Renegotiating a Lease Renewal

When the term of a lease nears its’ conclusion the landlord will usually want to negotiate new terms with a tenant.  In the absence of this, the existing lease will continue on a monthly notice basis – but in most cases, there is a renegotiation that takes place.

It’s natural for a tenant to want to pay as little as possible, and for a landlord to want to obtain as much rental as possible – so just how can the two parties negotiate terms that are fair.

Much has been said about the significant increase in rental values – which will naturally impact on a tenant.  However, it’s important to also appreciate that landlords have also had to absorb significant increases in their costs.

Consider how interest rates have escalated over the past year.  Where a property is bonded, this has an immediate and direct cost to the landlord, which he has had to absorb for the duration of the existing lease.  Also, consider that rates and taxes increase annually.  In most residential leases the landlord is not able to pass the increased rates onto the tenant, however, some leases do allow for this.

The landlord also has increases in house insurance and the costs of maintaining his property.  In most cases, these additional costs cannot be passed on to the tenant during an existing lease.

Then also consider that rental values have escalated drastically due to the increased demand for rental properties, and the limited supply.  When you put yourself in the landlords’ shoes it makes good business sense to extract the highest rental possible to mitigate the increased costs of owning the property.

There are, however, certain factors that would encourage a landlord to accept more modest rental increases – and in most cases, these factors are completely in the hands of the tenant.

For example, if the tenant pays promptly every month the landlord will ascribe a value to the fact the tenant is low-risk.  The landlord will also view the tenant in a very favourable light if the property has been well maintained.  The property is, after all, an asset that belongs to the landlord – and when a tenant shows real concern for the condition of the property the landlord will value this.

Naturally, if a tenant is a late payer, doesn’t maintain the property, and is hard to manage, the landlord will insist on the maximum increase and have no issues replacing the tenant.

Ultimately a shrewd landlord will balance the increased rental with the reduced risk of renting to a tenant that conducts himself well, and has proven his worth.  It’s much easier for a rental agent to motivate a landlord to reach a fair compromise with the tenant if there is evidence of the above.

Steve Caradoc-Davies

Principal of Harcourts Platinum, and Director of Harcourts South Africa

Email your real estate question to steve.cd@harcourts.co.za

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