The landlord-tenant relationship may be arranged in several different ways in commercial leases. Tenancy at will is one of the most flexible arrangements, but flexibility has both its advantages and disadvantages. Here’s a look at what tenancy at will offer both landlords and tenants.
What is Tenancy at Will?
A tenancy at will is a rental agreement in which either the landlord or the tenant may terminate the tenancy at any time, with reasonable notice. There is no fixed term or end date; the tenancy may continue indefinitely until one party decides to end it.
The same arrangement is sometimes called an “at-will tenancy.” It’s common in some residential leases, where the arrangement is usually called “month to month.” “Tenancy at will” or “at-will tenancy” is more frequently used in commercial real estate.
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How Does Tenancy at Will Work?
A tenancy at will works much like any lease, even though this arrangement can be much less formal than ideal.
The arrangement works according to a lease, with details such as rental amount, date due and similar items, just as any lease would. A tenancy at-will lease can be just as detailed as any other commercial or residential lease might be.
The defining characteristic is that either party — the landlord or the tenant — can end the lease at any time. There’s usually a requirement, either in the lease or in state law, that a certain amount of notice must be given before ending the lease (e.g. 30 days). Aside from this one criterion, however, there’s nothing to stop either party from ending the arrangement.
Ideally, all at-will tenancies would be as formal as other commercial leases. At-will tenancy can be maintained even when a written lease is negotiated and signed.
In reality, many at-will tenancies arise from either handshake agreements or expiring leases. A verbal agreement is enforceable in most states, and many states have expiring leases that automatically convert to tenancy at will if nothing is done after a lease’s end date.
Is a Tenancy at Will Legally Binding?
Yes. A tenancy at will is generally legally binding regardless of how formal or informal the agreement is. However, a written agreement is highly recommended in case any disagreements over the tenancy arise. Sorting out a disagreement can get messy if no written agreement exists.
(Some states may have laws governing how legally binding a verbal agreement is, and states may also have squatter’s rights laws for long-standing tenancies at will. Clarifying everything in writing can help prevent state legal minutia from over-governing an agreement.)
Pros and Cons of Tenancy at Will
Tenancy at will has advantages and disadvantages that landlords and tenants should know. Some are particularly significant for commercial property leases.
Pros and Cons for Tenants
- Flexibility: Tenants can easily move out or relocate without being tied to a long-term lease. This can be advantageous for businesses with uncertain futures, such as new businesses that aren’t proven or growing businesses that don’t know when they’ll need a different space. It also can be helpful if waiting for a better location to become available.
- Potential for Lower Rent: In some cases, landlords may offer lower rent to attract tenants in a competitive market, especially if they are seeking short-term rentals to fill vacancies during a slow time (e.g. off-season or non-holiday).
- Insecurity: Tenants may face sudden eviction with a short notice period, which can be stressful and costly due to the need to find a new location quickly. Tenants may not be able to negotiate a favorable lease at a new location due to the time pressure, and changing locations is detrimental to customer traffic.
- Unpredictable Rent Increases: Landlords can raise the rent with little notice, making it difficult for tenants to budget and potentially causing financial strain. Tenants might have to accept a rent increase when faced with quickly finding a new space as the only alternative.
- Limited Build-Out: Tenants are unlikely to make major investments in a location’s build-out when their lease is uncertain. This can lead to operations that are less than ideal.
- Fewer Allowances: Tenants shouldn’t expect many rent concessions when they’re unwilling to make a long-term commitment to a landlord.
Pros and Cons for Landlords
- Flexibility: Landlords can easily evict problematic tenants or raise rent to match market rates, allowing them to respond more effectively to changes in the rental market. They also can more easily dismiss tenants who they don’t like, and without the legal hassles that a long-term lease would present.
- Attractiveness to Tenants: The flexibility of a tenancy at will may make it more appealing to potential tenants who are hesitant to commit to a long-term lease, increasing the likelihood of securing a renter. This can be especially helpful if trying to attract new startups that’ll hopefully grow and draw attraction to a property.
- Tenant Turnover: Higher tenant turnover can lead to increased vacancy periods, lost rental income, and additional costs for marketing and preparing the property for new tenants.
- Difficulty in Long-Term Planning: The unpredictable nature of tenancy at will can make it challenging for landlords to plan long-term investments or property improvements, as they may be unsure of whether the tenant will remain in the property.
- Fewer Major Tenants: Landlords are unlikely to secure anchor tenants or other major established businesses without longer-term leases. Landlords can use a combination of long-term and tenancy-at-will arrangements to bring in different types of businesses, though.
Other Types of Tenancies
Tenancy at will certainly isn’t the only landlord-tenant arrangement. Other common ones and how they compare to at-will tenancy are:
A periodic tenancy is an agreement in which the tenancy renews automatically for a specific period (such as month-to-month or year-to-year) until either party provides notice to terminate. This type of tenancy balances flexibility and stability, especially if the period is extended further than a month.
Tenancy for Years
Also known as a fixed-term tenancy, tenancy for years has a predetermined end date, and the tenancy automatically terminates at the conclusion of the lease term. Tenancy for years has provided more stability and predictability for both the tenant and the landlord, but it may lack the flexibility that some renters or property owners need. Most major commercial tenants have tenancy for-years agreements, even if their leases aren’t referred to as such.
Tenancy at Sufferance
Tenancy at sufferance occurs when a tenant remains in possession of the property after the expiration of a lease without the landlord’s consent. It’s considered the weakest form of tenancy and exists only until the landlord takes action to remove the tenant, either by initiating legal proceedings or negotiating a new rental agreement.
When to Terminate Tenancy at Will?
Landlords and tenants might terminate at-will tenancy for various reasons, such as the tenant finding a new place to live, the landlord deciding to sell the property, or either party wanting to change the terms of the commercial lease agreement. Whenever the arrangement isn’t the best option for either party (or if things aren’t working out), the tenancy might be ended.
Wrapping Things Up
A tenancy at will offers a flexible rental arrangement for tenants and landlords, but it has inherent uncertainties and potential drawbacks. Consider at-will tenancy if you need flexibility. If flexibility isn’t the preeminent priority, another arrangement might better suit your needs.