How to Handle the Annual Renewal of a Long-Term Lease Agreement in Peru

As a licensed real estate broker specializing in Arequipa, Peru, I often guide foreign investors and expats through the intricacies of Peruvian property law. One of the most common, yet frequently mishandled, aspects of property management is the annual renewal of long-term lease agreements. Proper renewal isn't just a formality; it's a critical legal procedure that protects your investment, ensures consistent income, and minimizes the risk of costly disputes or eviction challenges.

This article provides a detailed, practical guide to navigating the lease renewal process in Peru, with specific considerations for property owners in Arequipa.

Understanding Peruvian Lease Law: Fixed-Term vs. Indefinite Leases

Before delving into renewal specifics, it's crucial to understand the fundamental types of lease agreements under the Peruvian Civil Code (Decree Legislative N° 295).

1. Fixed-Term Lease Agreements (Contrato de Arrendamiento a Plazo Determinado): This is the most common and recommended type for property owners, especially for long-term rentals (typically 1 year or more). It specifies an exact start and end date. Under Peruvian law (Article 1688 of the Civil Code), the maximum initial term for residential leases is 10 years, though 1-3 year terms are standard and highly advisable.
2. Indefinite Lease Agreements (Contrato de Arrendamiento a Plazo Indeterminado): These agreements do not specify an end date. While less common for initial long-term rentals, they can arise from improper renewal or what is known as "tacit renewal."

The Perils of Tacit Renewal (Renovación Tácita)

A critical concept for landlords to grasp is renovación tácita (tacit renewal) or continuación de arrendamiento (continuation of lease), as stipulated in Article 1700 of the Civil Code. If a fixed-term lease expires and the tenant remains in possession of the property with the landlord's consent (explicit or implicit, such as continuing to accept rent payments) without a new written agreement, the lease is legally considered to have converted into an indefinite lease.

Why is this dangerous for landlords?

• Loss of Fixed Term Advantage: You lose the predictability and control of a fixed term. The landlord cannot unilaterally terminate the lease just by the original expiration date.
• Difficulty in Termination: Terminating an indefinite lease requires formal notice (often 60-90 days via Carta Notarial) and can be significantly more legally challenging and time-consuming than simply allowing a properly notarized fixed-term lease to expire. The Expedited Eviction Law N° 30913 (Ley de Desalojo Express) provisions are primarily designed for notarized fixed-term contracts, making evictions under indefinite terms significantly more complex and protracted.
• Negotiating Disadvantage: The tenant gains a stronger position, as they are not bound by an impending expiration date, making rent increases or changes to terms harder to enforce.

To avoid tacit renewal, always ensure that any continuation of the lease, even for a short period, is formalized in writing and notarized before the original contract's expiration.

Step-by-Step Guide to Annual Lease Renewal in Peru

As your Arequipa real estate broker, I cannot overstate the importance of a structured approach to lease renewal. Here's how to do it effectively:

1. Step 1: Review the Existing Lease Agreement (90-60 Days Before Expiration) Start this process well in advance. Pull out the original notarized lease agreement.

   • Key Clauses: Scrutinize the clauses regarding the lease term, rent amount, payment schedule, responsibilities for maintenance, utility payments, security deposit, and crucially, any specific renewal or termination clauses.
   • Renewal Options: Does the original contract contain an automatic renewal clause or a clause that requires a specific notification period for renewal or non-renewal? If so, adhere strictly to these terms. Many well-drafted contracts will specify that the lease terminates automatically unless both parties agree in writing to renew.
   • Tenant Obligations: Review the tenant's compliance with all terms – timely rent payments, proper use of the property, adherence to community rules if applicable.

2. Step 2: Assess Performance and Tenant Relationship (60-45 Days Before Expiration) Evaluate your experience with the current tenant.

   • Payment History: Has rent always been paid on time? Have there been any bounced checks or delays?
   • Property Care: Has the tenant maintained the property well? Have they reported issues promptly? Conduct a preliminary informal inspection if possible.
   • Communication: Is communication clear and respectful?
   • Your Intentions: Do you wish to continue renting to this tenant? Are you satisfied with the current terms?
   • Tenant's Intentions: Does the tenant wish to remain in the property? This is a good time for an initial, informal conversation.

