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Fixed-term Leases and Alternative Lease Structures

June 6, 2022

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Almost everyone is familiar with the standard year-long, fixed-term lease.

It’s a staple in the rental business community.

However, it’s not the only type of lease.

There are many kinds of leases available depending on different situations and landlord decisions.

This article will focus on the three major kinds of lease structures: fixed-term, periodic, and subleases.

Let’s take a look at all three and what they mean.

Fixed-term Leases

Fixed-term leases are the most common kind of residential lease structures. They solidify the tenant’s occupancy and monthly rent for a specific period of time—typically six months, a year, or two years. Fixed-term leases give you a lot of stability and provide reliability in terms of a consistent rent payment amount for tenants.

Advantages:

One of the major advantages of fixed-term leases is that you set terms for an exact amount of time and no one has to worry about those changing. There are rules in place that both parties know will hold true throughout the lease.

Fixed-term leases also mean that you get consistent rent payments for the entire lease.

Furthermore, these kinds of leases ease the burden related to finding new tenants quickly (an issue that’s sure to come up when it comes to more temporary lease agreements).

Disadvantages:

As a landlord, though, fixed-term leases prevent you from changing the terms of the lease for the entire rental period. You cannot implement new rules, fees, or conditions during the term of the lease, unless both parties consent to an addendum. This lack of flexibility can cause issues if circumstances change or you realize you forgot to input important rules in your lease.

Likewise, you cannot raise rent during the term of the lease, even if the your property value goes up.

You also cannot end the lease before the lease period is over. Once again, this can be a disadvantage because if the value of the surrounding area suddenly increases or you add improvements to the property during someone’s lease.

Finally, these kinds of leases can make it difficult if you get stuck with a bad tenant and need to evict someone. Evictions are costly and time-consuming, especially when it comes to a fixed-term lease.

Periodic Lease 

Periodic leases are also called month-to-month leases. They allow you and your tenants to terminate the agreement at any time without a penalty, assuming proper notice is given. Make sure you explicitly state what constitutes proper notice for vacating the premises and if rent increases could be a part of the deal.

Advantages:

The major benefit of month-to-month leases is that you have a lot of flexibility regarding whether or not you keep tenants in your rental. If you want them to vacate, you just give the agreed-upon notice and then the tenant will need to leave by that time.

These kinds of leases also make it considerably easier to implement policy changes, increase the rent, or make adjustments to the lease.

Disadvantages:

The primary disadvantage to this lease type is naturally the exact opposite. Tenants can leave whenever, as long as they give proper notice. This means turnover could become an issue for you. Periodic leases don’t offer nearly the same stability as fixed-term leases.

Subleases 

Subleases are a unique type of apartment lease that only applies if your tenant sublets to someone else during your tenant’s lease. A sublease agreement means that the original leaseholder agrees that a tenant not on the original lease will now reside in your rental. They will also be responsible for paying the rent and maintaining the unit.

By and large, a tenant can sublease rental properties unless the lease or state law prohibits it. If the lease restricts subletting, the tenant cannot sublease the property. If the lease allows subletting with the landlord’s permission, the landlord must allow it within reason.

Advantages:

Allowing subletting can make your property more appealing to people who may need the flexibility. This widens the pool of people who will consider renting from you.

When it comes to a sublease, the original renter is responsible for getting someone to take over the original lease. This means you don’t have to spend extra effort trying to find someone to replace the tenant.

Lastly, original tenants are typically responsible for subtenants. Depending on the subleasing agreement, the original tenant may be responsible if the subtenant doesn’t pay rent, damages the property, or causes other problems. This obviously takesis obviously takes a large burden off of you.

Disadvantages:

As a landlord, you’ll have to figure out how to screen subtenants. Otherwise, you won’t know the caliber of tenant subleasing your property. The original tenant may find someone to cover the rent, but that doesn’t necessarily mean they’ll be a great tenant.

If the original tenant is responsible for the subtenant, obtaining late rent payments from the original tenant may be difficult. It can also create tons of extra work for you to track down the original tenant for damage repairs if the subtenant doesn’t pay.

The subtenant could breach the original lease in other ways, like being too loud or sneaking a pet in when you have a no-pet policy. In some states, your original tenant can evict the subtenant. But, sometimes, you may have to intervene, and that will be loads of extra effort and time.

Conclusion

Each of the three prominent lease structures provides certain advantages. Month-to-month leases generally offer the most flexibility for landlords. Fixed-term leases provide the most stability and reliability. Subleasing can make a property more appealing and give tenants more flexibility.

All landlords have different wants and needs, though. It’s important to assess what lease structures will work best for you and move forward with that in mind.

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