Whether you’re a landlord or a renter, you should understand the differences between a fixed-term lease and a month-to-month rental agreement.
Both fixed-term leases and month-to-month rental agreements are valid arrangements for landlords and renters to make. They both facilitate the landlord-tenant arrangement, but they are very different agreements. Let’s explore the differences.
What’s a fixed-term lease?
A lease for rental property is a contract between landlords and tenants that spells out the obligations of both parties. There is usually a time period associated with a lease, and the lease should state what this time period is, such as from September 30 of the current year to August 31 of the following year. This would be a 12-month lease.
Although a 12-month lease is the most common fixed-term lease, a fixed term can be for any length of time agreed upon by the landlord and tenant.
The lease is up at the end of the fixed term. There is no notice letter required from either a landlord or tenant to terminate a fixed-term lease since the lease simply terminates on the end date.
However, a landlord will typically notify a renter a month or two before the end of the lease term to find out what the renter’s intentions are. If the renter plans to leave at the end of the fixed term, the landlord can then plan to find a new tenant. Or if the tenant wants to renew, the landlord can issue a new lease.
Both parties should note that at lease renewal time, the landlord could change any lease terms, such as increasing the rent. Landlords cannot change terms after tenants sign a lease. Terms can only be changed before each new lease is presented to renters.
When a fixed-term lease ends, and if the renter stays but no new lease is signed, the fixed-term lease becomes a month-to-month arrangement.
What’s a month-to-month rental agreement?
Month-to-month rental agreements could be written or oral (although it’s always best to get rental arrangements in writing). Month-to-month agreements offer the greatest flexibility because either party can terminate the agreement, usually with just 30 days’ notice. You’ll need to check your state law on this as some states require more notice than that, and some require less.
If neither the landlord or tenant in a month-to-month agreement gives notice, the agreement automatically renews. In other words, the arrangement continues as is until one party gives formal and proper notice to the other.
Landlords also need to check their state laws on how much notice they need to give month-to-month tenants to change terms, such as a rent increase. This, like a termination notice, is usually 30 days, but the number varies from state to state.
When is a fixed-term lease better?
A fixed-term lease is better for landlords and tenants who want a more stable and secure arrangement. Once the renter signs the contract, the landlord can count on a monthly income source for the lease term. The tenant, after signing a fixed-term lease, knows they will have a place to stay for as long as the lease term. There will be no surprise notices to vacate from the landlord or no unexpected rent increases.
When is a month-to-month arrangement better?
A month-to-month lease works for landlords and renters who don’t want to be tied into a long-term arrangement. It allows the rental terms to change, typically with just one month’s notice. So a landlord could raise the rent more often under a month-to-month lease, for example. And a landlord or tenant could terminate a month-to-month agreement without having to wait for a fixed-term lease to end.
A tenant who isn’t sure they will stay in the area long will prefer a month-to-month agreement. That way, if they do need to leave suddenly, they’ll only need to give proper notice; they will not forfeit a security deposit, pay a break lease fee, or be on the hook for the whole rest of the term—any of which could happen when a renter breaks a fixed-term lease.
A landlord who isn’t sure how long they will keep the rental or whether they are comfortable with a particular tenant will prefer a month-to-month arrangement. Note that tenant screening, available through Cozy, greatly helps landlords choose reliable tenants.
There’s a place in the rental world for both fixed-term leases and month-to-month agreements. Decide whether you want the flexibility and freedom of a month-to-month agreement or the stability and reliability of a fixed-term lease. Knowing the differences helps ensure that both landlords offer and tenants accept the best situation for their needs.