Who gets the rent on settlement day?

By Maera Tezuka

A real estate agent gives the keys to a tenanted property to the new owners

If you are a property investor looking to expand your portfolio, you should know that purchasing a residential property already filled with existing tenants can be the best possible situation – not only will there be no down time when it comes to making money on your new purchase, you won't have to spend any time or effort on advertising the property and sourcing out possible tenants.

Who gets the rent on settlement day?

Apportioning rent money paid over the course of the settlement could potentially mean splitting the income between both the buyer and the seller. But while it can get tricky, here are the key points to remember when it comes to rent:

  • Any payments made after the settlement period goes to the buyer.
  • Any payments made before and/or on the settlement period itself still belong to the vendor.
  • If the tenant suffered a delayed payment, and the seller is entitled to some part of it, the new owner must pay the apportioned amount to them as soon as they receive it.
  • If the tenant paid the rent to the seller after the settlement, they must pay it back to the new owner.

The seller’s settlement agent or the current property manager (if applicable/ if the buyer opts to retain them) can handle the rent adjustments and distribute the share of both parties.

What happens on settlement day when you sell tenanted property?

Selling a tenant-occupied property can be a great way to attrach investors searching for ways to augment their portfolios with real estate assets.

But you may not be selling to a property investor at all. If you find yourself discussing the property with a buyer searching for a temporary home, you need to keep in mind that it is the vendor’s job to make sure former residents vacate the building before the buyer moves in, ensuring the property’s smooth transition from rented to private residence.

As the seller, you must give your tenants the proper amount of notification and forewarning if you decide to sell the property.

  • If you want to sell the lot with a tenancy in place, you must include a special condition in the Offer and Acceptance saying that the property is sold subject to a lease, because buyers are entitled to a vacant possession of a property at settlement according to the Clause 6.1 of the Joint Form of General Conditions.

Contracts of tenanted properties may not state the tenancy, instead relying on a verbal agreement between the occupant and the previous landlord where the tenant is expected to be out of the building when the settlement day comes. That said, it is best to have the agreement written down, as buyers can delay the settlement period until the property is empty.

These delays can incur penalties and interest that can rack up thousands of dollars in the long run.

If your buyer isn't interested in keeping your tenants on:

  • Give your tenants at least a week to gather their things and transfer to another location before the settlement day so final house inspections can proceed without any conflict.

  • If occupants are required to leave the property due to various reasons, it is necessary to give them a notice ahead of time to prepare and look for another place to live. The number of days leading up to the eviction depends on the kind of lease the current tenant enjoys.

There are two kinds of lease agreement: fixed and periodic term.

Fixed term, as the name suggests, has a set term which usually spans for 6-12 months. After that, renters can transition into a periodic term where they pay on a monthly basis.

You cannot evict tenants on a fixed term lease, as the contract made between them and the previous landlord must be respected.

Tenants on a periodic lease should be given at least four weeks' notice to vacate.

What happens on settlement day when you buy tenanted property?

Purchasing an investment property with tenants already paying rent can be an excellent situation for investors, as you will find yourself saving a ton of bucket loads of cash, time and effort in sourcing out possible tenants amongst other business to-dos. You will begin to earn money as soon you take over ownership – unless you decide to use the property as your private abode.

Below are some settlement day tips should you decide to use rent out the real estate:

  • If you decide to retain the current tenants, find out what kind of lease agreement/s they had with the former landlord (i.e. fixed term or periodic term).

  • Decide whether you want to stick with the current property manager or replace him/her with one whom you can trust to handle the tenants, property and its various business activities.

Having a good property manager is imperative for the good of your business. He/She is responsible for sticking an eye out for problems and reaching out his/her hand for any problems that may occur such as property damages, late payments by tenants, etc.

One thing to keep in mind is that purchasing a tenanted property is that it will also comes with the property manager that was hired by the previous landlord. Inherited a bad manager? You can always opt to replace him/her for a better one.

  • As the new landlord, you can raise rent (but not during the duration of a fixed lease) on the condition that you give tenants a 60 days’ notice about it.

  • Do not forget to notify relevant state bond authorities such as the Residential Tenancies Authority of any changes such as updates to the lease agreements, new landlord and payment details, new property manager, etc.

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