SELLING A TENANTED PROPERTY - AVOIDING THE UNKNOWN RISKS
Updated: Dec 12, 2021
We don’t need to tell you that during this crazy time of the year the urgency to settle goes into overdrive, consequently increasing the probability of important issues getting overlooked, issues which come back to bite the parties in that “Happy New Year” period.
If you are negotiating the sale of an investment property that is already tenanted, it is critical to know the tenant’s position under their lease. Ask yourself, do you really know the tenant’s position on:
rental payments (are they up to date or is the tenant in arrears?);
damage to the property;
claims or demands.
Although managing agents are generally on top of these issues, it's critical to disclose the above when drafting the contract. The tenancies section of the contract on Page 3, must be completed correctly but it is also limited when disclosing the above points.
Standard condition 5.4 of the REIQ residential contract of sale assigns to the buyer on settlement the following:
covenants by the tenants under the residential tenancy agreement; and
Did you know the contract does not entitle the buyer to recover rental arrears from the tenants before settlement? This means the buyer cannot recover the arrears, even if it was to assist the seller, and as the seller is no longer the landlord it can complicate the seller’s position and reduce their options in attempting to recover the rental. For example – after settlement the seller won’t have access to the bond to recover the pre-settlement rent arrears, nor will they have the “stick” of being able to send the tenant a notice to remedy breach.
When selling a tenanted property with rent arrears or other unresolved issues with a tenant, we recommend the seller discuss these with their lawyer – preferably before signing a sale contract!
Unfortunately, the REIQ contracts have limited information on your rights and obligations in managing the property between signing the contract and settlement (beyond a statement in standard condition 8.3 that the seller must use the property reasonably until settlement and must not do anything regarding the property or the tenancy that “may significantly alter them” or result in later expense for the buyer). Overlaying the contract is a general principle under the common law (judge-made law) which might oblige the seller to take action to preserve the property for the buyer’s benefit if the tenant is doing something that is seriously damaging the property. All of this is rather vague and there is no clear guidance on what the seller is allowed to do (or may even be required to do) before settlement when selling a property that is occupied by a defaulting tenant.
By having Creevey Russell Lawyers review a sale contract before its signed and telling us that that there are rent arrears or other unresolved issues with the tenant, we can help the seller understand their position and risks, and potentially help to negotiate special conditions into the contract to protect them. The seller’s options may be more limited if they have already signed a sale contract, but they should still seek our advice regarding early warnings of the issues with the tenant.