Your tenant is coming to the end of his or her lease agreement and you need to determine if you should offer a lease extension and how to go about it. Before making a decision, it's important to review the current tenancy, including tenant behavior and compliance with the lease terms.
Having an existing tenant sign a new lease is a good decision in most cases. Unfortunately, there will be times when it is best to let the tenant move out. We outline some of the pros and cons of renewing a lease below to help you make the best decision for yourself and others residing in the property. When weighing these options, consider both the property's current condition and your own personal circumstances, such as future plans or lifestyle changes.
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Considerations of Extending a Tenant’s Lease
One of the biggest benefits of renewing a lease is that it can save time for landlords and reduce costs. According to several recent studies on the topic of rental turnover costs, landlords spend an average of $2,000 to get a vacated unit move-in ready. Here are just some of the expenses that factor into this average:
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Your mortgage payment on the unit
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Cleaning and maintenance
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Advertising for a new tenant
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Screening of a new tenant
Although you still need to make your mortgage payment regardless of who lives in the unit, you eliminate all other fees by keeping the same tenant. You can also institute a rent increase when starting a new lease with the tenant. However, the increase should be in line with the going rental market rate or the tenant may move out anyway because rent is now too high. As for time savings, keeping the same tenant by renewing a lease takes much less time than advertising for a new one, showing the property, and screening tenants.
The goal of most landlords is to have a low or non-existent vacancy rate. This is obvious since you don’t make money when no one lives in a unit, yet you still have to pay the mortgage and upkeep expenses. Renewing a current tenant’s lease takes the risk out of having a unit sit vacant for an extended period of time, in addition to the risk of break-in or vandalism that comes with it. Lease renewals also help maintain steady cash flow for property owners by ensuring consistent rental income.
You also need to consider when it would not be in your best interest to renew a lease. For example, the tenant may have been habitually late paying rent or other tenants registered frequent complaints about him or her. Issues such as property damage or a poor rental history may also justify not renewing a lease. There can also be some benefit to having a unit sit empty for a short time as it gives you a chance to renovate. Once you have finished working on the unit, you should be able to command higher rent for it.
Reach Out to Tenants 60 to 90 Days Before the Lease Expires
Whether you decide to offer a lease renewal option or not, be sure to give the tenant plenty of time to decide whether to renew or find other housing, and provide notice that meets the required notice period as specified by local laws. Should you be the one who is not offering a lease renewal option, you need to put that decision in writing and provide it to your tenant. The letter should include a notice to vacate and state a reason. Sometimes it has nothing to do with the tenant at all; for example, a landlord who wants to sell the building.
Sending a formal renewal notice is a best practice to ensure legal compliance and to document the lease renewal process.
If you have decided to offer the tenant a chance to renew the lease, contact him or her about three months before the expiring lease. Following this timeline gives the tenant an opportunity to consider options, including whether to renew your lease, while also giving you plenty of time to find a new tenant if necessary. Be sure to include a date by which the tenant should inform you of a decision to either move out or renew the lease.
Working with Tenants to Renew a Lease
The first thing you need to do with a tenant who has decided to stay is provide him or her with a new lease agreement to sign. You have several options with the new lease in terms of duration.
Some tenants prefer greater flexibility after having completed a typical one-year lease and may request a month-to-month agreement going forward. A month-to-month agreement offers flexibility for both landlords and tenants, allowing either party to end the lease with proper notice, but it also means less stability compared to a fixed-term lease. While this option is not always a good one for landlords, you do have the option of increasing rent in exchange for the flexibility to move on short notice. Just be sure to include language that requires a 30-day notice should the tenant decide not to renew the lease for the following month.
You can also offer a shorter lease period than the original lease such as a six-month extension. When the tenant has no plans to buy a house or look for new rental property, a longer lease is more appropriate. Many lease renewals continue with the same terms as the previous lease, unless otherwise negotiated. Choosing a longer lease term provides stability to both of you while still giving you the option to raise rent should market rates increase. During the renewal process, there is also an opportunity to negotiate rent and other lease conditions. Lease negotiations are important to ensure both parties are satisfied with the renewal terms.
Before the tenant signs the new lease agreement, make sure to review and confirm all agreed upon changes to ensure nothing has been overlooked or added unexpectedly.
Don’t forget to provide the tenant with a copy of the lease renewal once signed. The lease renewal now becomes the new binding legal document between the two of you.
To encourage tenants to renew, landlords can offer incentives such as a rent discount or property upgrades.
Conclusions
When it comes time for lease renewal, taking a close look at your lease agreement is essential for a smooth and successful renewal process.
As you approach the lease end date, make sure to provide proper notice to your tenant—typically 30 to 90 days in advance—so both you and your tenant have time to review the renewal offer, negotiate terms, and make informed decisions. This notice period is not only a courtesy but often a legal requirement, especially in states like California where local laws such as the Tenant Protection Act regulate lease renewals and rent increases. Always provide written notice of any changes to the lease terms, including any plans to raise rent or adjust lease length.
During the lease renewal process, landlords have the opportunity to update the lease agreement to reflect current market conditions, address any changes in the property’s condition, and ensure compliance with local regulations. For example, if your property is covered by rent control, there may be limits on how much you can increase the monthly rent. It’s important to balance any rent increases with the value of retaining reliable tenants—sometimes a slight rent increase is justified, but keeping a great tenant can save you time and money in the long run.
Negotiating lease terms is also a chance to address any maintenance needs or update policies, such as requiring renter’s insurance. Many landlords now require tenants to carry renter’s insurance to protect their personal belongings and provide liability coverage. At the same time, maintaining your own landlord insurance is crucial to safeguard your property and rental income against unexpected events.
To encourage lease renewal and minimize tenant turnover, consider offering incentives like a renewal bonus or a small rent discount. Maintaining open communication, responding promptly to maintenance requests, and keeping the property in good condition can also make tenants more likely to renew their lease.