that if they go home for the holidays, you still have rent coming in.

They also work well for first time property investors who want the certainty that rent will be coming in for the foreseeable future.

And generally speaking, we still see fixed-term tenancies as the right choice for many landlords. More on this below.

What are the pros and cons of a fixed tenancy?

As this article discusses, there are benefits and drawbacks to a fixed-term tenancy – for the landlord and the tenant.

Pro #1 Tenants can’t move out early

The first benefit is that a fixed-term contract locks both parties into the property for the duration of the contract. This means less risk for the landlords as there is an (almost) assured certainty of rent for an extended period of time.

Similarly, tenants can enjoy the security of living in their home (especially if they have kids) without the fear of being evicted.

Pro #2 Tenants like fixed-term tenancies

The second benefit is tenants like fixed-term tenancies. This is because they like the security of having a home for a set amount of time. So, they are more likely to sign and re-sign on a property.

Con # 1 Fixed-term tenancies aren’t flexible

The downside is – fixed terms aren’t flexible. If you’re a landlord and think “I might like to move in, or do renovations to my property” you will have to wait until your fixed term ends before doing anything.

Similarly, if you get a unruly tenant, it’s likely you’ll have to sit that out too.

Bottom line: Fixed terms are still relevant because they give certainty to the tenant and the landlord.

However, certainty does come at the cost of flexibility. So, for landlords it’s good to consider if you have immediate future plans to move or sell your property before committing to a fixed period.

Can the landlord increase the rent on a fixed tenancy?

Yes. For both fixed-term and periodic tenancies, landlords can increase the rent 12 months after the tenancy begins.

But for fixed-term tenancies, landlords can only increase rent if the tenancy agreement allows this.

So, it’s a good idea for tenants to read the fine print when signing longer-than-usual contracts.

For instance, a tenant who signs up for an 18-month fixed term should expect to have the same rent for the duration of the contract.

The landlord must give at least 60 days notice in all instances of rental increases.

Periodic vs fixed tenancy – which one should I use?

All things considered, your property will have a lot to say about what sort of tenancy agreement will best suit your situation.

For example, a townhouse or an apartment – which is more likely to attract a transient tenant – might be better suited to a fixed-term contract.

And a fixed-term tenancy is a popular choice for landlords and tenants because it offers rental security.

Generally speaking, many of the landlords we work with, here at Opes, prefer fixed-term tenancies.

However, if you’ve got a large family home, in the suburbs, rented to a working couple and their children, it might be a better option to have them on a periodic tenancy if that means they feel more secure in their home without a fixed end date.

Write your questions or thoughts in the comments section below.