Selling a property that is being rented to tenants involves a few extra considerations.
Below, I list three things that agents and sellers can do to minimise the chance of setbacks during settlement of a tenanted property.
1. Include a special condition
Unless otherwise stated on the contract, the Joint Form of General Conditions requires that the buyer is given vacant possession of the property at settlement – so if the seller wants to sell the property with a tenancy in place, a special condition needs to be included in the Offer and Acceptance.
While this may seem obvious, we occasionally see contracts for tenanted properties that make no mention of the tenancy in the contract – perhaps because the tenant is expected to move out before settlement, or because the buyer and seller have made a verbal agreement about the tenancy.
But verbal agreement or none, if the Offer and Acceptance does not specify that the tenants will remain in place, the buyer will have the right to delay settlement until vacant possession is available. To avoid settlement delays, ensure the contract includes a clause stating that the tenancy will remain in place.
2. Advise your client about splitting the rent
Buyers and sellers alike are often eager to understand who receives which rent payments. To explain, I tell clients that:
- The buyer’s entitlement to rent payments begins the day after settlement. If the tenant has paid rent in advance over a period that includes settlement day, whatever portion of that rent falls after settlement day must be provided to the buyer at settlement. The seller’s settlement agent will adjust the rent and ensure it’s distributed to the correct parties at settlement.
- If the buyer is going to continue using the seller’s property manager, the property manager will take care of the rent adjustment instead.
- If the tenant hasn’t paid rent yet and the seller is entitled to a portion, the buyer must pay that amount to them as soon as they receive it. If the tenant pays the rent to the seller after settlement, the seller must immediately pay the buyer their share.
Knowing how rent adjustment works can help avoid disputes after settlement.
3. Ensure tenants move out a week before settlement
If the tenancy is not remaining in place for the sale, it’s important to allow sufficient time between the day that the tenant vacates and settlement day.
The owner will generally need to carry out a final bond inspection and carpet cleaning when the tenant leaves, followed by the buyer’s final inspection.
It’s not recommended that settlement proceeds until the final inspection is carried out, so I recommend having the tenant vacate at least a week before settlement.
By including the tenancy on the contract and ensuring the tenant vacates in a timely manner where applicable, you can maximise the likelihood of a trouble-free settlement when selling a tenanted property.
Image by Charlotte Holmes via Flickr.