3. Step 3: Evaluate Market Conditions and Rental Value (60-45 Days Before Expiration) Arequipa's real estate market, like any other, fluctuates.

   • Market Research: Research comparable rental properties in Arequipa. Look at similar properties in desirable neighborhoods like Yanahuara, Cayma, Selva Alegre, or Sachaca. Check online portals, consult with local real estate agents (like us!), and review recent rental advertisements.
   • Inflation & Cost of Living: Peru's annual inflation rate (Consumer Price Index) is a factor. Consider if the current rent still covers your costs and provides a reasonable return on investment. While Peru has seen periods of stable inflation, recent global events have introduced volatility, making rent adjustments a common consideration.
   • Currency: If your original agreement was in Soles (PEN), assess the current exchange rate against USD if that impacts your investment strategy. While most domestic contracts are in Soles, some foreign investors prefer USD-denominated rents. Legally, rent can be agreed in foreign currency, but the tenant has the option to pay the equivalent in soles at the current exchange rate on the date of payment (Article 1237 of the Civil Code).
   • Desired Rent: Based on your research and costs, determine a fair and competitive rental price for the upcoming term.

4. Step 4: Initiate Communication and Negotiation (45-30 Days Before Expiration) This is where formal communication begins.

   • Formal Offer: Send a formal communication to your tenant (email, letter, or ideally, a Carta Notarial if you anticipate issues or want maximum legal formality) proposing the renewal.
     • State your intention to renew the lease.
     • Propose the new rental amount (if any change).
     • Specify the proposed new lease term (e.g., another 12 months).
     • Outline any other proposed changes to the contract terms.
     • Set a deadline for their response.
   • Be Prepared to Negotiate: Tenants may counter-offer, especially if they are good tenants you wish to retain. Be open to reasonable adjustments. Remember, retaining a good tenant often outweighs the slight benefit of a marginally higher rent from a new, unknown tenant.

5. Step 5: Draft the Renewal Agreement Once terms are agreed upon, you need to formalize them in writing. You have two primary options:

   • Addendum to the Contract (Adenda al Contrato de Arrendamiento):
     • This is typically used when only a few terms are changing (e.g., lease term, rent amount).
     • The Addendum explicitly references the original lease agreement (e.g., "Addendum to the Lease Agreement N° [Original Contract Number/Date]").
     • It clearly states the changes: "The lease term is extended for an additional [Number] months, from [New Start Date] to [New End Date]." and "The new monthly rent will be S/ [New Amount in Soles] (or USD [New Amount in USD])."
     • Crucially, it must state that "All other terms and conditions of the original Lease Agreement dated [Original Date] remain in full force and effect."
     • This is generally simpler and quicker.
   • New Lease Agreement (Nuevo Contrato de Arrendamiento):
     • This option is preferred if there are significant changes to multiple clauses, or if the original contract is outdated or poorly drafted.
     • It's essentially a fresh contract, but you can draw heavily from the previous one, updating relevant sections.
     • Ensure the new contract clearly states that it replaces and supersedes the previous agreement.
   • Language: All legal documents in Peru, including lease agreements and addendums, must be in Spanish. If you need an English translation for your understanding, ensure it's clearly marked as an unofficial translation and that the Spanish version is the legally binding document.

6. Step 6: Notarization (Legalization of Signatures) - CRITICAL FOR Arequipa & Peru This is perhaps the single most important step for a landlord's protection in Peru, especially for foreign investors.

   • Why Notarize? Under Law N° 30913 (the Ley de Desalojo Express or Expedited Eviction Law), a lease agreement MUST have the signatures of both the landlord and tenant legalized by a Peruvian Notary Public (Notario Público) to qualify for the expedited eviction process. Without notarization, evicting a non-paying or problematic tenant can take years through standard court proceedings. This law is a game-changer for landlord protection.
   • The Process: Both the landlord (or their legal representative with a Poder Notarial - notarized power of attorney) and the tenant must appear in person before a Notary Public in Arequipa. They will present their official identification documents (DNI for Peruvians, Passport and Peruvian residency card/visa for foreigners). The Notary verifies identities and witnesses the signatures, then affixes their seal and signature.
   • Cost: Notary fees for signature legalization typically range from S/ 50 to S/ 100 per signature, plus a small fee for reviewing the document. This is a minimal investment for substantial legal protection.

