Saturday, August 23, 2014

Expat Clause

Lately I increasingly find that expat tenants are asking for an exit clause in the name of "Expat Clause" which states that should they be transferred to another country, lose their work permit or for whatever valid personal reasons that they cannot continue with the tenancy, they would like to be freed from the tenancy without penalty and have their deposits refunded in full.

This is obviously a risk we landlords have to take, not from the loss of the rental, as we can find new tenants but rather from the disproportionate commission paid to the estate agency. I have asked every agency and none of them were prepared to refund even part of the commission if the tenant executes the Expat Clause.

So, it is important when drafting the agreement, to insist that the Expat Clause can only be exercised in the second year of the tenancy and requires proof of the change in circumstances as well as sufficient notice (usually 2-3 months) to terminate the tenancy.

Some tenants insist that the Expat Clause can be exercised even within the 1st year as they may have only a conditional work permit of less than a year or they are on a shorter than 1 year assignment in this country which may or may not be extended. In my experience, if the tenant insist on this then it is most likely you are facing a shorter than 1 year term. So, you should not pay the agency a full commission.

Unfortunately, in this market glut, some desperate landlords are willing to accept whatever terms just to secure a tenant. While it must be accepted that foreigners have circumstances that they may have to leave the country earlier, if it is less than a full 1 year tenure, they should pay a slightly higher premium for the shorter term contract.

I propose that this premium should be spelled out in the contract and deducted from the deposit rather than raising the rental amount because agencies tend to receive their commission based on 1 month rent. For example, the clause should read something like this:

If the Tenant terminates this Tenancy for whatever reasons, the following percentage shall be deducted from the Deposit:

After fulfilling more than 12 months term: 0%
After fulfilling more than 10 months but less than 12 months term: 20%
After fulfilling more than 8 months but less than 10 months term: 40%
After fulfilling more than 6 months but less than 8 months term: 60%
Fulfilled less than 6 months term: 100%

What say you?


Patch said...

As you say, with the current glut of properties, the expat tenant is King.
Fortunately, my expat tenant, though having the exit clause did NOT exercise it. Also, I spoke to the agent and she was willing to find me a new tenant for free (if the expat tenant vacates less than 1 year).

Mas said...

Just saw your Blog...Just sharing with you...

In Singapore, we include a clause that the Tenant shall refund the Landlord on a pro-rata basis commission paid by the Landlord to the Agent should the Tenancy be terminated before the expiry of the term.

The Landlord shall be entitled to deduct such refund from the deposit held by the Landlord.

No issues from the Tenant about signing this.