Long Term Leases – Future Proofing or a Trap?

From 3 April, 2019, a standard long form lease can be used for residential tenancies in Victoria.

The agreement contains a lot of options, and opportunity for both parties to negotiate terms. If you are unsure of the meaning of the agreement, or it doesn’t accurately reflect what you want or have discussed, you may want to get some advice before signing the agreement.

DID YOU KNOW: It is an offence for an agent to give you a lease without first giving you a copy of the proposed agreement for the tenant’s use.

1. How will you be travelling in 5 years?

This new form allows the parties to agree on a term of 5 years or more for the property based on a choice of 3 types of rent increase – CPI increase (based on Australian Bureau of Statistics All Groups Melbourne Index), Statewide Rental Index increase (based on figure calculated by Department of Health and Human Services) or a fixed percentage amount.  Whichever you agree on, it is impossible to foresee major changes in the economy and whether you will be able to pay that rent in the future.

2. What!? more bond?

The landlord can require the tenant to pay an additional bond after the end of the first 5-year tenancy based on the rent payable after the first five years. This is bond is calculated like the first bond (e.g. current rent x 4 weeks minus your first bond), and must be lodged with the Bond Authority within 10 business days.

3. Modifications to the Premises – how much restoration is needed?

The landlord and tenant can agree on modifications that the tenant can make to the property (e.g. painting, installing shelves etc.), and unless the landlord agrees otherwise, the Tenant is required to “make good” the changes or pay the amount agreed with the landlord. 

Tenants Victoria is concerned that landlords will not take “fair wear and tear” into account when the lease ends and will insist on restoration beyond what was agreed.

For example, if the tenant puts in 3 nails in the wall and then paints the wall 10 years later to restore this wall, it may not be fair for the tenant. Ordinary depreciation discounts painting on a pro-rata basis over 10 years, so eventually the landlord suffers no loss. If the tenant paints because of the nails, the landlord gets a new coat of paint for free at the tenant’s expense, when a small hole in the wall could be bogged for a few bucks.

It is also difficult to calculate at the commencement of a long term lease how much it will cost to restore the property to the original condition at the lease end. Further, the legislation does not consider improvements, the duty is to restore the premises save for fair wear and tear.

It is important tenants are clear about their agreement including any restoration. If there are issues about their obligations in relation to fixtures or modifications, this may be something VCAT can resolve but the agreement may have a significant role in how this dispute plays out. If you are installing assets or fixtures be clear about ownership and who is responsible for repairs during the tenancy.

If parties cannot agree on modifications terms, VCAT may be able to mediate or resolve disputes.

Installation of metered utilities part way through a tenancy

Utilities costs already give rise to many compensation claims, and the new long term lease adds to this confusion.

Where a tenant has leased a premises without separate metering, the landlord is liable for the utilities. However, under the new long term lease, if the landlord installs separate meters, the tenant becomes liable for the usage cost.

There is no clear term in the long term lease agreement that allows VCAT to reduce the rent for the alteration of services, so it is extremely important that tenants check on the utility arrangements before signing a lease, or consider including terms if the metering changes.

4. Let me out of here – ending tenancy early

The tenancy can be ended before its term has expired, but under the standard form long term agreement the tenant is required to pay up to 1 month’s rent per full unused year of the tenancy to the landlord. The landlord is required to take reasonable steps to reduce their loss. However, a tenant would be wise not to pay compensation for the unused term unless VCAT has had a chance to examine the steps taken by their landlord to relet the property and reduce their loss.

5. Additional terms – more fine print?

The standard form lease allows for additional terms to be included about items let with the premises, and extension of the lease term. These are in Parts C & D of the Agreement, so if there is an issue it could be taken to VCAT for resolution.

Take Home Message – no one has a Crystal ball

Starting a new lease has a lot of unknowns. The no reason notice to vacate will soon be gone so it may be better to wait until after your first fixed term lease to consider if you want to start a long term lease, and you really know what are getting and who you are dealing with.

Unfortunately, there is no way to compel a landlord to offer a long term lease if you want one. If you want one and the landlord is offering, be sure to make thorough examination of the services, be clear on whether the premises is intended to be sold, what utilities are available and on what basis, meet the neighbours, contact Council for any building permits in the area and consider any other essential feature of the premises before signing. And as always, make sure any representations or terms are incorporated in writing in the agreement and both parties keep a copy of the agreement.

How good you or anyone else has been so far at predicting the future (Donald Trump anyone?).  There are many parts of this “simple” change that will need to be interpreted before they are understood.  If you really want to sign a long term lease, please contact our help line for advice before you sign, because 5 years is a long time to have regrets.