7. Step 7: Tax Implications As a landlord in Peru, you are obligated to declare and pay income tax on your rental earnings.

   • Income Tax (Impuesto a la Renta): For individuals renting out property, the income tax rate on gross rental income is generally 5%.
   • Monthly Payment: This tax must be paid monthly using a simplified form (Formulario 1683) if you're a natural person, or a more complex PDT 621 if you have other income sources or are a company. Payments are made through SUNAT's online portal or at authorized banks.
   • Receipts: Issue formal receipts (Recibos de Arrendamiento) or electronic invoices (Facturas Electrónicas) to your tenant for each rent payment. This ensures transparency and helps you track your income and tax obligations. Your Peruvian accountant can assist with this.

8. Step 8: Property Registration (SUNARP) and Due Diligence While the lease agreement itself isn't typically registered with SUNARP, it's a good practice for landlords to re-verify their property's status at the Arequipa Public Registry (SUNARP) periodically, especially before renewing a long-term lease.

   • Confirm Ownership: Ensure there have been no changes to the property's ownership status.
   • Check for Encumbrances: Verify that no new liens, mortgages, or legal claims have been registered against your property since the last check. This is part of ongoing due diligence to protect your asset. Requesting a Certificado de Gravámenes or Copia Literal from SUNARP will provide this detailed information.

Local Context & Warning for Arequipa Property Owners

1. Historic Center Properties: If your rental property is located within Arequipa's historic center (a UNESCO World Heritage Site), be aware of special regulations. Any significant renovations or changes to the facade or structure require prior approval from the Ministry of Culture and the local Municipality. Ensure your lease agreements clearly define responsibilities for maintenance and any alterations, strictly adhering to these rules. Unauthorized changes can lead to substantial fines and mandated restoration.
2. The Notary Public is Your Shield: I cannot emphasize enough the role of the Notary Public in Arequipa. They are not merely witnesses; they provide legal certainty. Their seal makes your lease agreement a título ejecutivo, meaning it has the force of a public instrument. For foreign investors, this is your primary defense against drawn-out legal battles in the event of a problematic tenant, as it enables the expedited eviction process.
3. SUNARP Arequipa: The local SUNARP office in Arequipa is where all property titles, mortgages, and encumbrances are recorded. Always conduct a thorough Estudio de Títulos (title study) via SUNARP before purchasing any property, and do a quick online check (Consulta de Partida Registral) before renewing a lease to confirm the property's clean status.
4. Cultural Nuances: Peruvians value respectful, face-to-face communication. While legal formalities are paramount, approaching negotiations with politeness, understanding, and flexibility can foster a better landlord-tenant relationship, which is invaluable for long-term rental success.

Necessary Tools and Safety Checks

• Original Notarized Lease Agreement: Your primary reference document.
• Official Identification: DNI (Peruvians) / Passport and Carné de Extranjería (Peruvian residency card/visa for foreigners) for both landlord and tenant.
• Reliable Notary Public in Arequipa: Choose a reputable one. Your real estate broker or lawyer can provide recommendations.
• Legal Counsel: A Peruvian real estate lawyer specializing in property law is highly recommended to draft or review all renewal documents, especially if terms are changing significantly.
• Proof of Rent Payments: Maintain meticulous records of all rent payments, including bank transfers or issued recibos de arrendamiento.
• Property Inspection Reports: Document the property's condition before the new term begins. Comprehensive photos/videos with dates are advisable to avoid disputes over damages.

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⚠️ Legal Notice: Consult a Local Lawyer. The information provided in this article is for general guidance and educational purposes only and does not constitute legal advice. Property laws in Peru can be complex and are subject to change. It is imperative that you consult with a qualified, licensed Peruvian real estate attorney and tax professional for advice tailored to your specific situation before making any decisions or taking any action regarding lease agreements or property transactions in Peru.

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Navigating lease renewals in Arequipa doesn't have to be daunting. By following these structured steps and understanding the critical legal requirements, you can protect your investment and ensure a smooth, profitable rental experience.

For personalized assistance with your property management and lease renewals in Arequipa, trust the local experts.

Contact ArequipaRealEstate.com today to secure your investment's future.