What happens at settlement for a rental property?

Can you claim the arrears of a tenant at settlement when selling your property?

No, the amount owing cannot be inherited as the purchaser’s liability. It is preferable to reach a resolution before settlement. Conveyancing cannot adjust for a third party’s debt at settlement because there is no assurance that the funds are recoverable. Settlement is the legal process of enabling an uninhibited transfer from the seller to the purchaser. Any debts of a third party (ie: the tenant) are not the purchaser’s responsibility.

If the tenant pays the arrears post-settlement to the buyer, the vendor is entitled to the sum in its entirety. Conversely, if the tenant paid in advance for rent owed after the settlement date then the vendor needs to reimburse the buyer. This can be adjusted at the time of settlement.

Who receives rent on the day of settlement?

Often properties are sold whilst tenanted as this is a marketable point for property investors. It avoids vacant rental periods which results in lost rental income and rental advertising expenses. A settlement of a tenanted property will include an adjustment of rental monies between the seller and buyer.

The most common result is that the seller inherits all rental payments prior to settlement and the purchaser inherits all rental amounts owing post-settlement.

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What if the buyer is not an Investor?

If the terms of your sale state that the currently tenanted property will be vacant (tenant free) as of the day of settlement, it is vital that the seller understands the legal steps to enable this. The vendor (or a property manager that acts on their behalf) is responsible for ensuring that the tenant has vacated the property by the settlement date. The purchaser is not expected to contribute to this process.

Rental laws demand that the seller provides the tenants sufficient notice that the property has been sold and that they are required to vacate. A general guide is that 60 days written notice must be provided to the tenant. There are more complex requirements and restrictions for sellers to navigate when there are tenants occupying a sold property under a fixed lease. Sellers will need to check their state laws before making any settlement date commitments.

Our experienced conveyancing team will provide sellers with the necessary advice to enable the successful settlement of a leased property. The buyer is entitled to delay settlement if the property is not vacant by the date agreed with the seller.

Buying a property with existing tenants

After settlement, the purchaser becomes the new landlord of the property. Prior to this, it is suggested that you request some guidance from your conveyancer. Your conveyancer can assist you with exploring the below examples (please note, this list is not exhaustive and simply a sample of common scenarios)

• Clarify what type of lease agreement the tenants have with the former landlord – (ie: fixed or periodic)
• Initiate a meeting with the property manager and decide if you are going to replace or retain them as your.. Landlords can also manage the property themselves if preferred.
• Requesting the rental history of the existing tenants, (eg: rent arrears), and clarifying if any property maintenance has been requested.
• You can increase the periodic rental charge (usually monthly payments) if the tenant is no longer on a fixed lease. A notice period required will be required.