RTA in focus: Break fee

RTA in Focus: Break Fee

11 March 2020

This article is part of the RTA in Focus series. With a raft of reforms to the residential tenancies framework set to start on 23 March 2020, we’re giving you the information you need to ensure you understand your obligations.

You can access all the articles in the RTA in Focus series here.

A break fee, calculated on a prescribed cascading scale, will now be a mandatory term of all fixed term agreements of less than three years.

Perhaps one of the most controversial changes to the residential tenancies framework relates to break fees.

To date, a break fee has not been a mandatory term in all residential tenancy agreements. However, that’s all set to change on 23 March 2020. Not only will a break fee now be mandatory, but the amount of the fee must be calculated in accordance with a prescribed cascading scale.

Sandra McGee, Property Management Manager at Starr Partners Merrylands and member of the REINSW Property Management Chapter Committee, explained that REINSW lobbied strongly against this new break fee calculation and believes it should not be mandatory.

“The NSW Government has stated that the policy intention for the break fee calculation is to provide certainty for tenants, before they enter into a residential tenancy agreement, about the costs associated with terminating the agreement early,” she said.

“However, the cascading scale they’ve put in place is grossly unfair and doesn’t consider the financial impact on the landlord. It doesn’t take into account any compensation for consent to break the residential tenancy agreement and the associated costs the landlord will incur as a consequence of the break.”

Property managers need to ensure that the new break fee is included in all residential tenancy agreements entered into on and after 23 March 2020. Importantly, you need to understand the implications of the new break fee and its potential financial impact on landlords.

What’s changing on 23 March 2020?

The inclusion of a break fee clause is not currently mandatory for all residential tenancy agreements.

The current section 107(3) of the Residential Tenancies Act 2010 (NSW) states that the compensation payable by the tenant for the early termination of a fixed term agreement is “the amount of the applicable break fee for the tenancy, if the agreement provides for the payment of a break fee.” (emphasis added)

On and from 23 March 2020, in accordance with the new section 107(3), it will be mandatory that all fixed term agreements for less than a three-year term include a break fee.

Further, the new section 107(4) will set out how this break fee must be calculated. Where a tenant terminates the residential tenancy agreement early, the break fee will be:

  • 4 weeks rent if less than 25% of the fixed term of the lease has expired
  • 3 weeks rent if 25% or more but less than 50% of the fixed term of the lease has expired
  • 2 weeks rent if 50% or more but less than 75% of the fixed term of the lease has expired
  • 1 week’s rent if 75% or more of the fixed term of the lease has expired.

This break fee does not apply to existing agreements; only those signed on and after 23 March 2020.

The amendments in practice

Sandra said that the new break fee calculation is simply not fair and equitable.

“There’s a clear disparity between the obligations of a terminating tenant under a fixed term agreement and one who is under a periodic agreement,” she explained.

“Under a periodic agreement, the tenant is required to provide a minimum of 21 days’ notice of their intention to vacate the property, which is a fair and equitable notice period for a tenant to give.

“However, under the new cascading scale, a tenant who is in the last three months of a 12-month fixed term agreement can effectively give zero days’ notice of their intention to vacate the property. They will only be liable for the equivalent of one weeks’ rent as compensation to the landlord.

“How is this fair to the landlord?”

Sandra said that the new break fee calculation will discourage longer term leases.

“Landlords will see little security in offering tenants longer leases, because the penalty for breaking the lease is minimal,” she said.

“It’s important to note that the new break fee calculation does not apply to existing agreements. Therefore, if you have existing fixed-term agreements that expire on or after 23 March 2020, it’s in the best interests of your landlords to continue on a periodic basis rather than sign a new agreement.”

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