When selling a property currently occupied by tenants, it’s important to make the Offer subject to the lease.
In a past settlement case, a young buyer signed to buy their first property in which a tenant was currently living on a periodic tenancy. The buyer was told the tenant would have moved out before settlement – however, the contract was not made subject to the lease ending.
As soon as we became aware of the existence of a tenant, we realised that the 30-day notice period (now 60 days) required before ending a periodic lease meant that the tenant would still be in the property until days after settlement date.
However, the buyer wanted the keys straight away – and rightly so. Clause 6.1 of the Joint Form of General Conditions states that the buyer is entitled to vacant possession of a property, unless that property is sold subject to a lease.
If vacant possession is not possible and no lease is mentioned on the contract, the buyer can choose to charge penalty interest until the property is vacant, or to issue a default and cancel the contract altogether.
Luckily for the seller, the buyer chose instead to sign a settlement date extension until after the tenant was due to vacate, forgoing penalty interest and allowing themselves time for a final inspection.
While the buyer’s experience was less than ideal, the situation could have been a lot more expensive for the seller had the buyer chosen to collect penalty interest, which would have been over a thousand dollars. Had a similar mistake occurred in which a fixed-term lease was left off the contract, it’s possible that a buyer could be waiting months for vacant possession, compounding thousands of dollars in penalty interest.
When transacting on properties containing tenants, it pays to ensure the lease is appropriately included on the contract – whether or not the tenant is seeking vacant possession. By doing so, you ensure that a reasonable settlement date is set and save all parties considerable hassle.
Image by MacQ via Flickr.