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Termless or fixed term rental agreement - which one to prefer?

06.07.2022

Termless or fixed term rental agreement - which one to prefer?

In the Estonian rental market, two types of rental agreements are used – fixed-term and termless. Although traditionally, people's preferences have always been using fixed-term agreements, the COVID-19 crisis caused an upheaval in this sector and changed the majority's choices.

We in Rendin, with many owners and experts of real estate, advise using a termless rental agreement because of its flexibility and security that the fixed-term cannot offer. Therefore, Rendin only enables to use only termless agreements.

Important to know about the termless agreement:

  1. It is more flexible than an agreement with a term.

  2. The landlord and tenant both can terminate an agreement unilaterally by notifying the other three months in advance.

  3. It allows react faster to changing circumstances.

  4. It gives the landlord a certain advantage when solving the problem of problematic tenants.

  5. It allows increasing rent after every 12 months.

Important to know about the fixed-term agreement:

  1. It is more limited compared to a termless agreement.

  2. It cannot be terminated unilaterally, i.e. without a valid reason.

  3. Both parties know the agreement's expiration date and can consider that when making plans.

  4. Psychologically, it is easier for the landlord to increase the rent when the agreement expires or to conclude a new agreement for the new period.

  5. It gives the landlord a sense of security that a tenant has been found for a year. But, at the same time, nothing guarantees that the latter won't end up in financial difficulties.

Why Rendin allows only termless agreements?

Rendin came on the market two days after Estonia declared an emergency situation due to the coronavirus pandemic. We saw at that time how people wanted to terminate fixed-term agreements prematurely – both owners and tenants. For this reason, we decided to change what kind of rental agreements Rendin offers. In addition, we understood that a rental agreement without a specified term allows us to react faster to changing circumstances.

In the past, fixed-term agreements were more popular because they provided the owners with a sense of security – ensuring cash flow for the next 12 months. At the same time, nothing can guarantee that this period goes smoothly and the tenants won't find themselves in financial difficulties, for example. Therefore, people relied on an illusion of security.

The differences in terminating fixed-term and termless agreements

Often, people are not well-versed in the law and don't know how to terminate a rental agreement. The options vary according to the type of agreement.

Either party can terminate a termless agreement with three months' notice. It must be in writing, and the recipient must confirm receiving it. If the parties agree (and formulate it in writing), the agreement can also be terminated earlier.

According to the Law of Obligations Act (sections 314–319), extraordinary cancellation is permitted with sufficiently good reason and when the continuation of the agreement no longer serves the interests of both parties.

Our blog contains step-by-step instructions for terminating a termless rental agreement.

A fixed-term agreement ends on the agreed date, concluded in the agreement. It cannot be terminated ordinarily or without a good reason (e.g. the reason isn't wanting to move to another city or country due to an unexpected job offer). An agreement with such rigid limitations could lead to a situation where the tenant leaves the dwelling and ceases to fulfil their obligations arbitrarily, creating all sorts of problems. The landlord must find a new tenant and also deal with the debts of the previous tenant.

Options for raising the rent

The law says that the landlord can raise the rent after every 12 months with a termless agreement. There are two ways to do this:

  1. Notify the tenant 30 days in advance.

  2. Agree with the tenant when signing the agreement that rent is raised periodically.

A more detailed description can be found in Rendin help centre.

When raising the rent the landlord should analyse whether it’s really reasonable. A stable rental relationship is often both financially and psychologically more beneficial than rising the rent and risking the vacancy of the rental property.

Which agreement protects from a problematic tenant?

Landlords have a common misconception that it’s easier to get rid of a problematic tenant when using a fixed-term agreement. However, we would counter this argument with a simple question - why should the person who didn’t fulfil their obligations before suddenly start honouring the contract? If the tenant has ignored agreements beforehand, they’ll most likely continue doing so in the future.

One should also know that a fixed-term agreement will turn into a termless one if the person will remain living on the premises once the agreement term is over and a new agreement isn’t signed.

The benefit of the termless agreement is that if the landlord terminates it regularly (by notifying the tenant three months in advance), it’s more difficult for the tenant to counter the termination. Of course, it’s still possible that the landlord might have to turn to court to get the tenant evicted, but the process is more straightforward compared to other possible solutions.

Protecting the landlord from problematic tenants is one of its value offers of Rendin. We share the risks with the landlord, compensate possible debts to the landlord and help with the legal side.

You can read more about the eviction process from our blog.

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