The law and landlords
Selling your investment property should be a time when the pain of carrying that property for many years is rewarded with profit from the sale. In theory, a decision to sell your investment property seems like a simple one to make. Yet on a practical level, it can quickly become apparent that other decisions need to be made which affect both yourselves and your tenants. It can be tricky trying to manage that final lease period and ensure that you comply with current tenant laws as well as trying to plan dates for your selling campaign.
If both landlords and selling agents are not aware of how the tenancy act applies to each situation, problems can occur. These problems can easily become costly and cause valuable profits to slip through a landlord’s fingers. In too many instances, landlords learn about their obligations to tenants only after they have listed the property for sale. It is then too late to make corrections as selling plans have usually been set in motion.
Landlord and tenant relationship law was updated in recent years but some of those changes still catch many people by surprise.
Things to consider as a landlord
If you intend to sell your investment property and you don’t inform the tenant at the time their lease is signed, the tenant has a right to break the lease if they want to. As a landlord, selling an unintentionally vacant investment property can become costly. If the tenant exercises their right to leave during the selling campaign, you can quickly drop 6 to 12 weeks rent over the course of the campaign and settlement period. If the property does not sell, then the landlord has the added pain of paying another lease fee to find a tenant.
The solution for landlords is to be upfront and fair to tenants about your intention to sell in the future. You should disclose your plans to sell, in writing in the lease agreement. This protects you against any suggestion of non-disclosure. Also, you may wish to demonstrate some fairness to the tenant by offering them an incentive when the selling campaign starts to help ease the burden of constant inspections.
Incentives for your tenant might include such things as a slight reduction in rent during the sales campaign, (in the form of a rebate) or a complimentary cleaner to help prepare the property for open inspections. Small offers likes these can go a long way to creating an enormous amount of goodwill between a landlord and tenant.
Owner occupiers will attest to how stressful it is on the whole household when their home is placed on the market. But homeowners are eventually rewarded with profits from the sale. However, tenants are not. When an investment is put up for sale, tenants wear that same stress but don’t see any reward at the end. In fact, their reward is usually negative – move out please. So be mindful of this and try to compensate them in some small way for co-operating with you during the sale period.
Notice to vacate
If you decide to sell the property unoccupied and do some repair or modification work prior to going on the market, the vacation process needs to be carefully managed.
The specific ‘notice to vacate’ requirements often catch many landlords by surprise. It is therefore important for landlords to fully understand both their rights and what is required of them, when issuing a ‘notice to vacate.’ to tenants. Become aware of these requirements well in advance of making major decisions around selling, timing and using trades people etc.
In NSW, to ensure that you have a vacant property after the expiration of the lease, a landlord must give a minimum of 30 days notice to tenants of the expiration. The tenants however, need only give the landlord 14 days notice if they wish to vacate the property upon expiration of the lease.
If the lease has already expired and the tenancy is continuing, the landlord must provide the tenants with 90 days notice to vacate. Once such notice has been given though, the tenants need only give the landlord 14 days notice to vacate any time during that 90 day period. The timing of when the property falls vacant in this situation is beyond the landlord’s control.
From a practical point of view, being subject to either a 3 month waiting period or even a surprise 14 day period, creates a nightmare scenario for the landlord and agent if they are aiming to book tradesmen in such as painters, gardeners, carpet layers and handymen etc. The timing is too fluid and can result in the property standing vacant for a month or so as trades people juggle their availability.
It is for this reason that landlords should always be aware of when the lease expires on their investment property. If they don’t, the law, as it stands in terms of expired leases, creates uncertainty for landlords. Therefore, if you are contemplating selling your investment, keep all leases current to maximize your control.
Selling with tenants
Many landlords who decide to sell, choose to sell with the tenants in place in order to avoid losing valuable income. There are many benefits to this strategy but there are also a few pitfalls.
Firstly, the tenant’s lease cannot be broken without their consent. Therefore, if you sign a lengthy lease on your investment property, whilst the tenants are allowed to vacate within the lease period (with some penalties), the owner cannot terminate the lease if the tenants are abiding by all lease conditions. This applies even if and when the property is sold. If the tenant chooses to stay and the property is sold, the new owner is obligated by law to abide by the conditions of any current lease.
Secondly, if the property is sold with an expired lease in the contract, but the contract of sale between vendor and purchaser states the property is being sold with ‘subject to existing tenancies’ then the new owner inherits the existing tenant. This is fine only if the property has been sold to an investor.
A major consideration for a landlord who is selling with a lengthy or expired lease over the property, is that they may inadvertently rule out owner occupier buyers. A reduced number of buyers could easily result in a lower selling price.
Thirdly, tenants are entitled to 14 days notice of the property being listed prior to any inspections taking place. This could interfere with a ‘quick sale’ in a hot market.
Your contract of sale
In NSW, Many landlords mistakenly believe that a tenant can be given ‘30 days notice to vacate’ even if the contract of sale states ‘subject to existing tenancies.’ In reality, the tenant is entitled to the full 90 day exit period on an expired lease, even if contracts are exchanged on a subject to tenancy basis.
At the point of contract exchange, it is imperative the selling agent, managing agent and solicitors are all on the same page as to whether the property will be occupied or vacant at settlement. The contracts need to be marked accordingly. Previous verbal instructions and undertakings won’t wash on settlement day if there are discrepancies. Only the exchanged contract matters in any dispute resolution.
If the landlord is selling a tenanted property to a buyer who wishes to move into the property at settlement, the contract must be marked ‘vacant possession.’
The importance of being correct on this issue is obvious, because no one wants a situation on settlement day where the tenants are rightfully entitled to remain in the property when the buyer thinks they are moving in. That is an awkward situation to say the least.
Correct planning for the sale of an investment property takes time, patience and a knowledge of current landlord/tenant laws in your State. It’s best to be aware of all the above mentioned moving pieces before making any firm decisions. There are many factors at play when selling an investment property and these are best discussed with your agent.