February 04, 2020
How to Mitigate Loss When a Lease is Broken
To lease or not to lease, that is the question. Whether ’tis nobler in the mind to suffer the slings and arrows of outrageous tenant misfortune. Or to take arms against a sea of landlord troubles.
Excuse the Shakespeare appropriation, but this is a question many landlords struggle with – to offer a conventional one-year lease, or to rent on a monthly basis. But not Christopher Seepe.
Chris is the author of two books, Landlording in Ontario, and the recently published, The Dark Side of Residential Landlording. Chris is also the owner and operator of seven multi-residential investment properties in a working-class market. And, he’s a strong advocate of waving goodbye to a one-year lease and shifting toward a month-to-month rental agreement.
Lease Agreement vs Rental Tenancy Agreement
A lease allows a tenant to remain in the rental unit for a set period of time, usually a one-year period. Leasing appears to come with a greater sense of security – the tenant has a guaranteed place to call home, and the landlord has guaranteed income. Neither party can change the terms and conditions of a lease or month-to-month agreement, such as rent, policies on pets or smoking, etc. without the written consent of both parties.
A rental agreement, on the other hand, comes into play when a landlord wants more flexibility. Chris says, “A rental agreement is exactly the same as a lease agreement except that the former has no end date. The RTA specifically states that when a lease agreement ends, it automatically converts to a month-to-month rental agreement.”
A month-to-month agreement is automatically renewed at the end of each month unless either party gives notice. In Ontario, it’s 60 days but check your provincial laws.)
The Landlord’s Reality
In theory, a one-year lease sounds like it covers both parties fairly. However, Chris points to the landlord’s reality which includes tenants who want flexibility to leave whenever it suits them, the bad or “professional” tenant who bails on the rent and a healthy dose of red tape when it comes to evictions.
“Uninformed investors, lenders, and insurance companies all love to see every tenant with a lease. They believe that the lease stabilizes a property’s income stream but they’re wrong,” states Chris. “The reality is that the landlord gives up eviction rights permitted by the RTA with little real value remaining that would favour using a lease. A fixed-term lease prevents you from undertaking no-fault notices of termination, such as eviction so a landlord can personally use the property, eviction so the new owner can move in, eviction for renovation and demolition, and eviction when a tenant routinely pays the rent late (form N8).”
According to the Federation of Rental Housing Providers of Ontario (FRPO), the average eviction process takes around 75 days. And, it doesn’t end there. In Ontario, there is an average of 28 additional days caused either by delays due to landlord error or by deliberate actions from the tenant.
So, if it takes about 100 days to get the non-paying tenant out, you’ve lost out on over three months of rent, you’ve incurred legal and sheriff fees and collection fees, and you can bet your bottom dollar that your tenant hasn’t been doing the rental unit any favours while they’ve been freeloading. Factor in clean-up costs and the expense of re-renting, and it adds up. Big time. Often to the tune of many thousands of dollars in lost revenue and costs incurred.
“The chances of getting more than a month’s rent in a prosecuted case is next to zero. And it’ll take 6 to 12 months to get the case heard,” states Chris. “The reality is that the aggrieved party is obligated under law to do everything reasonable within their power to minimize their losses. Your greatest tangible loss would typically be rental income but with vacancy rates throughout Ontario being the lowest in living memory, odds are high that you’ll rent out the unit within 30 days.”
The Benefits of Rental Tenancy Agreements
“Why give up your rights?” questions Chris. “With a fixed term lease, it takes longer to remove any bad tenant, and if you want to renovate and take over the unit for your own family you can’t do that either. In my experience, chronic late rent payment is a far more common issue than short-term tenancies.”
According to Ontario’s Residential Tenancies Act, 2006 (the RTA), a notice of termination must be given at least 60 days prior to its effective date, and may only be given if the tenancy is month-to-month or if the effective date of termination is the end date of the lease.
While every landlord should check with their local and provincial laws, monthly tenancy agreements give landlords another tool in their toolbox to help them mitigate risk from bad tenants, and greatly reduce potential loss of revenue.