Three Reasons why a Verbal Lease can turn into a Booby Prize
It may seem like a generous act of goodwill to allow your tenant to move in before finalising your lease – but this decision can have big consequences for you down the track.
The main issue is that your tenant will automatically be given minimum rights and obligations under the law if they move in and start paying rent without a written lease in place. Secondly the tenant may lose the motivation to sign the lease if they've already moved in, and thirdly you will have a enormous difficulty proving what the lease terms are if a dispute arises.
Let's look at each issue.
1. Verbal leases confer minimum rights on the parties
Leases don’t have to be in writing. A verbal lease (or partly verbal and partly written lease) will still be effective.
In addition to the terms of your lease that you have agreed to verbally, the law will confer on the tenant and landlord a whole swag of minimum rights and obligations, under statute and common law.
These minimum rights may conflict with the terms you would otherwise have agreed to and may backfire on an unsuspecting property owner.
For example, a retail tenant will have the right to a minimum 5 year occupancy unless you have the appropriate paperwork in place.
The benefit of having a written lease is that the lease agreement sets out and clarifies the parties’ rights and obligations clearly.
- what is the term of the lease?
- are there any options to renew the lease after the initial term has expired?
- how is the rent going to be increased?
- will there be a guarantor?
- how is the tenant permitted to use the premises?
- anything else you have agreed with the tenant in your particular circumstances.
Having those terms in writing will help to prevent misunderstandings. The parties can refer to the written terms of their lease to clarify any questions concerning their rights and obligations.
2. Your tenant may refuse to sign a written agreement.
You should also consider that once your tenant has moved in, they will lose a good deal of motivation to finalise the lease terms and sign the written form of the lease.
We recommend waiting until the lease terms have been finalised and the lease documentation signed, before allowing your tenant to take possession of the premises.
3. Verbal agreements are hard to prove
If you have allowed the tenant to move in without signing a written agreement, things can get messy very easily.
If the tenant breaches the agreement, it will be difficult (not to mention expensive) to prove what the terms of your verbal agreement were. You will be in a situation where it is your word against theirs.
The rights and obligations of residential tenants are prescribed by law and set out in the residential tenancies legislation in each state. You cannot contract out of these terms however you can add to them. A written lease is recommended to cement any additional verbal terms you have agreed to with your tenant.
The Bottom Line
If the tenant has moved into your premises and has started to pay rent without signing a formal lease, it may be a valid periodic or fixed term tenancy which will confer certain rights and obligations upon both the tenant and the landllord.
It is highly recommended that you finalise the terms of your lease and put the terms in writing, before letting the tenant take possession of the property.