Changing future for tenancies

According to Auckland-based Stainton Chellew, the time is ripe for longer term residential leases that are similar to commercial lease arrangements with rights to assign, sublet, and renew.

Recent legislative changes, along with the issue of housing affordability in Auckland, are paving the way for a longer term and different relationship between landlords and tenants, the firm has said.

Currently, one to two year terms dominate residential tenancies. 

Stainton Chellew partner Francis McEntee said a number of factors – including legislative changes and increasing IRD enforcement – mean residential property investors will be less inclined to buy and sell frequently.

“What they will be looking for is steady and low-hassle rental income. The culture of buying and selling residential rental properties short term will end.”

This is creating a rental environment closer to that of the UK and Europe where long term residential leases are common.

The new type of relationship might involve landlords giving tenants a greater level of freedom during the term of the lease, and fewer inspections, on the understanding the property would need to be reinstated at the end of the lease. 

McEntee said a balance would need to be struck and landlords might well require a higher level of bond to be paid in return for agreeing to a more “hands off” type of lease.

But it is something that could favour both landlords and tenants, he said.

“We’re not talking about long term leases for students here. We’re talking about people with jobs and families who make great tenants, but they have no certainty about where they live.”

There were opportunities in taking a long term business approach to rental property investment.

While tenants would get the scope to make a home for themselves, with less uncertainty of tenure, landlords would get lower tenant turnover, less costs on fees and maintenance and a more secure, predictable income.

McEntee said long term tenancy leases could work like current commercial leases.

These have an existing body of law around them and established precedents, like the ability to assign or sub-let the lease subject to landlord’s consent, rights to renew the lease for further periods, and to make some limited cosmetic changes to the property.

But such a tenancy lease would not be the same as a ground lease or leasehold title, which generally get a bad rap because of the potential for enormous rent increases, he said.

“What we’re talking about here is more of a balanced business proposition: a situation where landlord and tenant commit to a lease relationship long term for their mutual benefit.

“So it may be that landlords would still hold inspections from time to time, and there is also potential for holding bonds – those are variables that people could work through at the start. There might also be regular Consumer Price Index (CPIs) and/or market rent reviews.”

However, recent Barfoot & Thompson research showed that it is “periodic tenancies”, rather than fixed term tenancies, which are the preferred form of rental arrangement.

At the time, NZ Property Investors’ Federation executive officer Andrew King said that, although there is a push to provide longer tenancy security for tenants, there is a danger in this.

“It could be applied in such a way that it restricts what the majority of tenants actually want and restrict owners ability to sell a property if they need to.”

In his view, the rental market, while not being 100% perfect, is working well for tenants.