Considerations for landlords

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Whether you plan to sell your property with vacant possession or subject to an existing tenancy, it is imperative to consider the timing of the proposed sale and review the terms of any existing tenancy agreement before entering into a Sale and Purchase Agreement ("Agreement").

A common pitfall is agreeing to provide vacant possession without first confirming that the tenancy can be lawfully terminated and that the tenant will vacate prior to settlement. Vacant possession means giving possession of the property to the purchaser on settlement free from occupants, tenants, and the vendor's belongings (other than agreed chattels as per the Agreement).

Vacant possession

If a vendor wishes to sell their property with vacant possession, they must ensure that they can lawfully terminate the tenancy under the Residential Tenancies Act 1986 and provide vacant possession to the purchaser on settlement. Entering into an Agreement does not, of itself, entitle a landlord to terminate a tenancy.

Whether a tenancy can be terminated before settlement will depend on the type of tenancy in place, including whether it is a fixed-term tenancy or a periodic tenancy.

Generally, a fixed-term tenancy cannot be terminated before its expiry date unless the parties agree or there is a lawful basis for early termination. Accordingly, a vendor may be unable to provide vacant possession during the term of a fixed-term tenancy.

The process and notice period for terminating a periodic tenancy depends on the reason for termination. Accordingly, a vendor must ensure that the settlement date allows sufficient time for the tenancy to be lawfully terminated and for the tenant to vacate the property.

The vendor should ensure that any required termination notice has been validly served, the tenants have confirmed that they intend to vacate, and there is sufficient time for the tenancy to end before settlement. A vendor who agrees to provide vacant possession but is unable to do so on settlement may be in breach of the Agreement and exposed to claims for compensation, damages and penalty interest. In some circumstances, an application to the Tenancy Tribunal may also be required to obtain vacant possession. Accordingly, vendors should carefully consider their obligations under any existing tenancy agreement before committing to a settlement date that requires vacant possession.

Subject to tenancy

If the property is sold subject to an existing tenancy, the purchaser will generally inherit the rights and obligations of the landlord under the existing tenancy agreement from the settlement date. The vendor remains responsible for complying with all landlord obligations, including maintaining the property, complying with the Residential Tenancies Act 1986, and addressing any tenancy-related issues that arise until settlement.

Vendors should also ensure that all relevant tenancy information is disclosed to the purchaser, including the terms of the tenancy, the rent payable, any bond held, and any existing disputes or notices relating to the tenancy.

It is important to note that the bond does not automatically transfer to the purchaser on settlement. The appropriate documentation must be completed and lodged with Tenancy Services to record the purchaser as the new landlord for bond purposes following settlement.

Particulars of the tenancy should be recorded in Schedule 3 (or another attached schedule) of the Agreement. If tenancy details are not included, the standard terms of the Agreement provide that the property is being sold with vacant possession. It is therefore important to ensure that any existing tenancy is accurately recorded in the Agreement. Any inspection rights available to a purchaser under the Agreement will be subject to the rights of the existing tenants.

Our recommendation

Vendors are exposed to different obligations depending on whether the property is sold with vacant possession or subject to an existing tenancy. It is therefore important to consider how the property is to be sold and, where applicable, discuss the proposed sale with the tenants before entering into an Agreement.

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