There are two types of agreements in real estate rental: “Ordinary Lease Agreements” and “Fixed-Term Lease Agreements.” This article will discuss the differences between these two types of agreements, as well as their respective advantages and disadvantages for landlords.
Subheading Ordinary Lease Agreements
An "Ordinary Lease Agreement" refers to the rental contract commonly used in real estate leasing. It typically has a contract period of at least one year and is often set at two years. After the contract period expires, the tenant may renew the lease if desired, and by adhering to predetermined special clauses such as "notice period for termination" and "amount to be paid upon immediate termination," the tenant can terminate the agreement early. In the case of an ordinary lease agreement, the landlord cannot unilaterally terminate the contract or refuse to renew it upon expiration without a justifiable reason.
What Is a Fixed-Term Lease Agreement?
A "Fixed-Term Lease Agreement" was introduced following the revision of the “Act on Land and Building Leases” in March 2001, based on the " Act on Special Measures concerning Promotion of Supply of Good Rental Housings, etc. " (Ministry of Land, Infrastructure, Transport and Tourism). Its purpose is to facilitate the provision of quality rental housing by establishing a predetermined contract period.
While an "Ordinary Lease Agreement" cannot have a contract period of less than one year, a "Fixed-Term Lease Agreement" can be set for periods shorter than one year. Generally, there is no contract renewal in Fixed-Term Lease, which means the tenant must vacate the premises upon expiration of the lease. However, with the mutual agreement of both the landlord and the tenant, a new contract can be signed after the lease term expires. Unlike ‘Ordinary Lease Agreements,’ when renewing ‘Fixed-Term Lease Agreements,’ both parties can renegotiate the rent and other contract terms.
Advantages and Disadvantages of Fixed-Term Lease Agreements
There are numerous benefits for landlords when it comes to "Fixed-Term Lease Agreements."
● Landlords Can Decide the Rental Period
● They may want to rent out their property temporarily due to a job transfer.
● They may wish to rent out a vacation home or second house only during periods of non-use (off-seasons).
● They may want to rent out the house where their parents used to live.
● They may want to rent out a property that is scheduled for rebuilding or demolition in the future.
Accordingly, through a ‘fixed-term lease agreement,’ the landlord can rent out their property for a short term. Even with a lease period of less than a year, they can still effectively generate income.
● Guaranteed Vacating at Lease Expiration
A "Fixed-Term Lease Agreement" clearly states both in writing and verbally that the tenant must vacate upon lease expiration. As a result, regardless of any justifiable reasons, the landlord can request the property to be vacated at the end of the term without having to pay any relocation fees.
● Can be excluded from the special contract for requesting rent reduction
In an "Ordinary Lease Agreement," tenants are strongly protected and can request a rent reduction due to property deterioration, even if there is a clause in the contract stating that "the rent will not be reduced." On the other hand, in a "Fixed-Term Lease Agreement," clauses regarding rent adjustments are enforceable, and tenants cannot request a rent reduction under any circumstances. Therefore, landlords can prevent disputes over rent increases or decreases while maintaining stable income.
There are several disadvantages and important points to consider.
● Written Explanation Required
When entering into an Ordinary Lease Agreement, a “verbal agreement” can establish the contract. However, in the case of a Fixed-Term Lease agreement, the contract must be established through a “written” form, such as a notarized document. Consequently, landlords must clearly communicate to tenants, via a separate written document, that the contract will terminate upon expiration. Notably, if the requirements are not met, the ‘Fixed-Term Lease Agreement’ may be converted into an ‘Ordinary Lease Agreement.’
Furthermore, for contracts longer than one year, landlords must notify tenants of the termination one year to six months before the contract's expiration (notification period).
● Rental Prices May Be Lower Than Market Rates
Since fixed-term lease agreements are generally less favorable for tenants, it can be challenging to attract tenants even at the usual market rates. Therefore, the rent for such agreements is typically about 5-10% lower than the market price.
● Unable to terminate the lease before its expiration
In a fixed-term lease agreement, the landlord generally cannot terminate the lease during its term. If early termination is desired, special clauses for early termination must be agreed upon during the initial contracting stage.
● A ‘Fixed-Term Lease Agreement’ may be converted into an ‘Ordinary Lease Agreement.
While the law does not prohibit the landlord and tenant from mutually agreeing to sign another fixed-term lease agreement, if the landlord repeatedly signs fixed-term lease agreements with the same tenant, these agreements may be regarded as ‘Ordinary Lease Agreements.’ In such cases, the landlord may not be able to terminate the contract within the intended period. To prevent future disputes, it is not recommended to repeatedly sign fixed-term lease agreements with the same tenant.
List of Differences Between Fixed-Term Lease Agreements and Ordinary Lease Agreements
Can an Ordinary Lease Agreement be converted into a Fixed-Term Lease Agreement?
If a general lease agreement needs to be converted into a fixed-term lease agreement due to reasons such as “the property is old and needs to be rebuilt,” the situation must be explained to the tenant, and the general lease agreement should be terminated with mutual consent before signing a new fixed-term lease agreement. However, if negotiations with the tenant are not successful, the landlord cannot force the conversion of the agreement. In some cases, the tenant may request the landlord to pay relocation costs. If both parties cannot reach an agreement, legal procedures may ultimately be required to resolve the issue, making thorough communication between both parties important.
Summary
Fixed-term lease agreements offer many advantages for landlords who wish to rent out their property for a specific period. When considering entering into such an agreement, it is recommended to also weigh its potential disadvantages to make a choice that best suits one’s interests.
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