Sam Lee is a marketing manager and property consultant at JML Property. JML was established in 1994 and offers Investment Property & Homes. It specializes in managing properties for owners and investors, and providing attractive and comfortable homes for tenants.
Although most property transactions are made with ‘vacant possession’ where the property is made empty and ready for the buyer to occupy on the day of completion, some properties are sold with an existing tenancy contract in place. Let’s take a quick look at what might mean for the different parties.
If you are the tenant, the legal contract that you have with the existing landlord is protected by law and transferred to the new owner. You will simply be requested to start paying rent into a new bank account. However, if you are looking to remain in the property and wish to renew your contract after it expires, your luck will depend on whether the new buyer is an investor or a homebuyer. An investor is more likely to extend the lease, unless he or she is looking to renovate the property. A homebuyer will of course seek to end the contract ASAP to move into the property themselves.
If you are considering buying a property that is tenanted, there are a couple of things to consider. First of all, you must review the existing tenancy contract carefully for its terms and any special clauses, because as the new owner of the property you will need to honor that contract. For example, if it is a newly signed 3-year contract that allows the tenant to keep large pets, you must be prepared to keep the tenants (pets included) for that period. You might also want to find out what kind of tenants they are and what their relationship is like with the current owner, although this information might not be so easy to get. The last thing to consider of course is how much rent the tenant is currently paying since this will have direct implications for your cash flow.
For the seller, having a tenant in the property potentially means that it is more difficult to show and sell the property, depending on how cooperative the tenant is. If the tenant is messy or a hoarder this might make a bad impression of the property for potential buyers and negatively affect your bargaining power, although the opposite could work in your favor. If you are selling a commercial property, the valuation is derived directly from the net operating income of the property so the cleanliness of the tenants become irrelevant. Commercial transactions are much more mechanical, and it only matters how much the tenants are paying in rent, how long they will rent for and how much they cost to manage.