If you are thinking of selling a property that is currently tenanted, before you take any steps to list the property on the market for sale, it is very important that you have a look at the tenancy agreement you have signed with your tenant (the “Agreement”) to determine whether your Agreement is for a Fixed Term or for a Periodic Tenancy. Detailed below is a brief outline of these two types of tenancy:
Periodic Tenancy – how it works:
This is the most common form of tenancy and is any tenancy that is not for any specific period and will continue until either the landlord or the tenant gives notice to end it. With this type of tenancy, if the tenant wishes to give notice to vacate the property they must provide the landlord with 28 days notice in writing. If the landlord wants to terminate the tenancy then he/she must give 63 days notice in writing to the tenant, if the Landlord or a member of the landlord’s family is going to live the property. If, however the landlord requires vacant possession of the property for the following reasons, then in these circumstances he/she is required to give the tenant 90 days notice in writing to the tenant:
(a) the landlord is putting the property on the market within 90 days of the termination date to sell the property with vacant possession; or
(b) the property has been sold and the new owner does not want the property tenanted.
Legal advice should be obtained before terminating a tenancy as the Landlord may be liable if the notice does no comply with legislation and the tenancy agreement.
Fixed Term Tenancy:
A Fixed Term Tenancy has a start date and an end date which is recorded in the Agreement. This type of tenancy cannot be bought to an end any earlier than the date recorded in the Agreement unless both the landlord and tenant agree.
At the end of a Fixed Term Tenancy (that is longer than 90 days and that started after 11 February 2021) the tenancy will automatically roll over to a Periodic Tenancy unless the tenant gives notice to the Landlord that this is not what they wish to occur. This notice must be given no later than 28 days before the end of the tenancy.
Selling the Property with a Periodic Tenancy in Place:
If you wish to sell your property and your tenant and you have signed an Agreement that records a Periodic Tenancy then you must give the tenant 90 days notice in writing recording that the tenant must vacate the property on or prior to the expiry of that 90 days. It is very important when signing an agreement for sale and purchase that this time frame is allowed for when determining an appropriate settlement/possession date with the purchaser.
For example if you sign an agreement for sale and purchase for the sale of the property (the Contract”) on say 1 February and record a settlement date in the Contract before the 90 day period expires you are going to potentially have a problem as the purchaser will be looking to move into the property on that date but the tenant would still be legally entitled to occupy the property. Before you sign a Contract for the sale of your property you should seek legal advice so that your solicitor can check the Contract an ensure that plenty of time is allowed for to give your tenant the legally required notice to vacate the property in time for vacant possession to be granted to the purchaser on settlement.
Selling the Property with a Fixed Term Tenancy in Place:
If you wish to sell your property and you and the tenant have signed an Agreement that records a Fixed Term Tenancy, unless you have a buyer that is willing to purchase the property as a rental with the tenant still in occupation, you won’t be able to sell the property with a settlement date that provides for vacant possession until on or after the end of the Fixed Term Tenancy.
The Tenant will also have a right to a periodic tenancy upon expiry of the Fixed Term Tenancy and unless one of the criteria in the Residential Tenancies Act applies (e.g. the purchaser wishes to live in the house) the purchaser may not be able to remove the tenant.
Again, before you sign a Contract for the sale of your property you should seek legal advice and provide your solicitor with a copy of the Agreement to ensure that the settlement date (date of possession) in the Contract is on or after the end date recorded in the Agreement with the Tenant.
Consequences of entering into a Contract recording vacant possession but tenant still on a Fixed Term Tenancy at Settlement:
The standard Auckland District Law Society Agreement for Sale and Purchase form (“ADLS Agreement”), which is the standard form that most lawyers/real estate agents use for all sale and purchase transactions, records very clearly what is to occur if settlement cannot proceed on the settlement date due to the vendor being unable to provide vacant possession to the purchaser.
Clause 3.13 of the ADLS Agreement records that provided the purchaser provides reasonable evidence of the purchaser’s ability to complete settlement:
(1) the vendor shall pay the purchaser, at the purchaser’s election, either:
(a) compensation for any reasonable costs incurred for temporary accommodation for persons and storage of chattels during the default period; or
(b) an amount equivalent to interest at the interest rate for late settlement on the entire purchase price during the default period; and
(2) the purchaser shall pay the vendor an amount equal to the interest they would earn or would be earned on overnight deposits lodged in the purchaser’s lawyer’s trust bank account on such portion of the purchase price (including any deposit) as is payable under this agreement on or by the settlement date but remains unpaid during the default period less withholding tax, bank fees and any interest payable by the purchaser to the purchaser’s lender during the default period in respect of any mortgage or loan taken out by the purchaser in relation to the purchase of the property.
Please note that the default period is defined as being the period from the settlement date until the date when the vendor is able and willing to provide vacant possession and the purchaser takes possession.
Be careful when selling a tenanted house!
As you can see from the above, it can be a very expensive exercise. The ADLS Agreement also records that as well as the above the purchaser has the right to claim for any additional expenses and damages suffered by the purchaser which would typically include extra legal fees involved in the prolonged transaction.
The purchaser is also entitled to serve what is known as a “Settlement Notice” on the vendor if vacant settlement is unable to be completed due to vacant possession not being available and this Settlement Notice typically gives the vendor 12 working days to provide vacant possession so settlement can be completed. If this Settlement Notice is not complied with within the 12 working days then the purchaser can either sue the purchaser for specific performance (which is unlikely to be possible) or cancel the Contract and demand the refund of any deposit paid.
This, of course, raises another issue for the vendor. If the purchaser cancels the agreement you will need to successfully sell the property to another purchaser. This means it is likely you will incur a second real estate agent’s commission when you successfully complete settlement. Just because settlement did not occur with the first purchaser does not mean that you do not have to pay your real estate agent their commission for the first sale.
Your real estate agent will (and rightfully so) be entitled to their commission as they have unconditionally sold your property even though settlement did not proceed and the Contract was cancelled at the expiry of the Settlement Notice.
Have any more questions about selling a tenanted property? It can be a complicated area and it’s worth making sure you’re not going to incur unnecessary costs. Contact us today and one of our team can guide you through the process – it’s what we do!