Differences between a fixed term and ongoing lease agreement

Whether you’re a tenant or owner, it’s worth understanding how fixed-term and month-to-month leases differ, and what works best for you.

Ongoing leases are also called month-to-month leases or rolling leases.

Both types of leases are valid agreements for renters and property managers to enter-into. They both facilitate the tenancy but have important differences around notice, rent increases and duration.

What’s a fixed-term lease?

A lease agreement is a contract between a property manager and a tenant(s) that outlines the obligations of both parties. There’s typically an amount of time related to the lease. For example, February 1st to the following January 31st. This is an example of a 12 month lease.

Although a fixed-term lease is typically 12 months, the term can be for any amount of time, provided both parties agree on the start and end date (the fixed term). In some areas, local authorities are introducing fixed term three year agreements and up to five year agreements.

There’s no notice letter needed from either a property manager or tenant to end a fixed-term lease since the lease just ends on the final day as per outlined in the lease agreement.

However, it is generally considered ‘best practice’ for a property manager to notify the tenant a month or so prior to the end of the contract, so as to understand the tenant’s intentions. This allows enough time for property managers to find another tenant if the current tenant decides not to renew their lease.

If a new lease is signed, it is important to note that property managers have the ability to change the terms of the lease, as such, it’s important to review any changes made to the lease, if any. A rent increase is the most common change to be made at the end of a fixed term agreement. Rent increases are typically not permitted within a fixed term agreement unless agreed prior in writing.

Unless stated otherwise in the fixed-term lease, once the fixed term finishes, it automatically becomes an ongoing lease. In most jurisdictions this is month to month.

What’s an ongoing agreement?

An ongoing lease agreement can be either a written or oral contract, although it’s recommended to have any contract or agreement in writing. An ongoing agreement is best for tenants that favour flexibility, as the nature of the contract means that only a specified amount of days’ notice is needed to terminate the agreement (this can change by state, so it’s always worth checking state law). If neither party gives notice to terminate, then the contract automatically renews for the next month.

What’s the better arrangement for you?

The debate between a fixed-term and ongoing mainly comes down to how long you plan on renting for, and what locational and job security you have.

Tenants that are constantly on the move, or tend to travel frequently are more likely to appreciate the flexibility of a month-to-month arrangement. Conversely, those that plan on staying in the area for a while, such as families, are more most likely to appreciate the stability that a fixed-term agreement provides.

Owners that plan to sell, renovate or occupy the property may prefer a month to month agreement. Owners that value low vacancy, low reletting costs may prefer a new fixed term agreement.